Financial repression occurs when Central Bank policy drives interest rates well below the inflation rate.
And just as in China, financial repression will persist and distort the allocation of capital.
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Financial repression is a term introduced in 1973 by Stanford economists Edward S. Shaw and Ronald I.
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Meanwhile, deficits turn into increasing levels of sovereign debt that can only be funded by financial repression.
The positive net interest spread enhances bank profitability and gives state-owned banks an incentive to favor financial repression.
Financial repression has been the way out so far, Reinhart and Sbrancia write.
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Financial repression involves the government robbing pots of money like pensions and other equities, by cheating the rules of economics.
By suppressing nominal interest rates and pushing real rates into negative territory, the Fed has engaged in financial repression.
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"The basic goal of financial repression is directing credit to the government on terms as inexpensive as possible, " Ms. Reinhart says.
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Financial repression may compel U.S. institutions to buy bonds at yields that all but ensure negative returns in the long run.
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Forecasting short-term rates near zero for the foreseeable future sends the wrong signal namely, that financial repression and crony capitalism will continue.
Unless those distortions are removed by ending financial repression and allowing a greater scope for private markets, China will face increasing disharmony.
The post-war period of financial repression occurred under the Bretton Woods system of fixed exchange rates, which was marked by tight capital controls.
Now given we live in a globalised financial market, with free-floating exchange rates and no capital controls, how would you "do" financial repression?
Financial repression would chart a middle course through these outcomes, in which the real value of holdings in government bonds was steadily eroded by inflation.
By downsides, I refer especially to the loss of flexibility if circumstances change and the prolonging of an already too long period of financial repression.
Essentially, this is an example of an attractive investment area in an age of financial repression, as they continue to grow dividends and repurchase stock.
This financial repression tax is unlike income, consumption, or sales taxes.
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Two academics, Carmen Reinhart and Belen Sbrancia, have suggested financial repression as one way out of the debt crisis forcing domestic investors to accept negative real returns.
On a practical level, using gold as money has never been easier (though financial repression of gold through taxes and regulation still presents a formidable barrier).
This article is the third in an ongoing series of country focus pieces where the cashless society utopia has actually advanced the cause of financial repression.
The new leadership team that is soon to take over will need to take bolder steps if China is to end financial repression and extend prosperity.
To make financial repression work well, Reinhart and Sbranica point out you have to have a sharp inflation spike at the start, preferably into high single digits.
Financial repression, when coupled with inflation, provides a more optimum environment for a debt-laden government to dig out of its hole (more on that in a moment).
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As a result, financial repression, say economists and fund managers at Schroders in London, is becoming as much a part of the new normal as is slow growth and deleveraging.
"Good-bye financial repression, hello financial crash, " by Carlos Diaz-Alejandro.
Quantitative easing by the Federal Reserve Bank of the U.S. is a form of financial repression, because investors who are long safe Treasury bonds are losing money after inflation is factored in.
Financial repression has penalized savers while rewarding banks.
The most fruitful reform, notes Lardy, would be to end financial repression by liberalizing interest rates, which would increase real rates on deposits, thereby decreasing saving if the income effect is strong, and increasing consumption.
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