Following the advice and encouragement of some fellow Turdites, I'll be setting up an ongoing Financial Repression discussion page here in the blog forum. First I'll be posting a copy of my Main Street post from yesterday. I'll follow with a copy of another Turdite's response to it, and a comment from me in reply.
I've settled on the "Current News and Events" section of the forum because I envision this thread going forward as a place to post links to any new and topical articles on the subject, ongoing commentary on the subject, and most importantly, ongoing economic data.
If we can gather the proper resources, we should be able to monitor the current status of the Financial Repression scheme with relatively hard numbers. Just how negative are real interest rates? Or in other terms, just how severely are we being financially repressed? What is nominal GDP growth? What is real GDP growth? Where do we stand on inflation? What about nominal debt growth? Where do we find that?
Intelligent back and forth of ideas is a good thing, but I'd rather not see the thread devolve into a shouting match about what the real inflation rate is. I would be more inclined to simply state things more along the lines of "The government says it's X, Shadowstats says it's Y, a middle ground might be Z".
In the same vein, I'd rather not see the thread become a soapbox for political/economic opinions about what the gov't should do, what the Fed should do, or how the populace should respond. I'd like to keep it more grounded in what the gov't is doing, what the Fed is doing, how the populace is responding. Similarly, predictions about the future should be more about what actually will happen, and less about what you think would be right or wrong.
So, let's do this thing!
My post from Sunday morning, which referenced Financial Repression, seemed to get positive reviews, so I thought it was a good time to put together a little primer on the subject. For background, here's the post:
There's nothing new about "Financial Repression". For those who've been around these issues for a while, you've seen these kinds of statements many times:
Essentially, these are "old school" terms for what is currently underway, while "Financial Repression" is the "new school" terminology for the same thing. The "new school" kicked off in March of 2011 with the publication of a scholarly paper by Carmen Reinhart and Belen Sbrancia. Reinhart's paper pulled together a lot of data, put things all together in a rational framework, and resurrected an old name for it, namely "Financial Repression".
A couple of definitions are in order before we get much further.
Nominal interest rates, less inflation, equals real interest rates.
Nominal GDP growth, less inflation, equals real GDP growth. It might be more useful to rearrange that equation to read real GDP growth, plus inflation, equals nominal GDP growth.
Here is a link to Reinhart's paper. It's about 50 pages of scholarly writing, but well worth a read. Lots of data and charts too. At a bare minimum it deserves a good skim.
If you are pressed for time, here is an article which summarizes it succinctly.
If I had to summarize the whole thing in one sentence, it would go something like this: "Negative real interest rates are the primary tool by which the purchasing power of the nations savers is appropriated and ultimately applied toward the retirement of the nations debts".
The first heavy hitter to give it a mention was Pimco's Bill Gross, in his May Investment Outlook;
The next fellow to really give it some traction was Jim Rickards with his KWN interview from June. Rickards does a pretty thorough job of summarizing both Reinhart's paper and Gross's comments, and weighs in on his own with comments about gold, and why he feels that even though financial repression will likely work for a while, it may not be ultimately successful this time around.
If you don't have the time to listen to 20 minutes of Jim Rickards (shame on you!) then here's an article with something of a brief summary of some, but not all, of the interview.
Jump ahead now to just a couple of weekends ago, to another Rickards KWN interview. Starting about 6 minutes in with comments about the Volcker Rule, the discussion is pretty much all about how current events play into the framework of financial repression, with a lot of talk about gold as a bonus.
A couple of additional comments are in order.
The point of my original post was that real GDP growth was not essential, and that nominal GDP growth was the bottom line. In refreshing my memory for this post, I was surprised to find Rickards saying that financial repression might not be successful this time partially because we are not getting real GDP growth. So I went back to Reinhart to see if she really did say that real GDP growth was essential. I'm not finding it. While it is fair to say that the real meat of Reinhart's paper deals with the post WW2 United States, and that there was real GDP growth in the period, I don't see any statement by Reinhart saying that real GDP growth is essential across the board.
We would all agree that real GDP growth is a good thing. It makes the whole process easier. It keeps people from marching in the streets and from tossing politicians out on their butts every couple of years, but when push comes to shove it is not essential. A bare look at the math will tell you that if nominal GDP growth exceeds the growth in the nominal debtload, then progress is being made. If TPTB can't get real growth, they'll go for nominal. That is to say, they'll do it all with inflation if they have to.
I'll give Rickards the benefit of the doubt here because he was really saying that the Fed is not getting the real growth that they'd like, and they are not getting the inflation they would like, and therefore between the two components, they are not getting the nominal growth that they would like.
