The beginnings of 'financial repression'?

Graph showing debt to GDP in the developed world following WWII Graph showing debt to GDP in the developed world following WWII

There is one graph that has been mesmerizing policymakers for the past two years. It is not the Spanish bond yield, nor China's latest guess at its own growth rate.

It is this graph of debt to GDP in the developed world after WWII.

After 1945 the developed countries managed to shrink a debt pile equivalent to 100% of GDP to just 20% by 1970. And they managed it while at the same time generating two decades of unprecedented growth - the era of Doris Day, chrome-laden automobiles and the mainframe computer.

The term for how they achieved this is "financial repression". It was revived in a 2011 National Bureau of Economic Research (NBER) working paper by economists Carmen Reinhart and Beren Sbranica.

I've written on this subject on my blog before.

Here's how the post-war world did financial repression: they corralled people's savings inside national pools of capital, they capped the amount of interest you could earn on savings, they made national capital markets illiquid - so moving your money around in general became hard, and then they unleashed high inflation for a short period, which then wiped out the value of the savings, and thus the debt.

As a result, the real interest rate for the advanced economies between 1945 and 1980 was minus 1.94. Reinhart and Sbranica call this an effective "tax" on financial assets.

Financial repression is not, however, a term you are going to hear politicians come out with. It sounds scary and it is, to some, justifiably scary. Yet we today, in the developed world, have a near 100% debt-to-GDP ratio, and that is without having fought a world war.

There are some who believe the world's leaders are embarked on a covert policy of financial repression - the magazine Money Week, for example.

This week I think we've seen two signal moments in the beginnings of overt financial repression - the European Central Bank (ECB) grab on Cypriot bank deposits, and George Osborne's changes to the Bank of England's remit.

Chancellor George Osborne on Budget day 2013 The chancellor cut his official growth forecast in half.

Cyprus is a clear cut case. A 100,000 euros (£86,000; $130,000) deposit guarantee across the eurozone was flouted by "taxing" the deposits in banks that would otherwise go bust. It was an enforced write down of the value of savings and is accompanied by the most brutal capital controls possible - which is closing the banks and then re-opening them with a limit on withdrawals.

George Osborne's move today is designed to allow the Bank of England to play a bigger part in generating growth, due to the government's self-enforced inability to borrow more to spend on infrastructure etc.

He is effectively allowing the bank to "look through" the inflation figures, as they go above 2%, and to take unorthodox measures like buying company debt (aka lending to companies) even if it boosts inflation. This "looking through" I interpret as similar to the way the door security guy at a posh night club "looks through" you as you attempt to persuade him your are on the guest list. In plain English it means "ignore".

If, say, the Bank were to tolerate 4% inflation for several years, while the policy of quantitative easing (QE) held interest on savings at below 2%, the impact on savings would be eventually the same as the impact of the Cypriot government's grab. The personal finance industry has not been slow to point out that the remit change will hammer savers.

On top of that, there are other circumstances conducive to repression: the QE policy and new bank and insurance regulations, are forcing British pension funds to hold more government debt. Meanwhile the side-effect of QE is to heavily suppress market forces in the bond market: so that the government always has a buyer for its debt... which is effectively itself.

Now here's how Reinhart and Sbranica explain the modern version of financial repression:

"To deal with the current debt overhang, similar policies to those documented here may re-emerge in the guise of prudential regulation rather than under the politically incorrect label of financial repression. Moreover, the process where debts are being "placed" at below market interest rates in pension funds and other more captive domestic financial institutions is already under way in several countries in Europe.

Markets for government bonds are increasingly populated by nonmarket players, notably central banks of the United States, Europe and many of the largest emerging markets, calling into question what the information content of bond prices are relatively to their underlying risk profile. This decoupling between interest rates and risk is a common feature of financially repressed systems. With public and private external debts at record highs, many advanced economies are increasingly looking inward for public debt placements.

While to state that initial conditions on the extent of global integration are vastly different at the outset of Bretton Woods in 1946 and today is an understatement, the direction of regulatory changes have many common features. The incentives to reduce the debt overhang are more compelling today than about half a century ago."

