Explaining "financial repression" as the coercion
of investors to purchase government bonds that pay negative real interest rates, Gillian Tett of
the Financial Times this week
provided the perfect rationale for the Western central bank
gold price suppression scheme
-- all without mentioning
gold at all.
is, investors might be powerfully
discouraged from buying such crappy
bonds and thereby subsidizing
if, meanwhile, a rising
gold price was trumpeting a rate of inflation substantially greater than the bond interest rates or
if gold itself, via capital gains, was offering a substantially better return than those bonds.
an essay published in The
Wall Street Journal last December, recently resigned Federal Reserve Board member Kevin M. Warsh was among the first to complain about "financial repression," which he described as a matter of policy makers' "suppressing market prices that they don't
We can infer that gold's is
among those disliked prices if not the primary price in mind -- but we can only infer, since, despite GATA's importunings, not even The Wall
Street Journal itself, publisher
of Warsh's remarkable essay, could be persuaded to ask him, for purposes of a news story, to specify
the prices suffering
and to explain whether he learned of such price suppression during his recent
service at the Fed.
a planet with actual financial journalism, such questions might be posed
directly to central bankers
and former central bankers, with
public answers demanded
and refusals to answer reported prominently. On this planet -- or at least in what is still sometimes
called the Free World part of this
planet -- we still have to settle for mere hints and implications.
But, as shown by Tett's column this week,
appended here, such hints and implications can be found
all over the place.
Gold Anti-Trust Action Committee Inc.
Repression on Bonds Heralds Masochism
Financial Times, London
Thursday, May 10, 2012
Almost exactly a year ago, the economists Carmen Reinhart and Belén Sbrancia wrote a path-breaking
International Monetary Fund
paper about "financial
repression." It initially
caused many Western investors to blink. For while such "repression" has been extensively
discussed in emerging markets in recent years, not many people in America knew what this dark-sounding
(Answer: "Financial repression"
occurs when governments engineer a
situation in which investors
feel compelled to buy bonds at unfavourable rates, ie below the prevailing level of inflation, thus helping to reduce national debt.)
times change. A year later,
the word "repression"
is being bandied about at investor conferences across the Western world. No wonder.
In the eurozone, there
are growing signs that governments in places such as Spain and Ireland are "encouraging"
-- if not forcing -- banks and state pension funds to buy public sector bonds, at potentially unfavourable prices.
Meanwhile, in America
something just as remarkable is under way: Investors
are gobbling up government
debt at unfavourable rates without needing to be "repressed" at all. This week demand for 10-year Treasuries was so high -- as fears exploded about the eurozone -- that the US government sold debt with
a record low coupon of 1.75 per cent. And while the nominal yields on
10-year Treasuries, of about 1.91 per cent, are above last year's lows, in real terms they are in negative territory, given inflation over
2.5 per cent.
Anybody buying Treasuries, in other words, is essentially
agreeing to subsidise the
US government in coming years -- unless you believe that
deep deflation looms. Call it, if you like, a form
of "voluntary" repression;
either way, it will almost
certainly end up helping
the US state, to the detriment of investors.
So can it continue? If you ask US policy
makers and financial officials that question, you are apt to hear an embarrassed cough. Last week, for example, I questioned a group
of Federal Reserve presidents
at a debate
at the University of California at Santa Barbara. In
public, none of those Fed leaders was willing to describe the picture as overt "repression." After all, they said, monetary policy in America is independent, meaning that the raison
d’etre of the Fed's
super-loose monetary policy is to boost economic demand, not support fiscal policy.
If this helps cut debt, this
is just a happy accident;
or so the argument goes.
Nevertheless, what is crystal clear
is that Fed and Treasury officials alike are determined to keep those Treasury
yields ultra low, if not negative in real terms, for the
foreseeable future. And they
may well succeed. Never mind the fact that the Federal Reserve has been gobbling
up Treasury bonds, as part of its
loose monetary policy; or that private sector banks are raising their holdings of government debt to satisfy new regulations, such as the Basel liquidity coverage ratios. What is more fascinating is how investors are stealthily embracing a "voluntary repression" mindset too.
Consider what has happened with US pension funds. Five years ago, these typically
had a 60 per cent equity
allocation, with 30 per cent in bonds. But last month, according to the Milliman survey, the top 100 funds placed 41 per cent of their $1,300 billion worth of assets in fixed income -- topping the equities ratio for the first time. That shift might have looked rational a
few years ago; after all, annualised returns for Treasuries in the past decade have been 6.8 per
cent, versus 2.9 per cent for the S&P 500.
the timing looks terrible, given that, as David Goerz, chief investment officer of HighMark Capital says, "Aa 2 per cent Treasury
yield is equivalent to a price/earnings ratio of 50x compared
to a forward earnings
multiple of 13x for the S&P 500 today." Or
to put it another way, it would
make more sense, Goerz says, for funds to switch back into equities.
Alternatively, managers such as
Scott Minerd of Guggenheim, think
investors should be looking to corporate bonds for decent returns. But the experience of
2007 and 2008 has left investors
so scarred -- and scared -- they are more focused on capital preservation
and liquidity, than returns. Or to put it another way, if everyone else (including the Fed and banks) is piling into
Treasuries, many investors want to follow the crowd. Correlation of fear rules the day.
creates big risks in the long run; if
inflation suddenly surges,
growth resumes, or there is another
US fiscal row that creates default scares, prices could swing and many investors will get badly hurt.
But, in a world awash with
spare cash, it is a fool’s errand to predict exactly when this bubble might
burst. I suspect we could see this
voluntary repression prevail for some time; or call it, if you prefer,
the era of mass market financial masochism.
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