What about those inflation rates? The Gov't numbers are an obvious lie. A prime motive for that is to manipulate the public's perceptions about the degree of financial repression that is in place. If you use the inflation data from ShadowStats, or something in between, you realize that you are being financially repressed far more severely than most people realize. Rickards addresses it in the USA Watchdog article above by saying that if you are trying to get inside the Fed's head, and guess their moves, then you need to use the numbers that they use, which are the Gov't numbers. Whether that is really true or not is another question.
And what about gold? It would seem an article of faith around here that gold is one way, probably historically the primary way of escaping the clutches of financial repression regimes. A holy grail of a defense against the dark arts, if you will. Yet Reinhart barely gives it a mention. Under the subject of the creation and maintenance of a captive domestic audience, she states, way down the list of steps, that there must be "prohibitions on gold transactions". That's all I can find. There's really no depth of research here about whether such prohibitions have been integral to a variety of historical financial repression regimes. Again, it might be a product of the focus on the post WW2 United States experience. The public couldn't own gold through most of it, therefore that must be important. Seems rather weak.
I was therefore surprised that Rickards again chimed in on the subject. On his list of reasons why financial repression might not work this time, he adds the fact that the public currently can own gold, and that therefore a primary escape route has not been blocked off. I'm surprised that Rickards jumps on an issue of Reinhart's that seems so poorly researched. And it also begs the question as to whether said escape route might be blocked off in the future. Confiscation anyone? It's been beaten to death on this blog, but not addressed by Rickards here.
Copy of a response to the Main Street post:
Great contribution EO, as always. Rickards did say that he thought repression would not work. You are correct in pointing out the distinction between real and nominal GDP. The only thing I would add is that politically, real growth in GDP is likely necessary for the strategy to work. The populace will not tolerate 20+ years of this nonsense, when the policy becomes obvious. Turning to gold is one option. Political upheaval (riots even) is another. No one in power wants to see the latter.
My response: Yes, you are correct, Rickards does say flatly that he does not think that it will work this time around. He hedges a tad by saying that it will be in place for a good couple of years before it cracks up. My choice of the word "might" was me just falling back on my own habits of being very careful about predictions, especially those about the future!
On the real GDP question, I did say that getting some real GDP growth does make it all easier in terms of political upheaval. I'm sure there is a line in the sand somewhere about how far you can get with inflation alone. Nobody knows where that line is right now. But the limiting factor looks to be a political one, not one grounded in economics. And it will vary from country to country, from political system to political system.
I'll take an initial stab at calculating real interest rates.
I'll arbitrarily choose the 1 year Treasury as a "risk free" rate. Currently 0.11%.
I remember seeing just recently that the last two months of headline CPI were 0.4 and 0.3. My quick and dirty method is to add two months together, multiply by 6, and then add 2.5% on to it to compensate for government lies. 0.3 plus 0.4= 0.7. Times six = 4.2%. Plus 2.5% = 6.7% inflation right here and now.
Nominal interest of 0.11% minus 6.7% inflation = Negative real interest rates of 6.59%!! Just as an initial guess right out of the box! This is the degree to which the purchasing power of the savers in the country is being stolen.
Help! I'm being Financially Repressed!
Thanks for starting this thread.
Hi EricO, thank you for starting this forum. I agree we are being financially repressed. Most people are still unaware of this, so it can still go on for some years.
From Wiki: Reinhart and Sbrancia characterise financial repression as consisting of the following key elements:
Let's see. Capping of interest rates? Check. Government control of banks? Check (Jim Rickard's pact between gov & primary dealers). Captive market? Check. Capital control? It's coming.
To me, it is unambiguous we are in financial repression, and have been since QE1 in 2009. When many people wake up, it will morph into high inflation (Fed can raise rates but they will still be negative real). When most people wake up, it will morph into loss of faith in currency. Still some years away, I think.
Eric O - great post!
An additional stressor to factor in to the greater picture of how TPTB are trying to goose a nominal GDP is the increasing curve of the debt load as it magnifies itself into each successive year without a major deficit reversal. In trying to understand how long this type of approach might be successful (without having any real GDP growth), the annual deficit, at least in the next few years, is projected to increase by an ever larger factor. The projected deficit for this fiscal year is $1.65 trillion with the debt ceiling currently 15.194 trillion. The reality is the deficit will most likely come in higher at close to 2 trillion, even if the official government number is monkeyed to look lower. ZIRP, for the next couple of years, will act as a control measure on how much interest payments expand the annual deficit or as a percentage of total government outlays.
Question: How long can a covert financial repression scheme be hidden from the people subjected to its rigors?
