Referring to Financial Times editor Gillian Tett's
December 22 column, "Ties Between Sovereigns and Banks Set to
Deepen," to which the GATA Dispatch called your attention the other
night with the headline "Citing 'Financial Repression,' FT's Gillian Tett Sounds Like Jim Rickards
and Rob Kirby" (http://www.gata.org/node/10828), a friend asks:
"Is the message here that governments have determined that the
only way to stay in power is:
"-- To fund their excess through the banking system, at the
expense of the private sector;
"-- And to go along with the gold price suppression scheme so
that the only alternative to that system is not attractive either?
"If the Chinese, Indians, Japanese, and others buy into this power-preservation
scheme, then it appears -- as you have long said -- there really is no true
market left, and we're all screwed, no? This is not particularly what I want
to believe, but if that's where we are, then I guess I need to deal with
Your secretary/treasurer replied: "Yes, that's how I construe the
comments about 'financial repression' made by Rickards,
Kirby, Tett, and others. It's a matter of
government's making it impossible for investors to make money except in
undertakings specifically approved and designed by the government itself,
undertakings that get narrower and narrower as government intervention in
markets grows more pervasive.
"Economic circumstances and markets will keep trying to find ways
to assert themselves, and the different interests of some countries may cause
them to act against the 'financial repression' other countries try to impose,
what Rickards describes in his new book,
"Currency Wars" (http://www.amazon.com/Currency-Wars-Making-Global-Portfolio/dp/159184449...), so there's no assurance about how things will end
up, just assurance of less democracy and more totalitarianism. That's what
GATA has been fighting all along."
"Financial repression" was perhaps first foreseen by the
British economist Peter Warburton in his 2001 essay "The Debasement of
World Currency: It Is Inflation, But Not as We Know It" (http://www.gata.org/node/8303).
Warburton wrote: "What we see at present is a battle between the
central banks and the collapse of the financial system fought on two fronts.
On one front, the central banks preside over the creation of additional
liquidity for the financial system in order to hold back the tide of debt
defaults that would otherwise occur. On the other, they incite investment
banks and other willing parties to bet against a rise in the prices of gold,
oil, base metals, soft commodities, or anything else that might be deemed an
indicator of inherent value. Their objective is to deprive the independent
observer of any reliable benchmark against which to measure the eroding
value, not only of the US dollar, but of all fiat currencies. Equally,
they seek to deny the investor the opportunity to hedge against the fragility
of the financial system by switching into a freely traded market for
non-financial assets." [Emphasis added.]
That is, "financial repression."
As the idea reached her this month, Tett
wrote incisively: "To understand this, it is worth taking a look at a
fascinating recent working paper by Carmen Reinhart and M. Belen Sbrancia, published by the Bank for International
Settlements but drawing on earlier work for the International Monetary Fund.
"... What Reinhart and Sbrancia argue
is that if you want to understand how the West cut its debts during the last
great bout of deleveraging -- namely, after the Second World War -- then do
not just focus on austerity or growth. Instead, the crucial issue is that
during that period, the state engineered a situation where the yields on
government bonds were kept slightly below the prevailing rate of inflation for
many years. This gap was not vast. But since asset managers and banks
continued to buy those bonds at unfavorable prices, this implicit, subtle
subsidy from investors helped the government to cut its debt pile over
several years. Indeed, Reinhart and Sbrancia
calculate that such 'repression' accounted for half of the post-Second World
War fiscal adjustment in the U.S. and U.K., due to the magic of compounding.
"Now these days it is hard to imagine any Western government
overtly calling for a second wave of such 'repression.' After all, as Kevin Warsh, a former Fed governor, recently pointed out, the
drawback of financial repression is that it curbs private-sector investment
and credit growth. And in any case it is a moot point whether such repression
could even be implemented today, given the globalized nature of markets.
"Nevertheless, the political incentives to flirt with this
concept are clear. After all, the beauty of a stealth subsidy is precisely
that: It is too subtle for most voters to understand. It is also arguably a
more equitable form of burden sharing, and thus less politically divisive,
than, say, state spending cuts.
"Moreover, governments do not necessarily need to be 'repressive'
to achieve the 'repression' trick. As the economist Alan Taylor observes, if
investors are so terrified that they cannot see alternative investment
choices, they may end up buying government bonds by default -- even at
unattractive prices. [Emphasis added.] Indeed, that is arguably what
is already occurring today in the Treasuries market or the world of Japanese
government bonds. And, perhaps, in the eurozone
too. After all, when eurozone banks were given E442
billion of European Central Bank money two years
ago, they used half of this to buy government bonds -- without compulsion at
"Whatever you want to call it, then, the state and private-sector
finance are becoming more entwined by the day. It is a profound irony of
21st-century 'market' capitalism. And in 2012 it will only deepen."
Thus Tett, like Warburton long before her,
expressed perfectly the rationale for the gold price suppression scheme even
as she explained why there would be little point in questioning central
bankers about their implementation of "public" policy. ("Now
these days it is hard to imagine any Western government overtly calling for a
second wave of such 'repression.'") In mainstream financial journalism
it is simply taken for granted that the purposes and objectives of central
banking are not to be learned from central banks themselves but rather from
academics, market analysts, soothsayers, or whoever else might answer the
telephone when a central banker won't.
As a practical matter, this assumption of mainstream financial
journalism is probably correct. But the world might begin to change, however
slowly, if journalists tried putting the questions to central bankers in
public settings anyway and reported their evasions or refusals to answer.
Eventually investors and even the public might come to understand that great
power, the power to control the prices of all capital, labor, goods, and
services in the world -- that is, the power to control the price of
everything, absolute power -- was being exercised in secret so that
the world more easily might be expropriated, that democracy had been crushed,
and that, as a mere high school graduate remarked a few years ago,
"There are no markets anymore, only interventions." (http://www.gata.org/node/6242.)