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Financial Despotism

Financial Despotism

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Published by: Pablo Paniagua Prieto on Sep 06, 2012
Copyright:Attribution Non-commercial


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Financial Despotism and Government Schemes
Monday April 9, 2012
Pablo Paniagua
Habitually in a normal world, when economies are in trouble, growth is lethargic and stockmarkets have an intrinsically high level of volatility. Investors tend to apply the logicalexpression “fly to safety” in their financial strategies, meaning that investors are keen to havelong-term government bonds every time they perceive economic instability. This category of “standard” investment strategy under economic distress was considered a normal answer tostandard central bank intervention during economic tribulations. Frequently when theeconomy is under some sort of recession or contraction, the central banks usually intervene inthe monetary system aiming for some rapid stimulus. This is achieved by lowering the short-term interest rates close to zero, which enhance consumption and self-reliance. When thathappens, government bonds (which are guided by longer term interest rates) experiencepositive returns. In contrast, there will be some financial assets with shorter maturities, whichwould not experience positive returns (because they are anchored to the behavior of shorterrates artificially manipulated and lowered by central banks). This sort of approach is usuallyreferred to as “riding the yield curve” which assures some positive gains for investors in thelong run.Unfortunately we are not in a regular world any longer. Our current state of affairs is one inwhich even long-term interest rates are also distorted by central banks in an effort to fullyintervene and flatten the entire yield curve. This condition however is not atypical in humanhistory: we have experienced this right after the end of the World War II. During that time, thelong-term government bonds yield was around 2 per cent. Throughout that interlude of manipulation, the US government debt to GDP fell drastically from 116 to 32 per cent. Untiltoday, this sort of “government deleveraging” had never been so drastic and effortless.In an efficient world with free moving capital, the narrative should be quite diverse. If agovernment aims to reduce their debt through economic distortions caused by negative long-term interest rates, investors would anticipate the move and ask for higher compensations. Inthe worst case scenario, they would look for an alternate safe investment in some othersobering debt market, withdrawing their capital and trust in the previous government debt(which had tried to succeed in the intervention scheme). This however was not the case duringthe post World War II period; the Bretton Woods arrangement established capital controls in1946 so that investors were restrained with keeping their money at home and having to dealwith the governments yield intervention to pay their outstanding debts. Consequently foralmost 30 years, investors lived with negative real interest rates, because of this class of western government’s intervention and expropriation of wealth. It was then what economistscall “financial repression”.Returning to our current events, the sort of “financial repression” is much more difficult toachieve nowadays than during the Bretton Woods agreement. Now investors have veryflexible and free mobility of dispersing their capital throughout the world. This allows them toavoid numerous varieties of home-land authoritarianism. Especially the kind in which, somelocal government would try to achieve negative real interest rates to pay off their debt.
Unfortunately this is not quite what is happening in the world. What we have experiencedsince last year is a class of “financial oppression” similar to the one experienced during theagreement in New York, even if the pact was dissolved long time ago.What we seem to be experiencing, is a situation in which the majority of the biggest and mostpowerful western central banks have unrestricted and simultaneously intervened their bondmarkets with massive government bonds purchases. This distorts long-term interest rates andflattens worldwide bond yield curves. This massive, systematic and organized central bankbond market intervention is something the world has never experienced before. And it is theobvious interventionist answer to free capital mobility, similar to the one which BrettonWoods established (western central bankers established it in the 40’s with the intention of control capital and create “financial authoritarianism”). Thus what we see now is again thesame intrusion as 70 years ago, but with a different façade. The central banks conduct this sortof coordinated and discretionary intervention now in unison. This is precisely the sort of interference needed to create a global “financial subjugation” and the only way that westerngovernments can simultaneously and discretely deleverage their debt in a painless way.So what we see currently is negative long-term interest rates in most of the world’s financialcapitals: the US, China, Europe and the UK are simultaneously experiencing negative real rates.The outcome is the decrease of the outstanding debt’s real value of, both public and private.Once again, as 70 years ago, savers are the ones paying the price for excessive and bubble-feddebt, out of control private leveraging, consumption beyond consumer’s capacities of repayment, and uncontrolled and unsustainable western welfare government expending.The losers in this saga are once again retail long-term investors and normal Main Street savers,which see their real purchasing power capacity reduced each time central bankers bloat theeconomy with money printing. As Maria Belen Sbrancia of the University of Marylandrecognized in a recent working paper, “The negative real interest rate, provided a subsidy tothe US government equivalent to 2.3 per cent of GDP a year between 1945 and 1980”.* Thiseffectively showed us why it is convenient for central banks and governments tosimultaneously create this environment of negative real interest rates around the financialglobe.Unfortunately, this sort of scheme brings a deplorable signal for the whole society. Whensavers get to be socially punished and see their real savings diminished and in contrast, theover deleveraged consumers, speculator, investors and over-indebted governments always getthe benefits. This indicates that something is incorrect in the way societies deal withirresponsible debt. Under this situation then savers and the whole society start to questionthemselves: why should we, as society, worry about our increasing debt and lack of savings?Why not better ride the scheme the same way the government and too-big-to-fail institutionsdo? Sadly, if we as a civilization end up reasoning like that, then the whole pool of real savingsin society will soon deplenish. This dampers the possibilities of further sustainable growth: realsavings are the genuine source of long-term sustainable real growth, not monetary paperbased stimulus. Unfortunately this “financial repression” plot ultimately only discouragespeople to save and governments to misbehave economically. This leads to an end result of 

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