At least for me, I don't see them being able to keep this repression covert for much longer than a few more years because the debt load will cause more printing.....more printing equals more inflation.....taking this scheme more quickly into view for more to see and understand. I do think they can keep an overt repression scheme going longer than most of us would like to see.
Question: When do see the inflection point (yrs) for the financial repression scheme to become a call for action from the public?
Here is the text of today's GDP data:
Headline number is that July-Sept real GDP rose at an annual rate of 2.5%. They have an inflation adjustment in there of 2.0%, meaning that nominal GDP growth is at 4.5%. These are the government numbers at this time.
Personally, over the years I've settled on the habit of adding 2.5% to any inflation number that comes from Uncle Sam, in order to approximate the truth. So, their real GDP number of 2.5%, less the Eric O adjustment of 2.5%, brings real GDP growth back to dead flat ZERO for now. Which feels about right.
As good a time as any to point out that we have two different inflation measures that get bandied about. There's the CPI which by my count in a post above is running around 4.2% "official" and around 6.7% "Eric O", and then there's the one used in the GDP releases which is at 2.0% "official" and around 4.5% "Eric O". Clearly there are different methodologies at work here, but the same incentives at work for any government inflation number to be understated. From my observation over the years, and from trying to come at it from a variety of quantitative and qualitative methods, I've personally settled on always adding 2-3% to any inflation number that comes from the government. For purposes of this thread I'll just stick with 2.5%.
So where do things stand? If real GDP growth is 0.0%, and inflation is somewhere between 4.5% and 6.7%, then nominal GDP growth is between 4.5% and 6.7%. We have a post above about debt levels and annual deficits. We can eyeball the growth in nominal debt from there (it looks to be in excess of 10%) and that only includes official debt and not a host of other contingent liabilities that are out there. From the perspective of TPTB, they have their foot to the floor with the financial repression approach, with negative real interest rates already at a hefty 6.59% (see post above), but they are still not getting the results that they need. Nominal debt growth still exceeds nominal GDP growth. They need more GDP. They would love some more real GDP, but they'll settle on more inflation to goose nominal GDP if that's all they can get.
Expect more stringent financial repression still to come. Expect negative interest rates to get more negative. Expect more inflation. Expect more banks, pensions, insurance companies, and friendly foreign central banks to be pressed further into service as captive buyers of US debt. Expect a new round of news items about how Social Security and Medicare need to be tweaked in order to maintain inflows in excess of outflows further out into the future. Those programs have always been captive buyers of Treasury debt and must remain so. Expect more news items that walk, talk, and smell like capital controls. This process has only just begun.
Good luck everybody.
Interesting tweet from Rickards yesterday:
In case it's not clear, let me explain. Rickards and Krugman are well known antagonists. It seems that Krugman has come up with a new term, "nominal GDP targeting". Sounds a lot like the entire financial repression discussion we've had up thread. And it should, because that's exactly what it is. Not surprisingly, Krugman is very much in favor of it. Rickards has been saying for months that the Fed doesn't need to come out publicly and announce QE3, essentially because they really have all the tools they need right there within the construct of financial repression. So Rickards, while being against it, is smart enough to see right through it and see just exactly what they are up to.
The point of the tweet is that not only is the Fed not going to utter the phrase "QE3", and not only are they never going to utter the phrase "financial repression", but they have now come up with a new term for it that seems harmless enough as a useful tool in the management of perceptions. Ahhh, but we here in Turd Town see right through it! MOPE indeed.
Not sure if that Krugman link in the coped tweet is working, so here is a cleaner one.
I am excited to read his new book Currency Wars when it comes out in mid November.
Christine Romer (former head of Obama's Council of Economic Advisors) brought up "nominal GDP targeting". Krugman merely piled on in support.
Check out this paragraph from Romer:
"Though announcing the new framework would help, it probably wouldn’t be enough to close the nominal G.D.P. gap anytime soon. The Fed would need to take additional steps. These might include further quantitative easing, more forceful promises about short-term interest rates, and perhaps moves to lower the exchange rate. Such actions wouldn’t just affect expectations; they would also be directly helpful. For example, a weaker dollar would stimulate exports."
She's basically saying that if they don't get the Nominal GDP growth that they want, they can just push harder on the Financial Repression! Exactly what we are talking about on this thread. It's pretty clear what's coming down the road here guys. Prepare Accordingly.
Check in every few days and that will pretty much keep you in the loop.
Wow. This thread is really a great asset, Eric. Ditto on the "Thanks" for starting it.
