Financial Repression Has Come Back to Stay: Carmen M. Reinhart

[doom&gloom]

To imagine ANYONE would want in on the bond markets at this stage is beyond comprehension. Even a rise in interest rates will ensure the money mandarins keep the payout rate below the real rate of inflation. With 50% of bonds now being absorbed by the Fed/government, I wonder how long they can keep a lid on all this...

http://www.bloomberg.com/news/2012-0...-reinhart.html

As they have before in the aftermath of financial crises or wars, governments and central banks are increasingly resorting to a form of “taxation” that helps liquidate the huge overhang of public and private debt and eases the burden of servicing that debt.
Such policies, known as financial repression, usually involve a strong connection between the government, the central bank and the financial sector. In the U.S., as in Europe, at present, this means consistent negative real interest rates (yielding less than the rate of inflation) that are equivalent to a tax on bondholders and, more generally, savers.

*snip*


Faced with a private and public domestic debt overhang of historic proportions, policy makers will be preoccupied with debt reduction, debt management, and, in general, efforts to keep debt-servicing costs manageable.
In this setting, financial repression in its many guises (with its dual aims of keeping interest rates low and creating or maintaining captive domestic audiences) will probably find renewed favor and will likely be with us for a long time.

[dcarrigg]

Re: Financial Repression Has Come Back to Stay: Carmen M. Reinhart

To imagine ANYONE would want in on the bond markets at this stage is beyond comprehension. Even a rise in interest rates will ensure the money mandarins keep the payout rate below the real rate of inflation. With 50% of bonds now being absorbed by the Fed/government, I wonder how long they can keep a lid on all this...

http://www.bloomberg.com/news/2012-0...-reinhart.html

And think of the consequences of this.

It means that every pension fund will blow up. They were all built on 6%+/yr return assumptions. Keeping interest rates low means that they will get a third of that if they're lucky. Therefore the fund is doubling every 30 years instead of every 10 say. All structured annuities created before Greenspan's wild ride lose hard.

It means that savings are meaningless.

It means that home prices can and will fall quite a bit from where they are now if and when interest rates rise.

Because one day the rates will have to rise above zero. Mortgage rates will have to go up. People can't afford them now. An entire generation is priced out of the market in most of the country.

I'd say they can keep the lid on for a longer or shorter time depending on what the goals of the Fed are.

If the Fed wants to end every pension system in the US, all it has to do is keep interest rates here through 2015 or so - maybe pulling a full 10 years (old doubling period) low interest rates to destroy retirements. That should be enough that chapter 11 will kill them on the private side and chapter 9 and political pressure will kill them all at the state and local end. Keep in mind that this is a conscious choice on the Fed's part. The funds already starting to fall.

If the Fed wants home prices to stay high as long as possible, all it has to do is keep interest rates where they are as long as possible. Prices should go up, erasing negative equity eventually. Wages will not keep up, but the worst of the loans will be worked through. Of course, that assumes that there is demand...an assumption of which I'm skeptical.

If the Fed wants to encourage consumer spending as much as possible, all it has to do is keep interest rates where they are as long as possible. If saving's worthless, people will spend, particularly when things get more expensive, but take-home pay declines. Buy it now...while you can...

If the Fed wants to be able to afford the level of debt that the U.S. took (and continues to take) on, it will keep interest rates where they are as long as possible. This has the added benefit of depriving Social Security of funds (the primary holder of U.S. Treasuries), and combined with "payroll tax cut relief" should cut off the last stable funding stream for retirees the one way they can do it - austerity - crying broke.

If the Fed wants to lower unemployment by increasing inflation and eroding real wages (thereby taking weight off of payrolls and allowing more hiring), then it should keep interest rates where they are.

I'd say it's win-win-win-win-win for the Fed.

WIN - End retirement security for anyone who had previously enjoyed it by starving pensions. Put everyone else left exclusively into stocks. That way there they're completely at the mercy of the 401(k) roulette wheel, and therefore much more interested in the success of financial institutions.

