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"Currency Wars "
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"EXTEND & PRETEND "
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"SULTANS OF SWAP"
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ACT I
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EURO EXPERIMENT: German Steel or Schmucks?

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PRESERVE & PROTECT:  The Jaws of Death

 

 

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FINANCIAL REPRESSION

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2012

Preparations for FINANCIAL REPRESSION

PART IV

 

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FINANCIAL REPRESSION In Asia and the US

PART III


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FINANCIAL REPRESSION In Europe

PART II

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Understanding FINANCIAL REPRESSION

PART I

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Public Materials of Interest
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08/03/11

FINANCIAL REPRESSION

Financial Repression, by whatever name, coming to America! YouTube

 

06/14/11

FINANCIAL REPRESSION

"The Bernanke" explains Financial Repression YouTube

 

Public Materials of Interest
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READING MATERIALS
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FINANCIAL REPRESSION

FINANCIAL REPRESSION: One cannot operate a capitalist system if the state can borrow at a negative cost.

"One Cannot Operate A Capitalist System If The State Can Borrow At A Negative Cost" 06/23/12 Charles Gave

Consumption bubbles fuelled by negative real rates always contain the seeds of their own destruction.

Debt levels get too high and force household deleveraging; meanwhile the currency falls, which improves competitiveness in the global marketplace. The combined effect is a narrowing of the current account deficit.

When the world’s reserve currency nation experiences such a narrowing, the supply of dollars outside of the US falls, and inevitably catches some countries out.

Excluding oil and China, the annualized US current account has moved from a deficit of 3% of GDP in 2003 to a recent surplus of 1% of GDP. This improvement in the current account position has taken place despite the fact that most of the world is growing well below its potential. In effect, the US economy has exercised an immense deflationary pressure on the margins of companies outside of the US, and in so doing has managed to “recover” roughly 4 % of its GDP.

While the oil producers and China may still be sitting on a ton of US dollars—which they are recycling into USTs and thus keeping US government borrowing costs at bargain-basement levels—the dollar supply elsewhere in the world has fallen sharply. The countries which have no access to the US currency have to start using their foreign exchange reserves to meet their payments (very often to oil producers and China), thus amplifying the problem. When a country is forced to sell reserves, then it has to follow restrictive monetary and budget policies to depress domestic demand and recreate a current account surplus. The cost of capital rises sharply for the private sector. India today offers a prime example of a country stuck in this corner. In the chart below , I am showing the 12-month variations of foreign central bank reserves deposited at Fed—this is excluding China (I would also exclude the oil producers, but could not find a way of estimating their forex reserves). Past periods of rundowns in global forex reserves always have been associated with crises.

When the US current account deficit starts closing, the dwindling supply of dollars eventually leads to a panicked rush for dollars. Non-US companies that binged on dollars when the money was cheap and the dollar was forever going down, now find themselves caught out. Every entity with a negative cash flow in dollars scrambles for dollars — even through selling local assets and converting the proceeds — depressing risk assets everywhere. The US dollar and USTs outperform everything, including industrial metals (see chart overleaf). And of course equities are not spared (see chart overleaf). Needless to say, if one has to be invested in equities in these periods, stay in the US stock market (as US companies will not have such troubles) and avoid non-US equities except when they become extraordinarily cheap versus the US market (e.g., a ratio below 1.2x).

could go on and on with other examples, but let’s just get to the point: one cannot operate a capitalist system if the state can borrow at a negative cost. Years of irresponsibly loose monetary policy in the US has led to cheap funding for the US (and other) governments, but difficult credit conditions for the private sector all around the world. As I underlined in How The World Works, negative real rates leads to misallocation of capital which ends in asset deflation, while simultaneously limiting the capacity for recovery by driving out the private sector. The Fed has been managed by a bunch of Keynesians who care nothing about the role of the dollar as a reserve currency and who probably believed they were managing the central bank of Belorussia or Zimbabwe!

FINANCIAL REPRESSION

 

FINANCIAL REPRESSION - Income Inequality

Fed's Survey of Consmer Finances 06/12/12 BI

Income inequality has gotten so extreme here that the US now ranks 93rd in the world in "income equality." China's ahead of us. So is India. So is Iran.

FINANCIAL REPRESSION

Chart of the Day 03/16/12 - The inflation-adjusted median price of a single-family home in the United States over the past 42 years. Not only did housing prices increase at a rapid rate from 1991 to 2005, the rate at which housing prices increased -- increased. That brings us to today's chart which illustrates how the inflation-adjusted median home price is currently 42% off its 2005 peak. That's a $112,000 drop. In fact, a home buyer who bought the median priced single-family home at the 1979 peak has actually seen that home lose value (13.7% loss). Not an impressive performance considering that more than three decades have passed. It is worth noting that the median priced home is currently at the bottom of a price range that existed from the late 1970s into the mid-1990s.

FINANCIAL REPRESSION

FINANCIAL REPRESSION - Public Debt Forgiveness

The Debt Crisis: The cunning plan revealed? 03/13/12 Economist

DYLAN Grice of Societe Generale recently highlighted an intriguing quote from Sir Mervyn King, governor of the Bank of England, about the central bank's accumulated pile of gilts. Last month, Sir Mervyn said that

I have absolutely no doubt that when the time comes for us to reduce the size of the balance sheet that we'll find that a whole lot easier than we did when expanding it.