One thing to keep in mind is that the Gold Confiscation during the 1930's is generally a misnomer. It was not aimed at the common person, but rather the Banks. The Banks had tons of Gold (literally), and the Feds took it all, and gave them a piece of paper instead. As far as the average person goes, the percentage obtained was incredibly small. I want to say about 3-5%, but that's from memory and could be wrong (someone please correct me if that's wrong). Plus, the average person got to keep up to 5 coins.
Still, the main source was from the Banks. And the Banks still never got their gold back. Jim Rickards pointed this out in a piece on KWN a few months back.
Another gold confiscation attempt would be woefully unsuccessful now, IMO. They've still got the main treasure chest, supposedly.
Geez friend, your an amazing whirlwind. I have not even been to this corner of "Town". Love this pal. Great job.
If I may, I'd like to add an article that Jesse recently posted, as I think it's important for the future, and shouldn't be missed when we actually get through this mess:
Entitled: Reprise: The Causes of the Financial Crisis and the Obsessive Folly of Greed
I hope you don't mind my adding this for easy future reference. It was written so that the attempts to rewrite history will fail:
"There will come a moment when the most urgent threats posed by the credit crisis have eased and the larger task before us will be to chart a direction for the economic steps ahead. This will be a dangerous moment. Behind the debates over future policy is a debate over history—a debate over the causes of our current situation. The battle for the past will determine the battle for the present. So it’s crucial to get the history straight."
Joseph Stiglitz, Capitalist Fools, January 2009
And these are:
Reagan's nomination of Alan Greenspan to replace Paul Volcker as Fed Chairman
The Repeal of Glass-Steagall and the Cult of Self-Regulation
Bush Tax Cuts for Upper Income Individuals, Corporations, and Speculation
Failure to Address Rampant Accounting Fraud Driven by Excessive and Flawed Compensation Models
Providing Enormous Bailouts to the Banks without Engaging Systemic Reform for the Underlying Causes of the Failure
And please add anything that you think might be on topic.
Glad you are here. I was starting to feel a little lonesome...
Thanks for the post. I just read that entire article from its source over at Jesse's. The last line in the paragraph is a tell. Greenspan was a gold bug and purveyor of truth advocating a gold standard prior to 1966.
Hmmm, to go back in time and hear the conversation that put him into the hip pocket of the Fed would be utterly amazing.
Good Stuff ES
If you've digested the prior parts of the thread, you can see how manipulations of the CPI play an integral part of so many schemes. Here's a link to a post on Main St that in turn links to an important article about proposed changes to the CPI. The article points out some of the other effects of an understated CPI such as smaller Social Security payouts, tax increases as tax brackets fail to rise with inflation, etc. Those of us "in the know" about financial repression understand all of that, plus the degree to which it allows TPTB to overstate real GDP growth and to understate the degree to which our savings is being appropriated via negative real interest rates.
Here's a direct link to the article:
"Government restrictions on the transfer of assets abroad through the imposition of capital controls."
Here is my families experience. My brother is a medical professional (six figure salary) who was buying a home in Florida. In order to qualify for his mortgage he needed a 100K down payment (on a 300k home). Luckily my parents are well to do and were able to transfer him, through an interbank transfer, the money needed to secure the purchase.
Subsequently, when he sold his other home, he tried to transfer the money back to repay the temporary loan. Here is where the problems started. Despite numerous attempts and phone calls by both my brother and my dad to bank managers etc. the transfer failed on three separate occasions. This was despite working through the details and overcoming all the "glitches" that the banks threw in the way.
Finally they had to use a physical cheque that the bank here processed through an american dollar account (with a significant waiting period to clear it). If there was ever a sign of how bad things are in getting your money out of the US this was it for me.
Good luck to you down south of the border.
Just one example.
ZH weighs in with an article on Nominal GDP Targeting, which as we already know is just newspeak for Financial Repression. All the terminology discussed up thread will certainly help the reader in wading through the lengthy verbiage from Goldman Sachs.
This form of repression is nothing new. It's been around for quite a while. One simply cannot get a mortgage without there being a trail of "cold money". Banks have a term for this which escapes me at the moment. But they like to know that the money has been in an account long enough in order for it to either have been traced or seized. Typically 90 days, IIRC.
This is a by-product of the so-called "War on Drugs", which most Americans have whole heartedly embraced just so they can be a part of the corruption and the Ponzi scheme in order to make a few bucks with a house and a job. That they were so willing to sacrifice their Constitutional Rights for a pittance is the basic story of this generation. And now that pittance is a lot smaller, still shrinking, and it's starting to dawn on some citizens that maybe it wasn't a good deal.
It's not objectionable enough for those same folks to stand up and demand their rights back. As long as they are feeding off the Ponzi and profiting from the corruption, they'll keep quiet IMO, desparately chasing the delusion that we can return to the old F.I.R.E. economy.