It looks like you're using an Ad Blocker.
Please white-list or disable AboveTopSecret.com in your ad-blocking tool.
Some features of ATS will be disabled while you continue to use an ad-blocker.
Historic Precedent America’s post-war experience is a case study of how financial repression works. In 1946, following years of military spending, the ratio of US debt-to-gross domestic product (GDP) crested above 120% (roughly the same as Portugal today). Policymakers desperately needed to deleverage. This was done by creating a policy backdrop whereby the rate of economic growth could exceed the rate on government debt. The policies worked: ...As a result, the average monthly real yield on 10-year Treasuries was negative from 1945 to 1961 and less than 1.0% between 1945 and 1980. Many of today’s investors have no experience with this type of environment: Real yields have averaged 3.5% in the 30-plus years since 1980 (see Exhibit 2 ). The government’s debt-reduction efforts were successful. By 1974, America’s debt-to-GDP ratio had stabilized at 33%, a level that held for almost a decade (see Exhibit 3 ). This decline corresponds with the roughly 3% per year liquidation effect resulting from financial repression (Reinhart and Sbrancia; 2011). Policymakers supported deleveraging through a range of administrative actions, including the 1951 swap of marketable short-dated bonds into non-marketable long-dated bonds, regulation Q (a ceiling on interest payments from long-term demand deposits), controls on international capital flows and a ban on the private ownership of gold.
This is going to be the most boring sentence I have ever included in a column, but it might also be the most important: The real yield on Treasury debt has, in recent months, turned negative. Sound impenetrably dull? Sure. But here’s what it means: free money!
We expect problems relating to public debt will continue for at least several years. For many countries, it will be difficult to bring debt below 90% of GDP—a level above which economic growth is typically impaired. Japan, in particular, is on a troubling fiscal trajectory (see Exhibit 5 ). To paraphrase Fed Chairman Ben Bernanke, the current environment of artificially low government interest rates could persist for an “extended period.” Academic research suggests that, in some cases, government deleveraging can require 20 years or more to resolve (Reinhart, Reinhart and Rogoff; 2012). In our view, financial repression is a long-term trend. For market participants, it should continue to impact not just asset returns, but how they invest and think about risk.