Turn the Tables on Financial Repression

When I first heard the term “financial repression,” I thought it had to be a joke. Why would governments and central banks use a term with such a negative connotation? Even people who are financially illiterate will still understand that financial repression is a bad thing. Nonetheless, financial repression is real and will destroy the bond market.

Simply put, financial repression is strategy governments use to reduce their debt burden by manipulating interest rates below inflation. It allows them to borrow in dollars and repay in dimes.

Here’s how the IMF describes it:

“High public debt often produces the drama of default and restructuring. But debt is also reduced through financial repression, a tax on bondholders and savers via negative or below-market real interest rates. After WWII, capital controls and regulatory restrictions created a captive audience for government debt, limiting tax-base erosion. Financial repression is most successful in liquidating debt when accompanied by inflation.”

For example, if inflation is 9% and governments fix interest rates at 4%, there is an ongoing wealth transfer of 5% from the lender to the borrower that compounds over time.

I think financial repression is how the US government will try to manage its otherwise impossible debt situation by siphoning off the wealth stored in Treasuries.

The idea is to stealthily confiscate wealth from bondholders without causing too much alarm. However, there is a good chance that bondholders will figure out this insidious scam and dump their bonds, pushing interest rates higher.

Since the Fed cannot allow rates to rise much further without sparking the bankruptcy of the US government, they’d be forced to print more dollars to try to counteract the rising rates. However, that would cause inflation to increase and bondholders to seek an even higher interest rate to compensate for the inflation, creating a self-perpetuating doom loop.

That could invite a disastrous financial collapse or even hyperinflation. I expect the US government understands this and will implement measures to block the exits (capital controls) and corral more people into Treasuries through various mandates and regulations as they impose financial repression.

Many countries have forced private retirement funds into unwanted government debt. I have no doubt the US government would do the same under pressure.

They could try to sell it to the scared and ignorant public as a safety measure, to help people protect their retirement savings by putting them into “safe” Treasuries amid a stock market collapse. They could try to sell it with patriotic lies and then push War Bonds, as they’ve done in the past. They could mandate that some amount, say 25% of new contributions to private retirement accounts, must consist of Treasuries—for your own good, of course. They could forcibly convert existing assets held in retirement accounts into government bonds.

No matter the method, the result is the same. These schemes corral more wealth into Treasuries, where financial repression can easily take it. At the same time, I’d expect the mainstream media to ramp up its propaganda and gaslighting on inflation.

They’ll blame supply chain problems, Vladimir Putin, and greedy corporations… anything but the Fed’s currency debasement as the source of inflation.

Further, we can expect the government to change how it calculates inflation—to show fewer price increases—and raise its official inflation target from 2% to 3% or higher.

In Argentina, the government made publishing inflation statistics that differ from the official government numbers illegal. I wouldn’t be surprised if the US government did something similar.

At a minimum, discussing inflation statistics other than the official, crooked CPI might be deemed disinformation and cause you or your business to be de-platformed.

In short, expect a whole slew of shenanigans to rope people into Treasuries and lie to them about inflation to maximize the wealth they can steal with financial repression.

Here’s the bottom line. I think currency debasement is the inevitable outcome of the US government’s impossible debt situation.

The only question is whether the currency debasement will occur in a relatively controlled fashion (financial repression) or it will spiral out of control (potentially hyperinflation). Either outcome is catastrophic for bondholders.

Observation #7: The US government will use financial repression to debase the currency in a controlled fashion, though it could spiral into out-of-control inflation.

A Broken Contract

Bonds are simply a contract denominated in fiat currency. They’re like long-dated currency.

The issuer promises to repay the bondholder the principal amount at the bond’s maturity date, often with periodic interest payments.

The fatal problem with bonds is that they are denominated in fiat currency—central bank confetti—which I think will be debased to a staggering degree as it’s the only way the US government can deal with its impossible debt situation.

I expect the debasement will far exceed the measly nominal yield Treasuries and most other bonds will offer. That makes bonds a worthless promise. Bondholders are all but guaranteed to receive a negative real rate of return over the long term—and possibly be wiped out.\ However, that wealth will not just evaporate. Financial repression will transfer it to the US government.

The investment implications are profound. Treasuries are no longer “risk-free” but rather the opposite. Notwithstanding any short-term bounces, the long-term trend is clear. Treasuries are a guaranteed way to lose wealth.

Given that outlook and the recent record worst year, how likely is it that Treasuries will remain the world’s premier store-of-value asset? Not likely, in my view. That means people will look for alternatives to park their savings.

Observation #8: Treasuries will no longer be the “go-to” store-of-value asset as people look for alternatives.

Much of the value stored in the $133 trillion global bond market will move elsewhere… Either voluntarily to superior store-of-value assets or involuntarily to bankrupt governments and their cronies as they accelerate the largest wealth transfer in history.

That is the Big Picture reality that most people don’t understand… yet.

Article cross-posted from International Man.

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