Of course, the British government is not the only one pursuing a combined policy of QE, unstated currency devaluation, the suppression of market forces in the bond market and tacit toleration of high inflation. But it is a signal moment when an Anglo-Saxon economy, wedded to the ideology of inflation targeting for the past 20 years, suddenly begins to "look through" the inflation figures.

There is one missing piece of the jigsaw. To make financial repression work well, Reinhart and Sbranica point out you have to have a sharp inflation spike at the start, preferably into high single digits. This indeed was achieved in the late 1940s: "At the closure of the second great war, we witness a combination of very low nominal interest rates and inflationary spurts of varying degrees across the advanced economies."

Today there are inflationary pressures rising from population growth, competition for energy and natural resources, and from the rising middle class of the Bric countries (Brazil, Russia, India and China). But to spike inflation high, and sharply, would take some kind of crisis.

If some regional power could be induced to close the Straits of Hormuz for a few weeks, that would do it nicely.

Paul Mason Article written by Paul Mason Paul Mason Former economics editor, Newsnight

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After 12 years on Newsnight, Economics editor Paul Mason has moved on to pastures new and this blog is now closed.

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  • rate this

    Comment number 24.

    You know what is financial repression? Forcing the young to buy into an inflated housing market in order to enact generational wealth transfer in an attempt to can kick the pension crisis. It truly is repression as we cannot build our won homes as we cannot get planning permission. The government is like a drug pusher dealing credit.

  • rate this

    Comment number 23.

    AfA @22
    "class analysis"

    Not to dismiss @21, QE "for Gordon"

    Politician's 'interest' will always involve verbal defence, spin & rebuttal, but also the need to 'put right' or 'get right' at least in terms meaningful to 'own voters' & 'other players'

    Indulging 'pure contempt', we miss 'class position', ALL of us subject to 'corruption from democratic purpose'

    In needless inequality, fear & greed

  • rate this

    Comment number 22.

    QE "for Gordon Brown"

    Political vanity or career defence may contribute to understanding of political & economic events, but 'class analysis' - as between 'owners & workers', now between 'non-representatives & the managed' - will underly, and in the long run better direct us to 'a better context' for our politics. Equal Partnership agreed, no 'clinging' material conflicts of interest

  • rate this

    Comment number 21.

    i#20 omg it brough time for Gordon Brown to save his own skin.

    Its why labour cut capital spending rather than benifits and they were "buying" votes directly as the "nasty" party would obviously cut benifits.

    it was only ever about saving Gordon brown job and not the UK PLC

  • rate this

    Comment number 20.

    "Brown's watch"

    But THAT Quantitative Easing bought time for re-structure, that task put off by sabotaging of Aggregate as well as democratic Demand. Ever more QE to hide Under-Employed Disunity

    The tragedy: shared pain would have meant 'no pain', if truly 'in it together during process - at first 'recessionary' - of re-structuring

    Guided by democratic (equal power) market. Value

  • rate this

    Comment number 19.

    80% of QE happened on Gordon Browns watch, thats where the inflation or devaluation of the £ will be coming from

  • rate this

    Comment number 18.

    Just before I read this piece an email from Virgin money appeared telling me the interest rate is going down (late May hoping I will forget to move my savings) I have had similar emails from Halifax and Newcastle BS. The Cypriot savings tax is a form of wealth tax but crude and iniquitous but it is a model for a tax to reclaim the massive wealth accumulated by a small number in stead of everyone.

  • rate this

    Comment number 17.


    Never in any 'real world' will any currency be 'rigid', against any commodity, other currency or 'basket'

    'Our problem': inflations & deflations of amplitude & rate of change 'uncomfortable'

    Discomfort inevitable with 'shocks'. Unnecessary severe even fatal 'shocks' inevitable from chaotic 'corrupting' income-inequality 'intensely relaxed on democratic deficit'

  • rate this

    Comment number 16.

    Another post-Budget thought is that historically, Tories have been undone by inflation. It has a worse political effect on them, whereas with Labour, inflation is expected.

