What is financial repression?
Financial repression has historically involved a number of government actions to reduce debt—including lowering interest rates, increasing regulations and restricting capital movements—all while maintaining inflation. The goal is to create negative real (after-inflation) returns and inflate away public debt by forcing real rates below GDP growth.
Why does it matter to your clients?
Unfortunately, financial repression also functions as a “stealth tax” on individuals from whom it systematically strips wealth, since their investments no longer generate the income they expect. It’s a policy that rewards debtors and punishes savers—especially retirees.
How do we know it’s happening globally today?
In today’s slow-growth, highly leveraged environment, many governments worldwide are trying to reduce their debt by actively taking measures like these:
- Keeping interest rates at record lows. Globally, central bank rates are hovering close to 0% in all major developed markets. In the US, the Federal Reserve has stated that it will keep rates low until unemployment falls below 6.5%.
- Buying bonds. The Fed is now the largest holder of Treasuries and is moving to the long end of the yield curve to drive down 10-year bond rates. The Fed is also purchasing $40 billion worth of mortgage-backed securities each month for an indefinite period, and the European Central Bank has unveiled an unlimited bond-buying program.
- Intervening in markets. To get access to capital, Austria has restricted capital flows to foreign subsidiaries in central and eastern Europe. Select pension funds have also been transferred to governments in France, Portugal, Ireland and Hungary, enabling them to re-allocate toward sovereign bonds.
Does financial repression work?
As the chart below shows, financial repression has been used successfully to reduce government debt. By keeping real government yields below 1% for two-thirds of the time between 1945 and 1980, the US was able to inflate away the enormous debt left over from the Great Depression and World War II.
Financial Repression Can Last a Long Time
After WWII, the US debt-to-GDP level was 122%; it took decades of financial repression to reach 30%. Today, debt to GDP is at 107% and rising, and the US has instituted financially repressive policies that may last for years to come.
Past performance is no guarantee of future results. Sources: IMF, Datastream and Allianz Global Investors Economics & Strategy Group. Note: Years 1900–2011 are actual; years 2012–2017 are projections.