Financial Repression

What does Financial Repression Mean?

Financial Repression means the process through which Governments and Financial Institutions repress savers from receiving a reasonable return on their saving by artificially lowering the deposit rates.

Financial Repression takes mainly through:

a) The Governments and the Central Banks artificially lowering the interest rate by setting a very low value. This is near zero in the US and low single digit in China. Note China has a higher inflation so the real savings rate is lower than that in the USA.

b) Reducing and preventing savers from exploring alternate investments which have higher rates of return. China controls the capital flows in and out of the country. Chinese stock markets are highly volatile and manipulated while real estate is a bubble. The only safe investment is bank deposits for the Chinese. Western Governments  do not prevent alternate investments explicitly but implicitly directs pension and mutual funds into investing into US Treasuries.

Chinese Financial Repression Model

China has a large negative real savings rate in the world, which means that savers lose money every year to banks. The absolute rate is in the low single digit but given the high inflation rates, it means that the real savings rate is negative. China’s banking system is controlled by mega state owned banks which lend at negative real rates, to equally large state owned enterprises (SOE). A large part of the lending takes place not because of business reasons but due to political reasons. This led to China’s banking system running into a huge NPA crisis in the 1990s, the cost of which was paid by the Chinese depositors through ultra low saving rates. The system still continues today with banks managing to subsidize the industry at the expense of the savers. There was a huge spurt of loans in 2008 and 2009 as the Government tried to ameliorate the economy from the global crisis.

Europe and USA fleecing savers through Zero Interest Rates

After the Financial Crisis in 2008, USA lowered interest rates rapidly to zero and has not raised the rates since. In fact, 3 rounds of quantitative easing has further depressed rates in the economy. This has meant sheer hell for savers as they cannot earn a decent income through bonds or savings deposits. The Federal Reserve is boosting the industry at the expense of savers and pensioners who get almost nothing from their savings.

Europe has too followed the US model of very low interest rates as it tries to contain the sovereign debt crisis. The ECB has overcome resistance from the Bundesbank to implement their own QE and lower interest rates. These countries and their banks have accumulated huge debts which cannot be clearly paid back. With the option of defaulting, not an option for politicians, the insidious option of zero interest rates (and higher inflation ) is being used to bailout the banks and the treasures.

NY Times

Bill Taren, a retiree near Orlando, Fla., discovered in August that his credit union would pay only 0.4 percent annual interest on his saving account, even though inflation averaged 2.8 percent over the last year. So he and his wife decided to just stuff their money in the mattress, he says, because at least there “we can see the cash when we want.” Though bad for people trying to live off their savings, low interest rates happen to be quite good for anyone borrowing money, like governments themselves. Over time, interest rates below the inflation rate allow governments to refinance, erode or liquidate their debt, making it easier to live within their budgets without having to resort to more unpalatable spending cuts or tax increases. In the three and a half decades after World War II, interest rates in the developed world were on average below zero after adjusting for inflation, according to Carmen M. Reinhart, a professor at the Kennedy School of Government at Harvard. This helped Europe, the United States and Japan slowly whittle away much of their war debt as their economies grew faster than their debt burden.

“The difference is that the postwar period was one of strong growth, when rebuilding and capital investment was going on across the Continent, and there were strong demographics,” said Stefan Hofrichter, the chief economist at Allianz Global Investors. “But these elements are not necessarily in place today.”

Democracies use more roundabout techniques.

“They have to work with their captive audiences — the pension funds, domestic insurance policies, banks, any domestic buyers they can find — to force-feed sovereign debt, sometimes under the euphemism of ‘macroprudential regulation,’ ” said Professor Reinhart. Ireland and France, for example, have required or “encouraged” pension funds to invest in more government debt.