Financial Repression - Still a growing issue around the world

It is critical to know the financial environment we are navigating. Currently, we are in a world of financial repression through policies that hurt savers, encourage speculation, and hampers growth. This has been going on for approximately a decade. It is strong language but it is an apt framework for thinking about investment decisions and portfolio construction. We have written on this theme in the past, but it critical to understand this regime.

Financial repression is the use of government regulatory or monetary policy to capture or under-pay domestic savers in an attempt to strengthen growth, meet policy objectives like cutting the cost of debt, or funneling funds to specific projects. The phrase by Ronald McKinnon was first used to describe the policy actions of emerging markets, but it now represents the objective of many advanced economies.

• Maintain low rates and/or negative real rates to cut the cost of debt; the whole QE policy focus.
• Use "macro-prudential" policies to limit growth and control banking, finance, and insurance industries.
• Develop debtor friendly policies relative to creditors/savers to reduce the burden on borrowers.
• Develop policies that limit flow or control capital to reduce the impact domestic debtors.

All of these policies may be classified as financial repression. Some may serve useful short-term goals, but they all serve as a form of hidden taxation on savers. Inflation, regulation, forced negative rates, and capital controls are saving taxes that attempt to repurpose capital. If temporary policies turn more permanent, there will be significant distortions as savers attempt to avoid the repression.

The response of markets is predictable. Savers engage in riskier investments to offset the repression, the search or reach for yield. The low real rates support marginal firms, industrial and financial zombies that should not exist. Those firms that can borrow will borrow and allow for equity buy-backs over demand driven investments. Unfortunately, these repression regimes can last for decades because the reversals of economic distortions are  painful. 

A transition away from financial repression is not a burst of financial freedom that will be good for markets but a potentially violent upheaval as market adjust to "normalcy". Call it the big tail event, but financial repression is not easy to eradicate. Still, it is critical to think through a portfolio barbell of holding real assets and prepare for a tail contingency. 

 See Financial Repression is Here - Helicopter Money and MMT Coming