    W/real life infl running from 3, 4 or 5% up to 35%, depending on what you buy, Budget does not really address problem at all & yesterday was last chance for a fix before 2015. The Tories will have trouble with it at the GE.

  • rate this

    Comment number 15.

    For varying reasons or habits of thought, some will not like any idea of concerted national self-liberation from debt, such sentiment captured in the coinage of 'financial repression', sharing marketable resentment of impacts on 'the private sphere'. There is need to share understanding of 'social constructs', of public-private interdependence, of the case for all to settle on genuine democracy

  • rate this

    Comment number 14.

    Further the pity, having to wonder why debates degenerate, why it is that arguments cannot be built from shared perspective on 'democratic' priority, as if by its amended Charter & Agreement, or perhaps from specific Audience Research, the BBC is confined to 'explanation' only as far as relevant to "British Parliamentary' process, long complicit in privatisation of profit and socialisation of debt

  • rate this

    Comment number 13.

    A pity this vital economic debate, on how we might best invest in ourselves, still so easily reduced to pantomime (Paxman's word), our politicians being admitted unable to take 'tough decisions' to mobilise privately sequestered capital, forced to hope for deflation of debt by allowing inflation of the currency, placing the cost on the poor, helpless to avoid worse concentration of wealth & power

  • rate this

    Comment number 12.


    You may have to list those 6 ways. Maybe this is an old-fashioned conceit but I tend to think of war being about fighting rather than spending. The 'cost of war' isn't a reference to the price of guns.

    But of course, if enough people did start killing one another, wouldn't that ve a spiffing good distraction from the current ongoing theft.

  • rate this

    Comment number 11.

    Oil security is always the hot subject and a big issue for the US but they're well on the way to self sufficiency. By rights they don't need worry about Iran.

    But of course it's in their interest to destabilise competitors in the fuel market (the middle east) and cripple competitors in other industries (Europe, China).

    And by 'them' I don't mean ordinary americans.

  • rate this

    Comment number 10.

    PM: 'Today there are inflationary pressures rising from population growth, competition for energy and natural resources, and from the rising middle class of the Bric countries.'
    ~ ~ ~
    At present, the UK's inflation comes largely from taxation. Low interest rates&high commodity prices do not help but its the taxation of energy&transport, the latter multiplied via State spend over decades.

  • rate this

    Comment number 9.

    PM:'..//..and then they unleashed high inflation for a short period, which then wiped out the value of the savings, ..//'
    ~ ~ ~
    Did they do it deliberately? Was it a conspiracy?

    Or was it done by incompetence, a cock-up?

    My money is on the latter. We have evidence that Govts tend not to be clever enough for the former.

  • rate this

    Comment number 8.

    It is worse than you state. GDP is measured at about twice as much as it was in 1945 so that the relative debt is now equivalent to about 200% of GDP. The other major difference is that until the 1970's money was predominantly cash created, issued and spent by governments. Money is now privatised. It is created by privately owned banks when they lend. We now have financial depression by banks.

  • rate this

    Comment number 7.

    So Paul, my only debt is my mortgage. My only savings are offset against that mortgage and I am a net debtor. I "make" on the offset about 4% net per annum. Does the increasing availability of offset mortgages make this tool less effective ? I assume that as interest rates rise, offset mortgages won't disappear. Yours, economic illiterate ... but knowing Spurs should rightfully go to Europe !

  • rate this

    Comment number 6.

    "If, say, the Bank were to tolerate 4% inflation for several years" I am afriaid it was already doing its best Paul with this consequence.

    "So real wages are falling at an annual rate of 1.6% if we use the official inflation measure or 2% if we use RPI. "

    Accordingly it will fail and where is the real change? It is in fact more of the same.

  • rate this

    Comment number 5.

    "that is without having fought a world war"

    Do I have to point out the 6 different ways that isn't actually true? Adjusted military spending since 2000 has probably been over WW2 levels.

    Also not for nothing but the reason politicians aren't talking about it is that people wouldn't stand for it. One way trip to civil war. People would be happier with the state declaring bankruptcy.


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