Our Dollar, Your Problem: An Insider’s View of Seven Turbulent Decades of Global Finance, and the Road Ahead
by Kenneth Rogoff · 27 Feb 2025 · 330pp · 127,791 words
unsustainable debt or unexpected costs in the future (say, for emergency defense needs, the green transition, or a presidential administration gone off the rails)? Austerity? Financial repression (forced holdings of debt at low interest rates)? Outright default? Mind you, there was inflation before the printing press; it was just much harder to
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the world that could unfold in higher interest rates, greater inflation, financial instability, or more intense financial repression—or more likely than not, all four. It would not be good for the dollar’s brand. Financial repression looms large in what follows; it is a hidden tax few people understand. It typically occurs when
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institutions to hold more of its debt as part of a program of holding down interest rates. Economists have long understood the widespread use of financial repression in developing economies and emerging markets; it is discussed extensively in This Time Is Different. In recent years, particularly after the global financial crisis, it
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became much more prominent in advanced economies as well.1 Perhaps one attraction to governments of the financial-repression tax is that even though it inevitably ends up being almost entirely passed on to middle-income depositors, few realize it is going on. Moreover
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, by forcing financial institutions to hold more government debt than they might otherwise choose, financial repression reduces private-sector investment. Indeed, some of what finance economists refer to as the “convenience yield” of government debt (first mentioned in chapter 17) might
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” to hold large quantities of government debt to meet liquidity and collateral requirements. Later on in this chapter, I will return to the issue of financial repression in the context of the distinction between foreign and domestic holders of U.S. debt. As the world watches the United States flounder in dealing
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and low interest rates suddenly ran into debt problems; real interest rates and growth rates are highly volatile. One also needs to ask whether hidden financial-repression taxes are artificially lowering interest rates through what amounts to a hidden tax. For example, many freshman economics textbooks will tell you that the United
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paid down its World War II debt mainly through high growth. However, those who make that claim have clearly never looked at the role that financial repression played in the early post-war period or that very high inflation played in the seventies. The economists Julien Acalin and Lawrence Ball found that
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long-run trend in the difference between the interest rate and the growth rate has, if anything, been positive for over a century, even with financial repression.6 That should not be terribly surprising. The past hundred years marks the rise of the welfare state and major increases in the cost of
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very high level to have a significant impact because so much U.S. debt is short term and 10 percent is indexed to inflation), and financial repression (basically forcing Americans to hold debt, directly or indirectly). None of these would be pretty or painless. The U.S. dollar is not going to
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do to lock in foreigners than it can do to lock in domestic residents. In particular, with domestic residents, the United States can engage in financial repression by, say, expanding regulations to make banks a captive audience for debt, as discussed earlier. These costs get passed on to depositors in the form
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of lower interest rates on deposits, higher fees on services, and higher rates on loans. In essence, financial repression is a form of taxation that can only be directed at domestic residents. It typically hits low- and middle-income households much harder than wealthy
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households, which have ample means for diversifying into other assets. Financial repression won’t work with foreign holders, who can pull their money out. Regardless of the exact parallel to Triffin, there is little question that the
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. 24. See, for example, Kenneth Rogoff, “Why Human Chess Survives,” Project Syndicate, November 18, 2018. Chapter 25. Debtor’s Empire 1. A theoretical rationale for financial repression, as a device for improving government no-default credibility at the cost of lower investment, is demonstrated in V. V. Chari, Alessandro Dovis, and Patrick
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Kehoe, “On the Optimality of Financial Repression,” Journal of Political Economy 128, no. 2 (February 2020): 710–739. 2. Sebastian Edwards, American Default: The Untold Story of FDR, the Supreme Court, and
The Social Life of Money
by Nigel Dodd · 14 May 2014 · 700pp · 201,953 words
2006: 251). Institutions at the top of the hierarchy are able to exercise only a particular, negative form of power. This is the power of financial repression, whereby forms of discipline (such as austerity) are imposed upon those lower down. What these institutions cannot automatically do, however, is restore money’s underlying
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; and the destruction of capital, 88; and economic recovery, 21; economic and monetary policies in support of, 3, 5, 22, 88; effects of, 382; and financial repression, 69; forced, 75–76, 77; government programs in pursuit of, 2, 70, 78, 90, 388; and guilt, 256; and neurosis, 153, 159; the politics of
