You’ve probably heard of the term financial repression before, but maybe you didn’t know exactly what it meant. The Financial Times defines it below:
Financial repression is a term used to describe measures sometimes used by governments to boost their coffers and/or reduce debt. These measures include the deliberate attempt to hold down interest rates to below inflation, representing a tax on savers and a transfer of benefits from lenders to borrowers. Financial repression is also used to describe measures to facilitate a domestic market for government debt and the imposition of capital controls. The combined effect of all these measures means funds are channeled to the government that would otherwise flow elsewhere.
In short, it’s a devious tactic that heavily indebted governments inevitably turn to. And there is no entity on the planet that is more indebted than the US government. It therefore behooves Americans and others to understand what financial repression is, how it affects you, and how you can protect yourself from it.
Gordon T. Long of The Financial Repression Authority recently had me on his show to get to the bottom of all this.
Our discussion is below; you won’t want to miss it.
Until next time,
Gordon T. Long: As part of our ongoing series on financial repression, I have Nick Giambruno joining us here this morning. Nick is Senior Editor of InternationalMan.com at Casey Research.
Nick Giambruno: Hi, Gordon; thanks for having me.
Gordon: Nick, it’s a pleasure to have you, and I’m really looking forward to our conversation because you have a very unique background on some things.
Nick, could you define financial repression in your words?
Nick: When I first heard of financial repression, it was from some IMF document, and I immediately thought it was a mistake. Why would they use a term that conveys authoritarianism or something negative when they really, I think, wanted to use some sort of boring academic phrase? It’s actually ironic they chose that term.
In my mind, I think what the IMF calls financial repression is better described as financial authoritarianism. Because we’re not just talking about repressing financial things, like artificially low interest rates to help a government finance its debt, which sounds pretty academic or abstract to most people.
But when you look at the indirect and the immeasurable effects that come from financial repression, it negatively affects all aspects of life. That’s why I believe it is more accurate to call it financial authoritarianism, because that’s what it basically is. Central banking and a fiat money are the main enablers of financial repression. It gives the government the tools to manipulate the currency, to manipulate the interest rate that they otherwise wouldn’t have under a sound-money kind of system.
Financial repression is needed to help governments finance debt. But why do governments have debt? Because governments spend money. There are only three ways a government can finance itself: 1) taxes; 2) money printing, which is to say inflation; and 3) debt, which represents deferred taxes or money printing.
So, dealing with an out of control government debt burden which comes from out of control government spending, is where the impetus for financial repression comes from.
Gordon: Are you seeing any recent developments that are more troubling than others either in the United States or abroad?
Nick: I think the biggest example of financial repression is how interest rates are manipulated lower. If you look at the difference between what the rate of interest would be under free-market conditions and what the interest rate is under the central bank-manipulated conditions, that difference is essentially purchasing power that the government is taking from savers. It’s a hidden tax, or more accurately, a hidden theft.
It all goes back to the concept you learned in kindergarten, and that is you shouldn’t take what isn’t yours. Financial repression allows governments to take something that isn’t theirs, namely purchasing power (i.e., wealth) from savers without their knowledge or consent. Just because their theft is surreptitiously cloaked in boring academic terms and seemingly complex financial jargon doesn’t change the underlying immorality of what they are doing.
But it’s not just the direct effects—we also have to consider the immeasurable indirect effects, too. You just have to think how many distortions in the economy were created from malinvestment. For example, where businesses would take out loans to build factories that they otherwise wouldn’t if the interest rate was higher. Artificially low interest rates also helps the US government spend more money on welfare and warfare than it otherwise could, which of course bring incalculable negative distortions.
There are also the sociopolitical effects of financial repression. If you look at how it makes savers poorer, that could cause a lot of people to start calling for the government to impose more redistribution of wealth and that kind of stuff. So it is really hard to wrap your head around the total aggregate effect that financial repression has because it’s so massive.
Gordon: The degree of malinvestment, the mispricing of risk, the lack of price discovery, you just can’t begin to define it—the size of it—but clearly I think that what’s most troubling to me is not that it’s happening, but it’s something that is happening in a devious manner. It is clearly a process to pay the government’s debt. It’s a transfer of wealth through purchasing power from the saver, from those who have the assets, to the government. Another aspect to it is to ring-fence people’s abilities to invest their money through various controls or regulations. The most blatant to me right now is FATCA; and I wonder if you could share your views on FATCA or what it is and what’s going on there?
Nick: I think you hit the nail right on the head, because if you’re going to have financial repression, you have to control capital. If you don’t control the capital, you can’t repress it. The Foreign Account Tax Compliance Act, or FATCA, is one of those things that was shoved into one of those thousand-page bills that nobody in Congress read or understood.
While FATCA doesn’t make it illegal to take money outside of the United States, it does make it more difficult by raising the cost for foreign banks that would take Americans on as clients. Most, but not all, banks around the world want nothing to do with American clients, because first, the regulatory burdens are so high and expensive that it just doesn’t make business sense. And second, there are draconian penalties for even for an honest mistake. So FATCA makes it more difficult for Americans to move capital abroad outside of the immediate reach of the US government. This is part and parcel with the whole theme of financial repression.
Gordon: Nick, from an international perspective, what are the solutions? What does an investor do to protect himself against these whole policies of financial repression?
Nick: In terms of protecting yourself from financial repression and arbitrary government edicts, there’s a lot you can do to make yourself a hard target.
First and foremost, you want to get some of your purchasing power, your wealth, outside of the immediate reach of your home government. Despite FATCA, there are still a few places an American can easily get a bank account abroad. An American can also open a brokerage account in Hong Kong from his or her living room. We cover these options in detail in our Going Global publication.
It’s also an easy and low-cost solution to own physical gold in a safe foreign jurisdiction like Singapore, where it can be stored in non-bank safe deposit boxes. More on that strategy here.
Foreign real estate is also an important international diversification vehicle, as it’s a hard, tangible asset that is outside the immediate reach of your home government. They can’t really confiscate your foreign real estate.
Gordon: Because of the amount of rules and regulations that exist and are coming in, your income tax filings are going to just get thicker and thicker. The amount of filings for every foreign account that you have means you’re probably going to need an accountant.
Nick: Even though it is uncomfortable, you definitely should comply with the filing requirements and all the laws you are subject to. The penalties are draconian, and you don’t want to play games with the IRS. You’re guaranteed to lose if you do.
But don’t let this deter you. You should actually look at the increasing filing requirements and understand that the politicians are trying to fence you and your capital in. The politicians want you to be deterred and for you to keep your money within their direct reach. On the contrary, you should be emboldened to internationalize and legally get your wealth out of the immediate reach of these bankrupt bureaucrats.
Gordon: Absolutely. At minimum, it’s an insurance policy about what could happen, and hopefully you never really need the insurance policy, but not to have it when somebody else yells fire will be a real problem.
Nick, could you tell our listeners how they could learn more about your writings, because I know you do a fair amount of writing on these subjects and how they could follow your work?
Nick: Yeah, sure. The easiest way is to go to InternationalMan.com, and you can get our free newsletter which has just a wealth of really good actionable information there as well. It’s called The International Man Communiqué. Also just explore the website, because there is an abundance of information on these topics that we have been discussing.
Gordon: Nick, an absolute pleasure, enjoyed the conversation. You brought a lot of great comments to the show, and we have to have you back again.
Nick: Sounds great; thanks, Gordon.