Financial repression was the policy adopted by the US and other advanced economies from 1945 to 1980 in order to pay down their enormous government debts, and it’s the policy that’s being adopted again today.
In a 2011 National Bureau of Economic Research (NBER) paper, Carmen Reinhart and Belen Sbrancia characterise financial repression as:
- Explicit or indirect capping or control over interest rates, such as on government debt and deposit rates.
- Government ownership or control of domestic banks and financial institutions while placing barriers to entry before other institutions seeking to enter the market.
- Creation or maintenance of a captive domestic market for government debt achieved by requiring domestic banks to hold government debt via reserve requirements, or by prohibiting or disincentivising alternative options that institutions might otherwise prefer.
- Government restrictions on the transfer of assets abroad through the imposition of capital controls.
These measures allow governments to create an environment of negative real interest rates which erodes the real value of their debt. It also allows them to issue debt at very low interest rates keeping debt servicing costs to a minimum.
Unfortunately financial repression not only reduces the value of government debt, it also destroys the real wealth of savers.