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study of, 295 finance capital, 60, 64, 68, 74, 232, 249 financial engineering, 124 financial expropriation, 79 financial innovation, 121 financial instability hypothesis, 117, 124 financial repression, 69 financial system, 3; and crisis formation, 69; expansion of, 114; relationship to GDP, 114. See also capitalism; Wall Street system financialization, 10, 36, 61n22
The Price of Time: The Real Story of Interest
by Edward Chancellor · 15 Aug 2022 · 829pp · 187,394 words
Eat Credit 15 The Price of Anxiety 16 Rusting Money PART THREE The Game of Marbles 17 The Mother and Father of All Evil 18 Financial Repression with Chinese Characteristics Conclusion: The New Road to Serfdom Postscript: The World Turned Upside Down Acknowledgements Select Bibliography Notes Index About the Author Edward
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rates and inequality, 1945–2020. (Source: Global Financial Data and World Inequality) 11. The global stock of bonds trading at negative yields. (Source: Bloomberg) 12. Financial repression in China. (Source: Global Financial Data) 1. Introduction The Anarchist and the Capitalist In 1849, a debate took place in the pages of La Voix
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the 1970s when real interest rates were on average higher. The economist’s term for holding short-term rates below the rate of inflation is ‘financial repression’. As James Grant commented, ‘what’s being repressed today is the standard of living.’14 While saving rates varied across the developed world, the
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Great Boom of unprecedented size and duration’. Either globalization would succeed, said Thiel, ‘or it is the final and greatest bubble in history’.45 18 Financial Repression with Chinese Characteristics [T]he biggest problem with China’s economy is that the growth is unstable, unbalanced, uncoordinated and unsustainable. Premier Wen Jiabao, 2007
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over the banking system and when interest rates are set at inappropriate levels. In the early 1970s, Stanford economist Ronald McKinnon coined the pejorative term ‘financial repression’ to describe the negative consequences of keeping interest rates below the level of inflation. Under such circumstances, borrowers benefit at the expense of savers. Market
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copper cash, paper money gradually turned into a bureaucratic monstrosity that hampered the productive forces whose growth it had originally done much to foster.’6 Financial repression served as a tool of political repression.fn2 In his brilliant account of Lord Marcartney’s embassy to the Court of Qianlong, Alain Peyrefitte
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was beset by a number of severe imbalances – asset price bubbles and credit booms, excess savings and wasteful investments. These imbalances were the product of financial repression, according to McKinnon. In a 2012 paper written shortly before his death, McKinnon suggested that negative real interest rates on Chinese bank deposits had reduced
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s economy away from consumption towards low-quality investment and fostered asset price bubbles. If financial deepening made the China miracle, financial repression threatened to undo it. HOW FINANCIAL REPRESSION WORKS Here’s how financial repression was implemented in China. Capital controls trapped savings within the country. Households had little choice but to deposit their savings
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the cheap credit they received for investment, often favouring sectors selected by Beijing’s economic planners. Banks and state enterprises were the main beneficiaries of financial repression; household savers were the big losers. The state control of money and interest and the distribution of cheap credit to favoured parties belong to a
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hee used state banks to provide loans at negative real interest rates to exporters and favoured industrial projects.15 China adopted the South Korean template. Financial repression became firmly established towards the end of the 1990s. At the start of the decade, the People’s Bank applied high interest rates to
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coincided with the inception of Alan Greenspan’s easy money policy. The People’s Bank kept interest rates low to maintain the dollar peg. Financial repression emerged as a ‘consequence of the government’s policy of maintaining an undervalued exchange rate’.16 Exports and export-driven investment became the main contributors
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the wealthy elite.21 During this period workers’ incomes actually lagged behind economic growth, and household savings fell as a proportion of total savings.22 Financial repression was largely responsible for this state of affairs.fn4 In The Great Rebalancing (2013), Peking University professor Michael Pettis calculated the costs to household savers
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same coin. Thus, when a bank loan is used for the purposes of investment there occurs an automatic increase in reported savings.27 In China, financial repression stimulated credit growth; much of the new credit was invested, which, in turn, pushed up the savings rate. UNSTABLE, UNBALANCED, UNCOORDINATED AND UNSUSTAINABLE In
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property. Local governments dodged the regulations intended to keep public debt under control, creating opaque investment vehicles to borrow off the books.35 China’s financial repression came in the form of unstable bubbles, uncoordinated investment, unsustainable debt, and an unbalanced shadow banking system, and it also allowed unscrupulous vested interests,