WIN - Keep house prices up so far as possible so that negative equity doesn't become so apparent (as it may have in inflation-adjusted dollars) that people walk away from their mortgages en masse. Do this knowing housing prices (in general - not locally) will be depressed and or falling in real terms for the next couple of decades.

WIN - Keep consumer spending and debt levels as high as possible to prevent an even greater demand gap than would come if savings rates were above 1%. Give time for consumer spending in other countries to make up for it before you write-off the American middle class.

WIN - Keep the US debt relatively cheap so that government is affordable in the future and so that Social Security may be starved. This reinforces the importance of your 401(k) - and by proxy the success of finance - to your future. In the short term, people reliant 100% on mutual funds for retirement will kill for TARP II. In the long run eventually nobody will come to expect any form of payment in retirement any longer, which should work wonders for balance sheets and "enhance the competitiveness of American workers in the global economy".

WIN - As an added bonus, eventual inflationary pressures should ease unemployment a bit at the cost of real wages. Lower real wages should make the American working class "more competitive" with Chinese and other cheap labor.

Where do they lose? From the billion dollar vantage point it all makes perfect sense. Plus, they're pretty much backed into a corner. What else are they going to do? Raise rates and force trillions of dollars of defaults over night? Sink every big bank? Throw the whole system of debts and credits into chaos? They may as well declare a debt holiday and restart the whole damned system from scratch at that point. What percentage increase do you think it would take to topple the whole damned thing? 2? 3? Much more and it all goes to hell with debt loads and monthly budgets stretched the way they are.

For the majority of children born in the 90s it probably means never owning a home, save through inheritance, and maybe knowing hunger at age 70.

But who knows, maybe when gas is more per gallon than low-rung jobs pay for an hour's work, all bets will be off. I mean, when it costs more to get to and from a minimum wage job than one would take home after taxes, I figure things will turn south. That could happen within the decade too. At that point, the best laid plans are bound to go agley.




.....on a brighter note, the weather up here was gorgeous today.....

[Raz]

Re: Financial Repression Has Come Back to Stay: Carmen M. Reinhart

"Keep in mind that this is a conscious choice on the Fed's part."

Perhaps now, dcarrigg, you understand why I thought the guiilotine appropriate for Greenspan and Bernanke?

[goodrich4bk]

Re: Financial Repression Has Come Back to Stay: Carmen M. Reinhart

I note that all of the "wins" punish the young to benefit the old. If indeed this is a conscious choice, it is no less than a declaration of war. I am 56 and on the "winning" team if this comes to pass. Is anybody under 30 listening?

[Thailandnotes]

Re: Financial Repression Has Come Back to Stay: Carmen M. Reinhart

One of the things I wished Charlie Rose had asked Ray Dalio was..."Okay, so you're managing pension funds for Pennsylvania teachers. How is it possibly going to work?"

[don]

Re: Financial Repression Has Come Back to Stay: Carmen M. Reinhart

Best writeup yet of FIRE's ZIRP game plan. Thanks dcarrigg.

[photon555]

Re: Financial Repression Has Come Back to Stay: Carmen M. Reinhart

"Keep in mind that this is a conscious choice on the Fed's part."

Perhaps now, dcarrigg, you understand why I thought the guiilotine appropriate for Greenspan and Bernanke?

Are you sure that the guiilotine is appropriate?

From the movie 'Heavy Metal', Hanover Fist says, "Hanging's too good for'em. Burning's too good for'em. He should be torn into little itty bitty pieces and buried alive!"

[coolhand]

Re: Financial Repression Has Come Back to Stay: Carmen M. Reinhart

I note that all of the "wins" punish the young to benefit the old. If indeed this is a conscious choice, it is no less than a declaration of war. I am 56 and on the "winning" team if this comes to pass. Is anybody under 30 listening?