The nature of this cunning plan was not revealed. But there was an intriguing suggestion in yesterday's FT from Jo Owen, a former partner of Accenture. the Bank of England should simply retire (i.e. cancel) the debt. As the author writes

After buying £325 billion of debt from the market, the public sector (the Treasury) is paying interest to itself (the BofE) on debt that it owes to itself. It makes no sense for the public sector to owe itself money.

One can understand the author's reasoning, although wait until he gets started on America's social security trust fund. But what might be the flaws with this plan?

The main obstacle to retiring the debt lies with the markets and the credit rating agencies. They may see this as a slide towards Weimar Republic economics; monetary financing of government debt by printing money.

Indeed they might, for that is what it would be. It would also be an effective default, even if the buyer was conniving in the write-off. Those who were suspicious of QE have feared that this might be the end game all along.

However the author also suggests that the money created to buy the gilts could be "cancelled". I am not sure what this would mean in practice. When the bonds were bought, the money was added to the bank accounts of the sellers; in practice it is an asset of the banks. What would happen if banks suddenly took a £325 billion hit to their assets? One reason central banks went down the QE road was to stabilise the financial system; the overnight reversal of this policy would undo much of the good work.

It seems unlikely that this is really the Bank's plan. Instead, the Bank probably expects to sell the gilts to the commercial banks, which will need to own more government bonds as part of Basle process for beefing up their capital and liquidity ratios. Of course, this is still an oddity, on a par with a government owing money to itself. The government will be standing behind the banks as lender of last resort, and the banks will be standing behind the government as lender of first resort.

Having a captive buyer in the form of the banking sector is a form of financial repression. On that note, Carmen Reinhart has another excellent comment piece on Bloomberg. As she points out

Critical factors explaining the high incidence of negative real interest rates after the crisis are the aggressively expansive stance of monetary policy and heavy central bank intervention in many advanced and emerging economies.

This raises the broad question of whether current interest rates are more likely to reflect market conditions or whether they are determined by the actions of official large players in financial markets. A large role for non-market forces in interest-rate determination is a central feature of financial repression.

Official bodies (including foreign central banks) own around half the Treasury bond market; the share of private sector (and thus profit-maximising) is probably the lowest since the early 1970s. As Ms Reinhart warns

That, too, was a period of rising oil, gold and commodity prices, negative real interest rates, currency turmoil and, eventually, higher inflation.

FINANCIAL REPRESSION

FINANCIAL REPRESSION - Carmen M Reinhart

Financial Repression Back to Stay: Carmen M. Reinhart 03/12/12 BL Unlike income, consumption or sales taxes, the “repression” tax rate is determined by factors such as financial regulations and inflation performance, which are opaque -- if not invisible -- to the highly politicized realm of fiscal policy.

FINANCIAL REPRESSION

FINANCIAL REPRESSION - A "Nominal Policy" Vehicle

The Fed's Manipulation Of The Market Is Driving TrimTabs' Charles Biderman "Even More Nuts Than He Already Is" 03/10/12 Zero Hedge - "Individuals are net sellers of US equities and have been for years, probably because they need to pay bills and stuff. So how are they able to do that and get decent prices without the stock market cracking. Well simple the Federal Reserve has been printing huge amounts of money and that ultimately has been boosting the value of US equities, and therefore the sellers can sell.

 

FINANCIAL REPRESSION

FINANCIAL REPRESSION - Toolbox of Centralized Banking

Credit Suisse are big fans: “What to do when we get synchronised QE” 03/01/12

FINANCIAL REPRESSION

FINANCIAL REPRESSION - A Practiced Methodolgy for Sovereign Debt Reduction

Stealth sovereign bailouts 03/05/12 Zero Hedge

Jefferies summarizes a piece of academic research put out by the Bank for International Settlements in November 2011:

  • It appears that individuals forget that financial repression has been used far more frequently in the past, particularly in liquidating the vast debt accumulated by developed countries post the Second World War. Indeed, in the past, the US and UK have seen their debt ‘liquidated’ using negative real interest rates by 2% to 3% of GDP on average per annum.
  • The US and UK did not use high levels of inflation to do so in comparison to other countries. Argentina holds the record with negative real interest rates recorded every single year but one between 1945 and 1980. Between 1945 and 1980, there was only a single year when Argentina saw anything other than negative real interest rates.
  • Secondly, the inflation rate may not necessarily need to neither be that high relative to history nor take markets by surprise. According to the authors, between 1945 and 1980, the average US and UK negative real interest rate was 3.5%. However, the average for Argentina between 1942 and 1980 was 21.4%.

FINANCIAL REPRESSION


 

  • The Liquidation of Government Debt Carmen Reinhart, Belen Sbranica - International Monetary Fund (IMF web site) - National Bureau of Economic Research (NBER) Working Paper 16893 - 66 page .pdf
  • The Liquidation of Government Debt Carmen M. Reinhart and M. Belen Sbrancia, Discussion Comments by Ignazio Visco and Alan Taylor - Bank of International Settlements (BIS) Working Paper #363 - November 2011
  • Financial Repression - 01-07-12 - Alasdair Macleod, GoldMoney
FINANCIAL REPRESSION
FINANCIAL REPRESSION
FINANCIAL REPRESSION

 

Financial Repression: How Sneaky Governments Steal Your Money 02/27/12 Munknee.com

 

Extend And Pretend Coming To An End 02/27/12 Jim Quinn - Burning Platform

FINANCIAL REPRESSION

HERE IS WHAT THE US STOCK MARKET RALLY BUYS INVESTORS AT THE PUMP

UNDERSTAND THE DIFFERENCE BEWTWEEN PRICE AND VALUE

"Everyone knows the price of something, few know the value of most things."

 
 

 

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