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was misallocated in China on a scale not seen since the heyday of the Soviet Union. Soviet central planners had also operated under conditions of financial repression. In his Political Economy of Socialism, Hungarian economist János Kornai explained how monetary conditions in Communist Russia and its satellites contributed to their economic failure
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already been overtaken by a new type of lending, one that also took place outside the formal banking system. As Ronald McKinnon pointed out, financial repression creates an incentive for savers to remove their savings from banks and seek higher returns elsewhere. That’s what happened in the United States at
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CAPITAL FLIGHT The chief reason the authorities could prevent credit problems from escalating was that capital controls trapped domestic savings in China. The logic of financial repression, however, drove savings out of the country in search of better returns abroad. As long as the US Federal Reserve kept interest rates close to
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the People’s Republic would face a debilitating currency crisis. UNSCRUPULOUS INTERESTS Stanford economist Edward Shaw, who together with Ronald McKinnon developed the theory of financial repression, drew attention to its political aspects. Shaw suggested that control over interest rates enhanced the power of civil servants, who got to dispense cheap credit
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According to the ‘public choice’ school of economics, rents are created when the state interferes with markets and prices are kept away from equilibrium.124 Financial repression in China created copious rents and fostered crony capitalism. ‘Inordinate swindling is often bound up with a low rate of interest,’ observed that acute financial
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rents) took off.130 As paper wealth expanded, the Party cadres milked the asset economy and crushed political opposition.131 As in the West, financial repression tilted the playing field in favour of the rich and well-connected. People with access to cheap credit, and those who controlled real and financial
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top Party members.137 Local government officials who drove villagers off their land to hand it over to developers acted as ‘engines of inequality’.138 Financial repression turned back the clock on China’s economic liberalization. Throughout its history, the Middle Kingdom’s progress ‘has an intermittent character and is full
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. These developments are best summed up by a phrase that became commonplace in the 2010s: ‘the state advances, while the private [sector] retreats.’140 Financial repression has played a role in this regressive movement. The credit binge launched by the 2008/9 stimulus enhanced Beijing’s sway over the economy. As
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their grip on the most important price of all. The state, not the market, would determine the level of interest. The legacy of China’s financial repression was, as President Xi told the National Congress in 2017, a ‘contradiction between unbalanced and inadequate [economic] development and the people’s ever-growing
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government bonds was held below the level of inflation, then, over time national debt could be inflated away. This was the West’s version of financial repression. It is, of course, the government creditors who are repressed. The experience of the United States and Europe after the Second World War shows
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Banks acquired bonds directly from the government. After the war, the Treasury continued holding down interest rates even as inflation climbed into double digits.4 Financial repression was to last more than a generation. Between 1945 and 1980, interest rates in the United States and the United Kingdom averaged in real
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minus 3.5 per cent. Negative real rates provided an annual subsidy to the US government equivalent to a fifth of tax revenues. Thanks to financial repression, America’s national debt (relative to GDP) declined by nearly three-quarters. The British liquidated their war debts in a similar fashion.5 As
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we have seen with China, for financial repression to work the state needs to trap domestic savings at home. The international currency arrangements introduced at Bretton Woods in 1944 imposed capital controls that
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applied a ‘corset’ to control the quantity of bank credit. In post-war France, most bank lending came under the state’s purview.7 Financial repression returned to the West after 2008. Short-term rates in the United States and Europe were held below the level of inflation and remained negative
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into peacetime with what used to be called a ‘mixed economy’, one that was neither capitalist nor socialist. Nor was the post-war experience of financial repression an unmitigated economic disaster. In fact, after 1945 France experienced a prolonged period of strong economic growth, known as Les Trente Glorieuses. Germany enjoyed
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economy performed better than in recent years. The Bretton Woods period (1945–71) was largely free from speculative bubbles and financial crises. Decades of financial repression, combined with high taxes, realized Keynes’s long-held ambition for the euthanasia of the rentier.fn5 It seems that Hayek got his timing wrong
