Financial repression is any public policy that is designed to influence the market price of financing government debts, either through government bonds or the nation’s currency. Direct methods of repression include things like setting target interest rates, monetizing government debt or implementing interest rate caps. Indirect methods include polices designed to change the amount of debt or currency at a given price. Examples include requirements to hold minimum amounts of government debt on bank balance sheets or establishing minimum requirements for government bonds in pension funds.
Governments may take these steps to improve their ability to finance public debt and forestall more painful adjustment processes, though there can be other motives, and because these methods are less transparent, and thus less controversial, than direct tax hikes or spending cuts. Investors should be wary of financial repression because it is primarily a tool to redistribute wealth from creditors (citizens) to debtors (governments) to the detriment of creditors, fixed income investors and savers....
It is important to realize these methods as practiced are only partially effective and cannot go on forever, as advanced economies continue to add significantly to their public debts despite low financing costs. Some intensification of financial repression, fiscal austerity, or stronger growth must occur to lower the likelihood of a future debt crisis.
Scott A. Mather, PIMCO Economic Outlook, Game Change for Bond Investors?
Note:
1. "Governments practicing financial repression may be transferring wealth from creditors (citizens [bondholders]) to debtors (governments) to the detriment of creditors, fixed income investors and savers [rentiers]."
Bond holders are clearly upset by the prospect that QE3 (if it comes about) will target price instead of quantity, thereby capping interest rates. Fed bond purchases also transfer the interest on those securities to government, reducing the non-government net financial assets that would have accrued.
PIMCO is apparently concerned that Bernanke has figured out how to neuter the "bond vigilantes" by taking control of interest rates along the yield curve, a control that naturally falls to government as the currency monopolist.
2. "It is important to realize these methods as practiced are only partially effective and cannot go on forever, as advanced economies continue to add significantly to their public debts despite low financing costs. Some intensification of financial repression, fiscal austerity, or stronger growth must occur to lower the likelihood of a future debt crisis."
Mather does not seem to get that sovereign debt crisis is an oxymoron for countries like the US that are monopoly providers of a nonconvertible floating rate currency. This also accounts for the hissy fits that Bill Gross has recently been throwing.
Obviously, this will not "go on forever." It is an attempt to turn the economy around, although perhaps a misguided one, or else a hail mary pass since Congress refuses to act fiscally.
But it won't end because "it can't go on forever." The Fed already sets the overnight rate, and there is no contradiction in its setting the yield curve, too.
(h/t Zero Hedge)