I am 37, & yes, I am watching this with interest. I work in financial services, & all I hear about are how retail investors are flocking en masse into bond funds...the Boomers are so close to retirement, and they've been burned in rapid succession by stocks & houses that they just want the security of a nominal return...so they will suffer one last crisis.

Put another way - my father told me last weekend that me & my kids will be left to pay off all of these debts, & I told him he was wrong. The structure of the US dollar (debt-backed fiat currency) mandates that all debt be paid back, even if 100% of it must be monetized. That is what will occur.

In practical terms? Did you know the war reparations of the Weimar Germany government were due to expire only two years ago? Yet there was no complaining from today's Germans about what the debts their great-grandfathers & grandfathers spent for them. Why? B/c those debts were hyperinflated away 90 years ago. The same will be true today. This debt will be long gone before I am even retired, let alone my children.

Look at how foreign creditors & trade partners are already moving away from our currency. Once the move is complete, then we get our ka-POOM! Then we get a gold-referenced reset & we go back to 1920, with better technology. What do i mean by that?

If you are 65 & in shitty condition b/c you didn't take care of yourself & can afford your own care? Terrific. If you can't afford your own care? Sorry. You die.

There will be a lot more names in the obituaries nationwide, there will be a one-time, permanent drop in avg lifespan in the US. And that will be that.

[c1ue]

Re: Financial Repression Has Come Back to Stay: Carmen M. Reinhart

If you are 65 & in shitty condition b/c you didn't take care of yourself & can afford your own care? Terrific. If you can't afford your own care? Sorry. You die.

I doubt this will happen.

For one thing, there are way more baby boomers than Gen Xers and Yers.

For another thing, the boomers have the money. They have/are the politicians in power now. They vote.

Far more likely the last blood is wrung from the stone, and the younger generations will just have to either suck it or emigrate.

[coolhand]

Re: Financial Repression Has Come Back to Stay: Carmen M. Reinhart

I doubt this will happen.

For one thing, there are way more baby boomers than Gen Xers and Yers.

For another thing, the boomers have the money. They have/are the politicians in power now. They vote.

Far more likely the last blood is wrung from the stone, and the younger generations will just have to either suck it or emigrate.

Americans born 1965-2012 number 135mm and growing. Americans born 1946-1964 are 78mm and shrinking.

Secondly, yes Boomers have the money & are the politicians now. But when this thing goes ka-poom into hyperinflation, the Boomers' wealth which I noted above is largely in bonds & other interest rate sensitive assets (ie houses) will go ka-poom with it.

Thirdly, when this thing goes ka-poom into hyperinflation, the politicians will be blamed & will be voted out of office if they are lucky, worse if not. Things aren't even that bad yet & we already had Gen X & Gen Y pissed off in the Occupy Wall Street last yr. I can assure you the anger of the 20-30 year old crowd after the past 10 yrs is simmering.

Richard Fisher, the governor of the Dallas Fed gave a speech in 08 noting the present value of the Medicare, Medicaid & Soc Security totaled $80T to $120T. That was in 08, when rates were much higher, ie the present value was much lower. And you are implicitly assuming the Chinese will keep funding healthcare for fat lazy entitled Americans by buying 0% Treasuries? No way.

The last blood was already wrung from the stone. The Fed will have to monetize all the explicit debt, plus all the Medicare/Medicaid/Soc Security, or we will have death panels...implicitly:

"Yes, you can have that procedure, but all eligible facilities are backlogged for 6 months. If you want to pay for it yourself, we can get you in tomorrow." Then in 6 months, if you are still alive, wash, rinse, repeat, until the patient is dead. Problem "solved."

[c1ue]

Re: Financial Repression Has Come Back to Stay: Carmen M. Reinhart

Americans born 1965-2012 number 135mm and growing. Americans born 1946-1964 are 78mm and shrinking.

Americans born after 1994 cannot vote yet.