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Why Some are So Rich and Some So Poor (London, 1998). Lardy, Nicholas R., China’s Unfinished Economic Revolution (Washington, DC, 1998). Lardy, Nicholas R., ‘Financial Repression in China’, Peterson Institute for International Economics, September 2008. Lardy, Nicholas R., Markets over Mao: The Rise of Private Business in China (Washington, DC, 2014
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Standard: From Bretton Woods to the Rise of China (New York, 2013). McKinnon, Ronald and Liu, Zhao, ‘Hot Money Flows, Commodity Price Cycles, and Financial Repression in the US and the People’s Republic of China: The Consequences of Near Zero US Interest Rates’, ADB Working Paper, Regional Economic Integration No
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, ‘Shadow Banking Reemerges, Posing Challenges to Banks and Regulators’, Dallas Fed Economic Letter, 11 (10), July 2016. Napier, Russell, ‘Capital Management in an Age of Financial Repression’, Orlock Advisors, September 2016. Napier, Russell, ‘The Silent Revolution: How to Inflate Away Debt … with More Debt’, Orlock Advisors, June 2020. Naughton, Barry, ‘China’
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China was responsible for more than 100 per cent of marginal demand. 20. Ronald McKinnon and Zhao Liu, ‘Hot Money Flows, Commodity Price Cycles, and Financial Repression in the US and the People’s Republic of China: The Consequences of Near Zero US Interest Rates’, ADB Working Paper, Series on Regional Economic
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with recent experience, being associated with large-scale foreign capital flows, declining interest rates, an expanding financial sector, stock market bubbles and rising inequality. 18. FINANCIAL REPRESSION WITH CHINESE CHARACTERISTICS 1. See Ronald McKinnon, Money and Capital in Economic Development (Washington, DC, 1973), ch. 7 passim. 2. Lien-sheng Yang, Money
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by improving the efficiency with which economies use that capital.’ 13. See Ronald McKinnon and Zhao Liu, ‘Hot Money Flows, Commodity Price Cycles, and Financial Repression in the US and the People’s Republic of China: The Consequences of Near Zero US Interest Rates’, ADB Working Paper, Series on Regional Economic
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s Most Dynamic Region (New York, 2013), pp. 149–52. Bank loans to Korean exporters typically carried negative real interest rates. 16. Nicholas R. Lardy, ‘Financial Repression in China’, Peterson Institute for International Economics, September 2008, p. 4. 17. Between 1997 and 2013, China’s share of global manufacturing climbed fourfold to
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yuan. Lees estimates that nearly 70 per cent of new credit was needed to service existing debt. 88. As Michael Pettis writes, ‘it was severe financial repression, in other words, that allowed borrowers and banks to “grow” their way back to solvency, but this growth occurred mainly because the real cost
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financial crisis, as explained by Yasheng Huang in his Capitalism with Chinese Characteristics (Cambridge, 2008). 141. Wright and Rosen, ‘Credit and Credibility’, p. 29. 142. Financial repression lowered the cost to the PBOC of issuing central bank bills, which were used to sterilize its purchase of foreign exchange reserves. By 2010 there
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7. Russell Napier, ‘The Silent Revolution: How to Inflate Away Debt … with More Debt’, Orlock Advisors, 24 June 2020. 8. Carmen M. Reinhart et al., ‘Financial Repression Redux’, IMF Finance & Development, 48 (1), June 2011. The authors point out that over the previous four years, interest rates in 21 advanced economies had
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been negative in real terms for around half the time. 9. Carmen M. Reinhart and Jacob F. Kirkegaard, ‘Financial Repression: Then and Now’, VoxEU, March 2012. Reinhart and Kirkegaard state that under the Basel III regulations, bank holdings of government debt required lower capital requirements
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. In the UK in 2008, British banks were required to boost their holdings of UK government bonds. 10. Napier, ‘Capital Management in an Age of Financial Repression’. Napier states that after 2008, government-run pensions in France, Portugal, Ireland and Hungary had their assets taken over. 11. Ray Dalio, ‘An In
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EU, 187, 241, 262; default on sovereign debt (1672), 33, 38; early twentieth century monopolies in, 159; economy in Bretton Woods era, 291, 302*; financial repression today, 292–3; foreign lending manias (1860s-80s), 77–8, 79–80; housing affordability crisis in, 212–13; loss of manufacturing jobs to China, 261
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–3; as common feature of asset bubbles, xxiii, 116*, 123, 135, 172–87, 180, 220; consumer behaviour affected by, 32; and ‘financial repression’ in China, 266–81, 268*, 277*, 283, 292; ‘financial repression’ term, 191; under Alan Greenspan, 111, 112, 113, 114, 115, 117, 134–5, 162, 186, 190–91, 204, 226–7,
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2018). fn6 By 2018, the US had a negative net international investment position of $10 trillion, a fivefold increase since before the financial crisis. 18: Financial Repression with Chinese Characteristics fn1 Lien-sheng Yang, Money and Credit in China: A Short History (Cambridge, Mass., 1952), p. 97. The traditional reluctance of the
Broken Markets: A User's Guide to the Post-Finance Economy
by Kevin Mellyn · 18 Jun 2012 · 183pp · 17,571 words
groups such as big business and labor, all subordinate to the state (as with Italy and Germany and even some aspects of the New Deal). Financial repression is how banking works in China today, and once in place, it is very hard to change. The Banking Act of 1933 ushered in an
