Isn’t America Already Financially Repressed?

At CNBC, Antonia Oprita finds out about the newest horror in government profligacy from aptly named HSBC economist Stephen King. Now that faux-sterity has spooked the rubes, "financial repression" may be the only hope for the developed world’s morbidly obese governments: 

"Financial repression results from policies which allow governments to fund their borrowing through imposing costs on others," King wrote in a market note.

Governments could use regulations to force banks to lend more to the government while liquidity-pumping policies – such as quantitative easing – push bond yields down even when fiscal policy is out of control, allowing governments to avoid being punished by markets for lack of fiscal discipline, he explained.

The 1950s and the 1960s were, for the Western world, a period when financial repression seemed to work, as government debt fell rapidly. "This, however, was more a happy coincidence: debt fell rapidly for other reasons, allowing economies to shrug off the effects of repression," King wrote.

If applied today, repression is likely to starve the private sector of funds, as the rapid reduction in debt seen in the '50s and '60s was a consequence of bumper growth which brought in tax money rather than of government borrowing crowding out the private sector, he warned.

How would low interest rates reduce debt when they encourage more borrowing? In an interesting NBER paper [pdf] from M. Belen Sbrancia and the formidable economist Carmen M. Reinhart say it’s a function of reduced debt service cost: 

Financial repression includes directed lending to government by captive domestic audiences (such as pension funds), explicit or implicit caps on interest rates, regulation of cross-border capital movements, and (generally) a tighter connection between government and banks. In the heavily regulated financial markets of the Bretton Woods system, several restrictions facilitated a sharp and rapid reduction in public debt/GDP ratios from the late 1940s to the 1970s. Low nominal interest rates help reduce debt servicing costs while a high incidence of negative real interest rates liquidates or erodes the real value of government debt. Thus, financial repression is most successful in liquidating debts when accompanied by a steady dose of inflation. Inflation need not take market participants entirely by surprise and, in effect, it need not be very high (by historic standards). For the advanced economies in our sample, real interest rates were negative roughly ½ of the time during 1945-1980. For the United States and the United Kingdom our estimates of the annual liquidation of debt via negative real interest rates amounted on average from 3 to 4 percent of GDP a year.

It seems to me we already have a massive program of directed lending by a captive audience in the form of a Social Security "trust fund" that takes money out of every paycheck and puts it into low-interest federal debt. Governments may be able to force lending, but the way to reduce debt is to stop borrowing money. 

King notes that repression "may well redistribute the burden of adjustment from debtors to creditors via unusually low real interest rates but, in itself, is unlikely to be enough to deliver a major reduction in government debt as a share of GDP."

It’s also worth noting that the period when repression apparently worked to decrease debt-to-GDP ended with a long, severe recession that discredited the Keynesian consensus and introduced a new word – "stagflation" – to the language. That seems like a steep price to pay for more Solyndra loans, Secret Service agents’ hookers and GSA junkets in Las Vegas. 

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  • ||

    Sigmund Fraud and Joey Buttafuco's lost little brother in a Cavanaugh post. Classic.

  • Evil Otto||

    This is the main problem with "starving the beast". The beast will destroy everything around it in a futile attempt to survive.

  • ||

    In Soviet Russia, beast starves you.

  • Cytotoxic||

    True this!

  • ||

    Absolutely correct. The metaphor is actually misleading, as Joe M humorously illustrates: Voting on taxes (and relative representation) just gives the illusion of being the fodder master, particularly in the case of pervasive, plenary powers and strong public debt mechanisms. I admire the sentiment, especially as expressed by the likes of Friedman and Becker, but the rhetoric is far removed from the reality.

  • Invisible Finger||

    " Financial repression includes directed lending to government by captive domestic audiences (such as pension funds) "

    If a pension fund is forced to lend to government at a return of 0.005%, they'll never be able to meet the goal of 8% returns that were collectively bargained for.

  • ||

    So instead of cutting back, they'll just steal more. Sounds like...government.

    This is why minarchism is a pipe dream. It's a great starting point, but it will always grow out of control. It's what government does, since it is a parasite.

  • Evil Otto||

    It's funny to see an-caps complain that another political system is great in theory but just not stable enough.

  • ||

    It's funny to see morons constantly demanding that anarchism be perfect, and dismissing it because it isn't, while completely ignoring the massive, systemic flaws in their own preferred system(s).

  • AlmightyJB||

    I'm not necessarily an anarchist if only because I see it as a non-sustainable state (ie power vacuum), however, I agree that we would be better off with no government then with what we have now.

  • Evil Otto||

    We'd be better off with no bacteria in our intestines than the mostly benign flora we have.

    That doesn't mean we should get rid of the flora we have.

  • Evil Otto||

    It took 223 years to get to this point from the drafting of the Constitution. So yeah, minarchism isn't stable on a timescale of centuries. Sorry bout that.

    But depending on the strength differential between the various factions in an an-cap society, it would degenerate into either a bunch of mafia-style fiefdoms or a totalitarian state in less than a year. Perhaps much less.

    Where there is force most dare not oppose, there is government. Doesn't matter if they have badges or flags or acronyms.

  • np||

    But depending on the strength differential between the various factions in an an-cap society, it would degenerate into either a bunch of mafia-style fiefdoms or a totalitarian state in less than a year. Perhaps much less.

    Iceland had not just a real anarchistic society, but an actual ancap society from 930 to 1262. That's 332 years.

    Many countries has had pockets of anarchy--of stateless ordnung--as well in their histories. The US's own frontier societies were such:

    Even Ukraine had a few brief years, from a concerted effort by some like-minded people--think NH free state project--from 1918 to 1921:
    It would have successfully continued if not for outside military force

  • ||

    But, honestly, don't most minarchists treat it asymptotically? Most of the self-described libertarians with whom I associate do just that -- and I certainly do, insofar as I am a minarchist and a libertarian. (I consider myself a "directionalist," so I don't worry about the fine details of the end-state.)

  • ||

    ...allowing governments to avoid being punished by markets for lack of fiscal discipline...

    God damn, that is horrifying. The market mechanism is the only thing that can appropriately punish malinvestment and financial stupidity, and this fucker seeks to actively, intentionally destroy it.

  • Scruffy Nerfherder||

    Can't let the market interfere with Top Men.


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