As for those who can vote - the actual voting registration patterns show clearly that the Boomer cohorts muster far stronger at the polls:

http://www.census.gov/hhes/www/socde...10/tables.html

Total 18 years and over	229,690	210,800	137,263	65.1	38,516	18.3
18 to 24 years	28,924	26,718	12,095	45.3	8,922	33.4
25 to 34 years	41,155	35,500	20,515	57.8	8,578	24.2
35 to 44 years	39,946	34,973	22,899	65.5	6,255	17.9
45 to 54 years	44,322	41,125	27,935	67.9	6,388	15.5
55 to 64 years	36,378	34,740	25,564	73.6	4,103	11.8
65 to 74 years	21,366	20,605	15,347	74.5	2,306	11.2
75 years and over	17,599	17,140	12,908	75.3	1,964	11.5

The 18 to 34 only slightly beat out the 65 and older, whereas the 45 to 64 grouping (the 1946 to 1964 range you note) muster 53 million voters vs. the 55 million voters from 18 to 44.

Overall 18 to 44 has 55 million vs. while 45+ has 81 million voters.

Seems pretty clear who is winning the political battle.

Secondly, yes Boomers have the money & are the politicians now. But when this thing goes ka-poom into hyperinflation, the Boomers' wealth which I noted above is largely in bonds & other interest rate sensitive assets (ie houses) will go ka-poom with it.

I guess if the hyperinflation occurs in 10 years, maybe then the voting patterns will have changed. But of course, by then a whole lot of money and debt can be piled up.

Thirdly, when this thing goes ka-poom into hyperinflation, the politicians will be blamed & will be voted out of office if they are lucky, worse if not. Things aren't even that bad yet & we already had Gen X & Gen Y pissed off in the Occupy Wall Street last yr. I can assure you the anger of the 20-30 year old crowd after the past 10 yrs is simmering.

From the Dem/Repub churn in Congress in the last decade or two, it seems like 'voting out' is already occurring regularly. Yet nothing is changing.

Richard Fisher, the governor of the Dallas Fed gave a speech in 08 noting the present value of the Medicare, Medicaid & Soc Security totaled $80T to $120T. That was in 08, when rates were much higher, ie the present value was much lower. And you are implicitly assuming the Chinese will keep funding healthcare for fat lazy entitled Americans by buying 0% Treasuries? No way.

The Chinese aren't the ones funding Medicare, Medicaid, and Social Security. Those are all paid for via FICA taxes.

Sure, the present value numbers are very high, but then again what are the present value numbers for defense spending for the next 50 years? It would be an equal, if not higher, number.

The last blood was already wrung from the stone. The Fed will have to monetize all the explicit debt, plus all the Medicare/Medicaid/Soc Security, or we will have death panels...implicitly:

"Yes, you can have that procedure, but all eligible facilities are backlogged for 6 months. If you want to pay for it yourself, we can get you in tomorrow." Then in 6 months, if you are still alive, wash, rinse, repeat, until the patient is dead. Problem "solved."

That may be possible, but I personally think it is far more likely that most of the money will be spent now, leaving little for when the youngsters get to the point of needing health care. Thus a more likely scenario is:

"Yes, you can have that procedure" to Dad and GrandDad.

"No, you cannot have the procedure because there is no money" to the younger generations.

[charliebrown]

Re: Financial Repression Has Come Back to Stay: Carmen M. Reinhart

I have to agree with EJ on the hyper inflation issue. No hyper infalation here. By Hyper, I mean inflation rates of 50% per month or more. This is because the dollar is still the reserve currency, The U.S. is not politically insignificant, powerful military etc. (I do know the empire is in decline) I do see 70s ++ inflation coming. 25% y-o-y (SWAG). This time because of global wage arbitrage and high unemployment pensions blowing up , wages will not increase like they did in the 70s. So in general no hyper inflation but it doesn't matter. How many american families can have their real wages cut in half and still make ends meet?

