Carmen Reinhart’s take on the current state of financial repression:
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.
Moreover, she doesn’t see this condition going away anytime soon:
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.
From a risk/reward standpoint, no asset class holds a candle to fixed income over the past 30 years. That just might not be the case in an era of financial repression. Having the flexibility to invest in multiple asset classes (including stocks, real estate, and commodities) could prove to be essential in the years ahead.
