Aasof’s Reflections

At midday I’m off to the pub.  While I’m still in the process of ‘recovery’ from a very nasty illness, I need to get out – if only to show off my ability with all this technology my son has thrown at me (iPad, iPhone) – and an internet ‘dongle thing’ supplied by my new mobile phone supplier. However: the following article from the Cobden Centre caught my attention: the complete article is called the The Great Repression and I have focused on the last part of the article which asks (and answers) the question —

So how precisely will governments go about stealing savers’ money?

In a National Bureau of Economic Research  paper last year, Carmen Reinhart and M. Belen Sbrancia pointed the way. As their abstract states,

Historically, periods of high indebtedness have been associated with a rising incidence of default or restructuring of public and private debts. A subtle type of debt restructuring takes the form of financial repression.

Financial repression includes directed lending to government by captive domestic audiences (such as pension funds), explicit or implicit caps on interest rates, regulation of cross-border capital movements, and (generally) a tighter connection between governments and banks. Low nominal interest rates help reduce debt servicing costs while a high incidence of negative real interest rates liquidates or erodes the real value of government debt. Thus, financial repression is most successful in liquidating debts when accompanied by a steady dose of inflation

The UK government has already achieved partial control of directed lending given that it owns half of our banking system. Both of the Anglo-Saxon economies (USA & UK) have also achieved saver theft status by the manipulation of interest rates. Next on the list will be a creeping abuse of those captive domestic audiences and, perhaps, regulation on capital controls.  Very few of these will actually be novelties and the widespread use of such policies between 1945 and 1980 has been‚ ‘collectively forgotten’. We have had half a century of increasingly free markets. In the official governmental version of reality, those markets became too free, and now require the firm hand of the state. Governments are unlikely to acknowledge the extent to which their own untenable borrowings laid the groundwork for the financial crisis.

Highly paid shills  posing as an enthusiastic or successful customer to encourage buyers by posing as a disinterested advocate for the status quo on Wall Street,  have recently been wheeled out to observe the fundamental ugliness of western government bonds. They are correct. This is an asset class that has managed to defy the laws of economics in becoming ever more expensive even as its supply swells. Their response has been to recommend piling into stocks instead. The logic here is not so pristine.

If Napier’s thesis is correct, the West faces a period of outright deflation, which will be deeply traumatic for exactly the sort of speculative stocks that have lately done so well. Admittedly, the picture is confused, and prone to all sorts of political horseplay, as observers of the long-running euro zone farce can attest. Nevertheless, when faced with huge underlying uncertainties, structurally unsound banking and government finances; with central banks determinedly priming the monetary pumps, we conclude that the last free lunch in investment markets remains diversification.

G7 government bond markets are a waste of time (though you may end up being cattle-prodded into them regardless). But there are still investment grade sovereign markets offering positive real yields. Stock markets are partying like 1999. Which, in many cases, it probably is. We would normally advise to enjoy the party but dance near the door. This time round, we weren’t invited to the party — and we don’t mind in the slightest.

I would endorse what Charlie Booker said in The Guardian article The true value of money — or why you can’t fart a crashing plane back into the sky:

Banknotes aren’t worth the paper they’re printed on. The entire economy relies on the suspension of disbelief.