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Financial repression this ain't.
Not unless you like playing victim...
ALL OF a sudden, everyone's talking
about financial repression – the capture and torture of domestic savers
with below-inflation rates of interest, so that banking and government debt
shrinks in real terms.
"Such
policies," explains economic historian and author Carmen Reinhart for Bloomberg,
"usually involve a strong connection between the government, the central
bank and the financial sector." Check.
Given
the post-war size of our debts, she goes on, "financial
repression...with its dual aims of keeping interest rates low and creating or
maintaining captive domestic audiences... will likely be with us for a long
time." Check.
"[It's]
equivalent to a tax on bondholders and, more generally, savers." Check.
Now
if, like me, you already gave, then you might want to look for the exits
– and you really don't need to look very far. Yet to date, this sudden
burst of comment on financial repression can only counsel despair, despite
the greatest liberty of capital movement in 100 years. More oddly still, the
classic escape-route of buying gold – an escape-route blocked worldwide
when governments wore down their 20th century wartime debts – has
scarcely been mentioned.
Take
the Financial Times; it's published
15 stories on financial repression in the last month alone, yet only two mention gold. Google News counts 103 stories in
English from the last 2 weeks globally, yet barely 1-in-4 dares mention gold, and half of those only because they mention the high
classical Gold Standard ending 1914. Before then bondholders also got very
low (but not negative) real rates of interest. They also got the full return
of principal value on maturity.
"In
[our] age of free capital movement, financial repression is still
possible," reckons another historian (and a member of
GMO's asset allocation team) Edward Chancellor in the FT, "because it is being simultaneously practised in the
world's leading financial centres. Negative real interest rates are to be
found not only in the US, but also in China, Europe, Canada and the UK."
But
so what? No one's yet forcing US citizens to keep their money inside the
States, and no one's forcing them to choose a Euro, Canadian or Sterling
savings account if they go elsewhere either. Which is
lucky, with rates at 1%, 2% and 3% below inflation respectively. Yes,
the finance industry is paying the price of getting bailed out, with the
world's $30 trillion in pension funds forced to hold ever-greater quantities
of sub-zero-yielding debt. But outside the still-repressed East, private
savings today enjoy unheard of freedom to go where they wish and do as they
please. And even there, in India and China most notably, the freedom to buy
gold – the universal financial escape – is similarly at a
100-year peak.
Witness
the British experience with investment gold, for instance. Suspending the
Gold Standard when war broke out in 1914, London banned domestic gold trading
by private individuals throughout both world wars, pretty much all the time inbetween, and for more than three decades after Hitler
put a hole in his head.
The
cost to cash savers and gilt-holders? One hundred pounds lent to the British
state in 1945 was worth £91 in real terms by 1980. Whereas £100
held in gold would have become £304 of inflation-adjusted real value.
But unlike today, gold wouldn't have done you much good in the meantime,
because it was nailed to currency values (not vice versa) by the false peg
known as the Dollar Exchange Standard. And also unlike today, you would have
been breaking the law for much of that time, simply by owning coins or gold
bars.
A
brief window opened in 1971, but it was closed four years later because
savers used it too freely, sparking a foreign currency drain that brought
down the shutters on foreign inflows of metal again. It took another four
years for the UK's gold controls to be lifted entirely. By which point gold
had already begun its big move. Real rates turned strongly positive 12 months
later, and the urgency of buying gold to escape repression was gone.
Financial
repression this ain't, in short, but nor would it
be new if it was. Our current freedom to buy gold is very new, in contrast,
along with the wealth of alternatives – both domestic and foreign
– open to anyone daring to take control of their money instead of
lending it to government or paying a pension-fund manager to do the same.
Take
note: Nothing is certain to repair the losses you suffer on other, captive
investments today. US citizens, for example, suffering real interest rates
4.6% below inflation in Jan. 1975 were allowed to buy gold for the first time
in three decades. Bullion promptly dropped half its Dollar price, shaking out
all but the most pig-headed investors over the next 18 months before rising
8-fold by the start of 1980.
"In
[our] mildly reflating world" however, advises Bill Gross of Pimco, "unless you want to earn an
inflation-adjusted return of minus 2%-3% as offered by Treasury bills, then
you must take risk in some form." And buying gold is just such a risk
– a uniquely simple and obvious one, offering a stateless escape to a
borderless market. But make no mistake: Swapping the credit and inflation
risk of cash and bonds for physical gold means exposing yourself
to price risk.
Volatility
is certain as retained wealth worldwide thrashes free from the imaginary
manacles of the financial press, and the traps laid for the unwary by the
packaged financial industry.
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