Financial repression this ain’t. Not unless you like playing victim…
All of a sudden, everyone’s talking about financial repression – the capture and torture of domestic savers with below-inflation rates of interest, so that banking and government debt shrinks in real terms.
“Such policies,” explains economic historian and author Carmen Reinhart for Bloomberg, “usually involve a strong connection between the government, the central bank and the financial sector.” Check.
Given the post-war size of our debts, she goes on, “financial repression…with its dual aims of keeping interest rates low and creating or maintaining captive domestic audiences… will likely be with us for a long time.” Check.
“[It's] equivalent to a tax on bondholders and, more generally, savers.” Check.
Now if, like me, you already gave, then you might want to look for the exits –and you really don’t need to look very far. Yet to date, this sudden burst of comment on financial repression can only counsel despair, despite the greatest liberty of capital movement in 100 years. More oddly still, the classic escape-route of buying gold – an escape-route blocked worldwide when governments wore down their 20th century wartime debts – has scarcely been mentioned.
Take the Financial Times; it’s published 15 stories on financial repression in the last month alone, yet only two mention gold. Google News counts 103 stories in English from the last 2 weeks globally, yet barely 1-in-4 dares mention gold, and half of those only because they mention the high classical Gold Standard ending 1914. Before then bondholders also got very low (but not negative) real rates of interest. They also got the full return of principal value on maturity.
“In [our] age of free capital movement, financial repression is still possible,” reckons another historian (and a member of GMO’s asset allocation team) Edward Chancellor in the FT, “because it is being simultaneously practised in the world’s leading financial centers. Negative real interest rates are to be found not only in the US, but also in China, Europe, Canada and the UK.”
But so what? No one’s yet forcing U.S. citizens to keep their money inside the States, and no one’s forcing them to choose a Euro, Canadian or Sterling savings account if they go elsewhere either. Which is lucky, with rates at 1%, 2% and 3% below inflation respectively. Yes, the finance industry is paying the price of getting bailed out, with the world’s $30 trillion in pension funds forced to hold ever-greater quantities of sub-zero-yielding debt. But outside the still-repressed East, private savings today enjoy unheard of freedom to go where they wish and do as they please. And even there, in India and China most notably, the freedom to buy gold – the universal financial escape – is similarly at a 100-year peak.