Why every bank will soon be a tax collector for every
government everywhere
Financial repression. A few years
ago when a few people (Gillian Tett, Russell Napier, etc) started predicting
that it would be the thing that made our crisis go away, not many
were convinced. The phrase refers to the various methods that hideously
indebted governments use to channel the money knocking around an economy to
itself rather than anywhere else.
It can1
(ability/ possibility) include anything from capping
interest rates on government debt or deposit rates (as seen all over the
world at the moment); forcing institutions to buy government debt; or, at its
most obvious, putting in capital controls to prevent anyone taking their money
out of the country.
All these things have the same
effective result: by taking away other investment options they allow
governments to issue sovereign debt with much lower interest rates than they
would otherwise be able to1 (ability). That
brings down the cost of debt nicely. But if you then chuck in a little
inflation you can1 (ability / possibility)
make the real value of the debt come down too. Keep that up for a
couple of decades and you can1 (ability/ possibility)
repress your way out of trouble.
This, of course, is exactly how many
countries dealt with their horrible post-war debts: let’s not forget that the
UK was subject to capital controls until 1979. However, even a few years back,
there was a general view that in our new deregulated world, it wouldn’t be
possible for governments to use these time-tested methods to get themselves out
of trouble. Turns out that it is entirely possible. As Edward Chancellor pointed out in the FT, even in a time of apparently free
capital movement, financial repression is entirely possible if everyone does it
at the same time.
And doing it they are. “Negative
real interest rates are to be found not only in the US but also in China,
Europe, Canada and the UK”, where headline inflation is running at 3.4%, “far
above both short and long-term interest rates... Western governments have
learnt the lessons of history”, so they are all maintaining interest rates at levels
well below inflation. At the same time, inflation is pushing up nominal GDP,
and will1 ( 100% certainty
) in time “reduce the real value of outstanding debts, both public and
private”.
But the authorities aren’t leaving
it there. Far from it; they are going for more explicit repression as well. At
the same time, everyone is pushing for their banks to hold more debt for “macro
prudential reasons”.
And even when regulation isn’t
actually put in place, political pressure is. An article in the Wall Street Journal late last year noted that “senior bank executives” from
Italy and Portugal said they were being cajoled into buying government
debt. Last year, the idea started circulating in Ireland that pension
funds should2 ( 90% certainty ) be forced to
sell foreign assets and buy Irish government debt. It makes no sense, said one
commentator, that pension funds should1 (
advisibility ) hold bunds yielding 2-3% when they could1(past
ability) hold Irish debt on 6-10%.
Hmmm. This year, Irish prime
minister Enda Kenny is about to make it “easier” for pension fund managers
to shift from bunds to Irish debt – by transferring the risk of holding it from the pension
fund to the pensioner. Hungary has gone the whole hog and annexed pension
funds. In 2010, for example, in an effective nationalisation of their private
pension fund system, Hungarians were told to hand their private pension fund assets to the state or lose their state pension.
Reference : http://www.moneyweek.com/blog/banks-tax-collectors-for-governments-everywhere-58203