[Starving Steve]

Re: Financial Repression Has Come Back to Stay: Carmen M. Reinhart

I think the ZIRP is highly inflationary, and the Fed wants to inflate-away all debts in the bubble economy. So I agree with the comments above.

But, I still wonder why at near zero nominal interest rates on mortgages that home prices in California ( near the Silicon Valley ) are falling at 0.2% per month, as every month goes by. And this fall is on-top of the 25% shaving that home prices have taken since their blow-off top of 2007/8 in the area. The biggest bite out of a person's pay-cheque goes for housing costs, so a deflation in home prices and a big chunk out of home-ownership cost is really important.

I think this real estate deflation also happened in Japan when the Bank of Japan tried its ZIRP experiment a decade or two ago. One might remember that back in the 1980's and before the ZIRP experiment was launched by the Bank of Japan, that Japan ( Tokyo especially ) had the world's most inflated real-estate prices. So, we are all learning a new economics about how zero interest rates work in a bubble economy.

But I think you all are right that zero interest rates ( negative real interest rates ) are inflationary. We all are witnessing an accelerating inflation in food prices, energy prices, taxation, medical costs, insurance costs, rents, commodity prices, repair and maintenance costs, new car prices, utility rates, labour costs, travel costs, tuition costs, subdivision commons-fees, property taxes, cost of furnishings, legal costs, etc.

Interesting now that as the economy inflates, and the inflation is accelerating, that Bernanke and his Federal Reserve Bank in America have refused to raise interest rates, even a tiny bit. In fact, all of the central banks around the world involved in this ZIRP experiment have thus far refused to raise interest rates.... It would appear that they want inflation to take-root (establish itself) in their economies, once again. If so, this would be a repeat of their past decisions (and past mistakes) about how to handle inflation..... In other words, all of the misery of trying to purge inflation from their economies in the past ( as witnessed during the Milton Friedman-Margaret Thatcher years of high real interest rates ) will all have been for not.

[doom&gloom]

Re: Financial Repression Has Come Back to Stay: Carmen M. Reinhart

never forget Bennie said "inflation may get away from him" a bit... code-word for "yup, I really want inflation bad!"

[doom&gloom]

Re: Financial Repression Has Come Back to Stay: Carmen M. Reinhart

Americans born after 1994 cannot vote yet.

As for those who can vote - the actual voting registration patterns show clearly that the Boomer cohorts muster far stronger at the polls:

http://www.census.gov/hhes/www/socde...10/tables.html



The 18 to 34 only slightly beat out the 65 and older, whereas the 45 to 64 grouping (the 1946 to 1964 range you note) muster 53 million voters vs. the 55 million voters from 18 to 44.

Overall 18 to 44 has 55 million vs. while 45+ has 81 million voters.

Seems pretty clear who is winning the political battle.



I guess if the hyperinflation occurs in 10 years, maybe then the voting patterns will have changed. But of course, by then a whole lot of money and debt can be piled up.



From the Dem/Repub churn in Congress in the last decade or two, it seems like 'voting out' is already occurring regularly. Yet nothing is changing.



The Chinese aren't the ones funding Medicare, Medicaid, and Social Security. Those are all paid for via FICA taxes.

Sure, the present value numbers are very high, but then again what are the present value numbers for defense spending for the next 50 years? It would be an equal, if not higher, number.



That may be possible, but I personally think it is far more likely that most of the money will be spent now, leaving little for when the youngsters get to the point of needing health care. Thus a more likely scenario is:

"Yes, you can have that procedure" to Dad and GrandDad.

"No, you cannot have the procedure because there is no money" to the younger generations.

I expect them to keep bumping the age up. When I forst started working my SocSec was supposed to be at 65, now it is at 75, though I don't count on ever getting any ot it (or it being worth anything). At some point another 'commission' will come along and bump the age up to 72, then 75, and they'll find a way to tag Medicare in there as well.