May 2024

Have you heard about “financial repression”? If not, it might be worth reading this

A few months ago, the media were full of “shock horror” reports of Cypriots (and others) with more than €100,000 in Cyprus’ banks having over half their money confiscated to bail out the bankrupt country. And journalists and economists and other supposed “experts” were wittering on about whether such a thing could happen in Britain.

Well, it already has and is still happening. In fact, more British people have lost more money than most of those with money in Cyprus. The difference is that in Cyprus the appropriation of people’s money to save the bankrupt country from bankruptcy happened over just a few days, whereas in Britain, the process has been more insidious and has been happening over 6 years and will continue for several more years.

Britain is to all intents and purposes bankrupt. Our national debt was £700bn in 2010, is £1.15trn now and will be £1.4trn by the 2015 election. We can’t pay that money back. Moreover, our main banks are virtually bankrupt. They are exposed to $1.05trn of Eurozone countries’ debt, over half of this to countries (Spain, Italy, Greece, France) that are virtually bankrupt. Furthermore, many mortgage-payers are struggling to pay off their loans. If interest rates went up, house prices would fall, repossessions would rise and that would put further pressure on lenders. But the government no longer has enough money to bail out another failing bank.

So, to keep the whole house of cards from collapsing, the government is using a policy of what is called “financial repression”. That (not always accurate) fount of all knowledge Wikipedia defines “financial repression” as follows: “Financial repression is any of the measures that governments employ to channel funds to themselves, that, in a deregulated market, would go elsewhere. Financial repression can be particularly effective at liquidating debt”

Here are just some of the ways financial repression impoverishes us all:

1. By keeping interest rates artificially low (0.5%), the government lowers the interest it pays on its own debt thus avoiding bankruptcy. But it also means the £4trn we have in savings is losing money after taking account of inflation. In fact, if our £4trn is losing say 2% a year, that’s an incredible £80bn a year of our money that is evaporating without most people noticing this is happening because we still have our £4trn. The problem is that each year it buys £80bn less than it did the year before.

2. Low interest rates mean that the 200,000 or so people buying an annuity each year every year are getting paltry pensions – about half of what they would have got just before the financial crash. If the average pensioner is losing say just £3,000 a year compared to what they would have got in 2007, then that’s another £600m a year that is disappearing

3. Low interest rates and government overspending have trashed the value of the pound. It’s only gone down by about 10% against the euro and the US dollar since 2007. But against “real” currencies – Australian dollar, New Zealand dollar, Norwegian krone, Thai baht – the pound has lost about 40% of its value (see chart – AUSD/£)

The fall in the pound’s value supposedly helps boost exports by making British goods and services cheaper. But it also conveniently cuts the real value of the Government’s massive and unsustainable debt

4. By allowing inflation to comfortably exceed the joke target of 2%, the government further erodes the value of its own debt thus helping stave off national bankruptcy. Inflation of 3% a year reduces the real value of government debt by about £35bn a year

The genius of “financial repression” is that it saves overspending, underperforming governments from bankruptcy while impoverishing their citizens, without their citizens being aware of what is happening.

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