The Many Guises of Financial Repression

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What Is Behind the New Buzzword

Economists, market analysts, journalists and investors alike are all talking about it quite openly, generally in a calm and reserved tone that suggests that - to borrow a phrase from Bill Gross – it represents the 'new normal'. Something that simply needs to be acknowledged and analyzed in the same way we e.g. analyze the supply/demand balance of the copper market. It is the new buzzword du jour: 'Financial Repression'.

The term certainly sounds ominous, but it is always mentioned in an off-hand manner that seems to say: 'yes, it is bad, but what can you do? We've got to live with it.'

But what does it actually mean? The simplest, most encompassing explanation is this: it describes various insidious and underhanded methods by which the State intends to rob its citizens of their wealth and income over the coming years (and perhaps even decades) above and beyond the already onerous burden of taxation and regulatory costs that is crushing them at present.

It is as though a highway robber were not only content with robbing you at gunpoint on the street, but were emptying your bank account by having his associates hack into it at the same time and then visiting you at home to break into your wall safe for good measure.

One would think that people should be up in arms over it and do everything to avert it instead of merely calmly discussing it with a proverbial shrug.

How and why has it come to this? Why is there this sudden need for the State to not only openly grab the vast bulk of what its citizens produce, but add to the loot by robbing them by thinly disguised stealth methods as well? There are two main reasons for this: the legacy of the past and the unwillingness to shrink the power and size of the State.

Time Preferences and Obstacles to Reform

In democracies (especially when they are using a fiat money system) time preferences tend to be much higher than they would otherwise be. This is most pronounced in the case of the political class: the average politician cares not one whit about the long term health of his nation's capital stock - it doesn't belong to him after all. However, he is in a position to dispose of other peoples' wealth and will almost always do so in a manner that 'buys' the maximum of votes in the next election. Note that this tendency to maximize the income obtained by political instead of economic means raises the time preferences of nearly everyone in society – this is so because it diminishes the prospective return on capital for everyone, including of course those whose wealth is diminished by taxation. Long term economic growth suffers accordingly (for readers who want to know more about this particular topic, Hans-Hermann Hoppe has written extensively about it).

Ever more promises were made to ever more people, ever more privileges were extended and ever more costly welfare and warfare programs were initiated. It was seemingly easy to pay for it all: tax revenues were high and what could not be obtained by means of taxation was simply borrowed and/or printed. It has been perfectly clear for a long time that the funding of all these programs would not be sustainable in the long run. Even the governments own 'watchdogs' like the 'GAO' ('government accountability office') in the US and similar offices elsewhere have continually made a compelling case that spending needs to be reined in.

Alas, in the long term 'we're all dead' as Keynes maintained, so why worry? To the politicians of the day, the long term has always been something someone else would eventually have to deal with.

We have now arrived at the edges of this long dreaded moment, the time when the piper will have to be paid.  The moment that could always be put off in the past has clearly been reached in the euro area for instance, where the limitations on government financing imposed on the supra-national central bank have unmasked the truth about government finances in a number of countries.

The past cannot be undone. In many cases it has become impossible to get rid of so-called 'entitlement spending' short of declaring national bankruptcy – it has become part of so-called 'mandatory spending' (we have to use quote marks here because a sufficiently motivated political leadership could deal with it if it wanted to). Moreover, politicians are loath to cut discretionary spending as well: no matter what type of spending is cut, there will be 'blowback' from the vested interests that are denied their place at the trough. Any spending cuts or economic reforms that really make a difference are a sure way to lose elections.

As an example, consider Gerhard Schröder's actually not overly radical welfare state and labor market reforms in Germany. He undertook them in light of the economic pressures German reunification had produced. They went against the grain of what his party (the social democrats) stood for. They most certainly led to his electoral defeat. And yet, today it is widely acknowledged that Germany's economy would have continued to stagnate and could never have become Europe's 'economic locomotive' without them. The positive effects arrived far too late to save Schröder's political career – he actually made policy for the long term, a rare exception.

Leviathan Doesn't Want to Shrink

Apart from the legacy of the past – which consists of the already accumulated outstanding public debt and the many promises to continue spending – there is a desire to keep the State's bloated size intact at all costs. Every single bureaucracy within the State is eager to keep growing and amass more powers over time. No ministry wants to be the one that bears the brunt of prospective spending cuts.

Regular readers know that we have focused our criticism of EU-style 'austerity' on this point: governments that are reluctantly forced to reduce their deficits and debts in the euro area tend to do so in a manner that aims to keep the size of government unaltered – the main focus is on raising taxes even further, not on slimming down the bloated State. The banking industry – which is the industry enjoying the biggest of all privileges, namely the power to create money ex nihilo – is likewise taboo. Apparently there cannot possibly be too many banks or any banks not worth saving at tax payer cost. Meanwhile, the system's ability to obtain profits by denying savers a return on their savings is couched in propaganda about the alleged necessity for central banks to manipulate rates to zero, and in some cases even below zero, to 'save the economy'.

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