When I first heard the term “financial repression,” I thought it had to be a joke.
Why would governments and central banks use a term with such a negative connotation? Even people who are financially illiterate will still understand that financial repression is a bad thing.
Simply put, financial repression is a strategy governments use to reduce their debt burden by manipulating interest rates below inflation. It allows them to borrow in dollars and repay in dimes.
Here’s how the IMF describes it (emphasis mine):
“Financial repression includes directed lending to government by captive domestic audiences (such as pension funds), explicit or implicit caps on interest rates, regulations of cross-border capital movements, and (generally) a tighter connection between government and banks.”
More from the IMF:
“High public debt often produces the drama of default and restructuring.
But debt is also reduced through financial repression, a tax on bondholders and savers via negative or below-market real interest rates.
After WWII, capital controls and regulatory restrictions created a captive audience for government debt, limiting tax-base erosion.
Financial repression is most successful in liquidating debt when accompanied by inflation.”
For example, if inflation is 9% and governments fix interest rates at 4%, there is an ongoing wealth transfer of 5% from the lender to the borrower that compounds over time.
I think financial repression is how the US government will try to manage its otherwise impossible debt situation by siphoning off the wealth stored in Treasuries.
The idea is to stealthily confiscate wealth from bondholders without causing too much alarm.
However, there is a good chance that bondholders will figure out this insidious strategy and dump their Treasuries, pushing interest rates higher.
Since the Fed cannot allow rates to rise much further without sparking the bankruptcy of the US government due to the skyrocketing interest cost, they’d be forced to print more dollars to try to counteract the rising rates.
However, that would cause inflation to increase and bondholders to seek an even higher interest rate to compensate for the inflation, creating a self-perpetuating doom loop.
That could invite a disastrous financial collapse or even hyperinflation.
I think the US government understands this and will implement measures to block the exits (capital controls) and corralling more people into Treasuries through various mandates and regulations as they impose financial repression.
Many countries have forced private retirement funds into unwanted government debt. I have no doubt the US government would do the same under pressure.
They could try to sell it to the scared and ignorant public as a safety measure, to help people protect their retirement savings by putting them into “safe” Treasuries amid a stock market collapse.
They could try to sell it with patriotic lies and then push War Bonds, as they’ve done in the past.
They could mandate that some amount, say 25%, of new contributions to private retirement accounts must consist of Treasuries—for your own good, of course.
They could forcibly convert existing assets held in retirement accounts into government bonds.
No matter the method, the result is the same.
These schemes corral more wealth into Treasuries, where financial repression can easily take it.
At the same time, I’d expect the mainstream media to ramp up its propaganda and gaslighting on inflation. They’ll blame supply chain problems, Vladimir Putin, and greedy corporations… anything but the Fed’s currency debasement as the source of inflation.
Further, we can expect the government to change how it calculates inflation—to show fewer price increases—and raise its (totally arbitrary) official inflation target from 2% to 3% or higher.
In Argentina, the government once made publishing inflation statistics that differ from the official government numbers illegal. I wouldn’t be surprised if the US government did something similar.
At a minimum, discussing inflation statistics other than the official, crooked CPI might be deemed so-called “disinformation” and cause you or your business to be de-platformed.
In short, expect a whole slew of shenanigans to rope people into Treasuries and lie to them about inflation to maximize the wealth they can steal with financial repression.
The Bottom Line
I think currency debasement is inevitable due to the US government’s impossible debt situation.
The only question is whether the currency debasement will occur in a relatively controlled fashion (financial repression) or it will spiral out of control (potentially hyperinflation).
Either outcome is catastrophic for bondholders.
Much of the value stored in the $133 trillion global bond market will move elsewhere…
Either voluntarily to superior store-of-value assets like gold or involuntarily to bankrupt governments and their cronies as they accelerate the largest wealth transfer in history.
That is the Big Picture reality that most people don’t understand… yet.
Until recently, bonds had been in a bull market that lasted more than 40 years. Therefore, it’s not surprising that complacency is ingrained and widespread.
That’s why financial repression will likely blindside most people with a devastating effect.
That’s exactly why I just released an urgent new report with all the details, including what you must do to prepare.
It’s called, The Most Dangerous Economic Crisis in 100 Years… the Top 3 Strategies You Need Right Now.