Steadfast FinancesThe Age of Financial Repression

The Age of Financial Repression

Filed in Banking , Investing 101 , Personal Finance 3 comments

How long has it been since you earned any money by saving? You definitely can’t include the 1 percent interest you earned last year, which was taxed at 15 or 25 percent by the federal government and 5 to 10 percent by your state. No, the interest that you think you made lost ground to the over 2 percent inflation that boosted prices last year.

Honestly, it’s been years since you’ve actually saved any money. What your savings accounts have been doing over the last few years is losing money.

If you are surprised by this, then it may shock you to learn that your own government is responsible for repressing your savings.

Financial Repression

Financial repression is an old term that goes back several decades. It refers to tactics that central banks and governments implement to alleviate sovereign debt. In our recent era, it has been in the form of artificially low interest rates.

It’s an interesting financial maneuver. By artificially lowering interest rates, governments can restructure debt at low costs, spend cheaply and hopefully, grow the economy fast enough to avoid future economic repercussions.

There is a financial victim in this type of policy: savers. With interest rates returning losses, savers can’t earn a reasonable return on their money. That means that a large portion of private wealth also erodes.

Marketing Financial Repression

Interestingly, the government and central banks never try and sell financial repression on the merits of government needing debt. That’s a sure way to aggravate voters. However, this isn’t to say that these policies don’t have marketing.

Financial repression is often touted as a way to provide cheap credit to companies. That credit is to be used for buying capital. The purchasing of new capital creates jobs and boost consumer markets.

However, this recession has proven that this reasoning doesn’t hold water. According to HBR, companies are currently sitting on nearly $2.8 trillion in cash over the last 24 months. Low borrowing rates have actually created a situation where companies have no impetus to invest or pay down their own debt. It’s not a war chest, it’s a vault.

Does It Matter?

Artificially low interest rates are definitely hurting savers and unless you are buying I-Bonds, it’s wreaking havoc on your emergency savings. However, I’m curious as to whether savers are simply taking their medicine or seeking out riskier returns. Today’s mega-financial universe has any number of financial products, safe or risky. Still, more people may be induced to spend.

We are definitely living in an era of financial repression, but I’m not sure it matters as much to savers anymore.

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Posted by CJ   @   13 September 2012 3 comments
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Sep 13, 2012
10:02 am
#1 Mike :

Part of my cash is earning around 10% at Lending Club.

Sep 13, 2012
10:54 am

Very perceptive – good point! However, you have to ask yourself: who is benefiting, and how can I put my money there?

At the moment those corporations with their trillions in idle cash (led by Apple) are the beneficiaries, and it’s no surprise that the smart money has been following stocks, which are up more than anything else this year.

Another reason, perversely, why corporations are doing well is the U.S. tax code, which makes it profitable for corporations to leave their cash overseas, because if they bring it to the States, they get whacked with taxes.

In fact, there are now several Fortune 500 companies who pay their CEOs more than they pay in taxes. How perverse is THAT??

But it makes earnings look good, which in turn leads to nice stock prices.

As a wealthy friend of mine always says: it doesn’t pay to argue, it only pays to invest where the money gets made.

Sep 14, 2012
10:30 am
#3 Lucas :

As far as stocks go, with the DOW only a couple of great days behind its bubble high of October 2007, you gotta wonder if stock are once again in a bubble. Perhaps it is time to sell at close to the top and wait for the inevitable crash to buy again. It seems tome if you want to buy low and sell high, you have to buy when everyone is selling,and sell when everyone is buying. Otherwise you are investing on faith–faith that if you buy high you can sell higher, rather than on reason.

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