What Is Financial Repression?

Financial repression is a term that describes measures by which governments channel funds from the private sector to ﷺthemselves as a form of debt reduction. The overall policy actions result in the government being able to borrow at extremely low interest rates, obtaining low-cost funding for government expenditures.

This action also results in savers earning rates less than the rate of inflation and is therefore repressive. The concept was first introduced in 1973 by Stanford economists Edward S. Shaw and Ronald I. McKinnon to disparage government policies that suppressed economic growth in emerging markets.

Understanding Financial Repression

Financial repression is an indirect way for governments to have private industry dollars pay down public debts. A government steals growth from the economy with subtle tools like zero interest rates and inflationary policies💜 to knock down its own debts. Some 🍰of the methods may actually be direct, such as outlawing the ownership of gold and limiting how much currency can be converted into foreign currency.

In 2011, economists Carmen M. Reinhart and M. Belen Sbrancia hypothesized in a National Bureau of Economic Research (NBER) paper, entitled "The Liquidation of Government Debt," that governments could return to financial repression to deal with debt following the 2008 economic crisis.

Financial repression can include such measures as direct lending to the government, caps on interest rates, regulation of capital movement between countries, reserve requirements, and a tighter association between government and banks♑.

The term was initially used to point out bad economic policies that held back the economies in less developed nations. However, financial repression has since been applied to many developed economies through stimulus and tightened capital rules following the 澳洲幸运5开奖号码历史查询:2007–09 Financial Crisis.

Features of Financial Repression

Reinhart and Sbrancia indicate that fꦅinancial repression features:

• Caps or ceilings on interest rates
• Government ownership or control of domestic banks and financial institutions
• Creation or maintenance of a captive domestic market for government debt
• Restrictions on entry into the financial industry
• Directing credit to certain industries

The same paper found that financial repression was a key element in explaining periods of time when advanced economies were able to reduce their public debt at a relatively quick pace. These periods tended to follow an explosion of public debt.

In some cases, this was a result of wars and their costs. More recently, public debts have grown as a result of stimulus programs designed to help lift economies out of the Great Recession.

The 澳洲幸运5开奖号码历史查询:stress tests and updated regulations for insurers essentially force these institutions to buy more safe assets. Chief among what regulators ༺consider a safe asseꦚt is, of course, government bonds.

This buying of bonds helps, in turn, to keep interest rates low and pot🔴entially encourages overall inflation—all of which culminates in a quicker reduction in public debt than would have otherwise been possible.

Consequences of Financial Repression

The consequences of financial rep😼ression include a reduced rate of return for savers because governments keep interest rates artificially low.

This results in the savings rate falling below the inflation rate, which reduces the 澳洲幸运5开奖号码历史查询:purchasing power of savers. This can severe𒈔ly impact certain groups of the population, such as retirees and others relying on fixed-income payments.

Further, financial repression leads to an inefficient allocation of resources because funds are diverted from productive private-sector investments to pay down government debt, which hur✅ts economic growth and innovation.

Lastly, financial repression can lead to a loss of confidence in the domestic economy, resulting in capital flight,𒀰 where money moves o🌃utside of the domestic economy to economies abroad as investors seek higher returns.

Example of Financial Repression

Assume that a nation has a nationa𓆏l debt of $1 trillion. The government wants to reduce its debt and sets an interest rate cap on savings accounts at 1% per year. Inflation, however, is at 4% per year.

Savers are actually losing 3% a year on their savingsꩲ because inflation is much higher ✨than what they are saving (4% versus 1%), eroding their purchasing power—their money buys less than it did before.

The government then determines that banks have to hold a large portion of their assets in government bonds, which only pay 2% per year. While this is better than the savings rate, it is still well 澳洲幸运5开奖号码历史查询:below inflation.

Now assume a retiree has $100,000 in savings and earns only $1,000 a year due to the 1% savings rate. At the same time, the value of their savings is eroded by $4,000 because of inflation, meaning that they are losing $3,000 ($4,000 - $1,000) in purch🎃asing power every year.

This scenario works well for the government because it can borrow at these lower rates, allowing it to reduce its debt more cheaply, however, this comes at the expense of the savers and the whole economy, as it discourages investment and faces reduced growth prospects.

The Bottom Line

Financial repression is when governments implement policies to lower their debt by borrowing cheaply from the private sector. These measures include controlling interest rates and limiting capital movement. This often ends up giving savers returns that don't keep up with inflation.

While these policies can reduce the public de𝓀b𒈔t faster, it is often at the expense of economic growth and savers.