Tags: Financial | Repression | Debt | Crisis

Financial Repression Only Delays the Inevitable

By    |   Thursday, 26 April 2012 12:29 PM

Financial repression is a term used to describe several measures that governments use to channel funds to themselves, that, in a deregulated market, would go elsewhere.

Financial repression can be particularly effective at liquidating debt.

The type of financial repression being used by governments at the moment, especially in the West, is in the form of quantitative easing, where governments print money to purchase their own debt.

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This keeps interest rates low and money from flowing into the bond market so it can flow elsewhere. The idea behind it is that as long as interest rates are low, the government can continue to fund itself as interest expenses don't increase and eat up a huge part of the budget.

The problem with this theory is that at some point, the law of supply and demand — and economics — will take hold. Japan is able to keep rates low even with debt a near 190 percent of GDP because it owns 95 percent of its own debt, a luxury the United States doesn't have (the United States owns less than 60 percent of its own debt).

At some point when the debt becomes large enough and goes to 120 percent, 130 percent or 140 percent of GDP — whatever the tipping point may be — the market is going to demand higher interest rates as the country will become a larger credit risk.

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Either this or the dollar will totally tank (even against the euro) because the United States will be paying artificial, far-below market interest rates. SO low that only the Fed will purchase the debt and foreigners will shun the debt (this is in the early stages as since mid-2011, Chinese purchases of U.S. debt have all but stopped).

There is no such thing as a free ride and you cannot just keep funding yourself with printed money. At some point, the price must be paid and it will be paid by serious austerity, a spike in interest rates or a collapse in the value of the dollar.

About the Author: David Skarica David Skarica is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. He also writes the Gold Stock Adviser. Discover more by Clicking Here Now.

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Thursday, 26 April 2012 12:29 PM
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