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debt levels affordable and in reducing them over time. The bad news is that it massively redistributes wealth from savers and investors to the government. Financial Repression Made Simple In a recent paper for the National Bureau of Economic Research (NBER), The Liquidation of Government Debt (NBER Working Paper 16893, March 2011
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countries practiced “a subtle type of debt restructuring,” financial repression, to achieve “sharp and rapid” reduction of public debt as a portion of their economies. Financial repression has three key pillars: • First, governments directly or indirectly set interest rates that are below what the market would set. From the 1930s to 1982
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smart people who have the right academic credentials. I know this, as a holder of multiple Harvard degrees who has managed to escape becoming rich! Financial repression stealthily confiscates accumulated wealth and adds to governments’ ability to “make investments”—that is, spend public money on things (many of them legitimate, such as
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by households to bridge the peaks and valleys of the income and expenditure is a huge risk to prosperity and economic growth. Starving the Entrepreneurs Financial repression is also associated with a world where entrepreneurs and start-ups find it almost impossible to get the funds they need to survive and prosper
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-big-to-fail institutions, 41 Triple A bonds, 41 US Federal Reserve System, 38 Financial liberalization, 89 Financial Market Meltdown, 25, 61, 89, 109, 159 Financial repression, 9, 78, 111 Financial Services Authority (FSA), 60, 159 Food and Drug Administration (FDA), 69 Fordism, 68 Free-market capitalism, 89 Free markets, 3 French
China's Future
by David Shambaugh · 11 Mar 2016 · 261pp · 57,595 words
among the ten largest in the world by capitalization. Thus the government maintains the dominant position in the financial system. Economists refer to this as “financial repression,” a situation where the government artificially depresses deposit and lending rates and orders the state banks to increase or decrease loans in line with government
The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse
by Mohamed A. El-Erian · 26 Jan 2016 · 318pp · 77,223 words
in their operational modalities and even their mindsets. The list of institutional worries does not stop here. Having been subjected to a prolonged period of financial repression, savers have started to realize that, due to partial policy responses on both sides of the Atlantic, they are being sacrificed in attempts to rehabilitate
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and solvency challenges become deeply intertwined and even harder to solve. By taxing creditors and subsidizing debtors through artificially low and repressed interest rates, the financial repression regime that central banks have been imposing can help alleviate debt overhangs. But it takes a long time—a very long time—for such a
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debt service reduction (DDSR). DDSR is needed to overcome debt overhangs in situations where sufficient growth is not forthcoming, default would be too disruptive, and financial repression is not enough. Fortunately, history provides a guide on fruitful approaches. An example is the Brady Plan at the end of the 1980s/early 1990s
How Asia Works
by Joe Studwell · 1 Jul 2013 · 868pp · 147,152 words
Ko¯ichi, the diary-writing Niigata farmer, lost the family’s entire accumulated wealth playing the stock market. Financial deregulation, coming after a period of financial ‘repression’ that focused resources on developmental objectives, had an inevitable wealth effect as asset prices rose. Japan was suckered by this increase in paper wealth into
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policies is essential in the formative stages of development. Retail savers and borrowers have to be asked to pay the price of what economists call ‘financial repression’ for as long as is necessary to promote basic technological upgrading. The real problem is that we understand so little about how and when nations
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, the acid test of financial policy is how much acquisition of technological capacity can be achieved in industry before the window of opportunity afforded by financial repression closes. China has made considerable gains, but there is much more to be done. The main problem for China is that its structural rate of
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as before because it cannot run away from the debt as quickly. The best days of industrial policy-led development are therefore already gone. A financial repression too far Finally, it should be said that there is one element of financial system policy in China that has almost certainly been unnecessarily inefficient
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China is simply a follower in that tradition. China’s development is exceptional not because of the tried and tested land reform, infant industry and financial repression policies that made it possible, but because of its scale. At more than ten times the population of Japan, anything that happens in China has
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focus on manufacturing for export, there would have been no way to engage tens of millions of former farmers in the modern economy. And without financial repression, it would not have been possible to pay for an accelerated economic learning process. In all of the above, markets and competition were made to
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, that there are problems on both sides of the argument about appropriate economic development policy. In countries that have successfully combined household agriculture, manufacturing and financial repression since the Second World War there has been an unwillingness or an inability to recognise the limitations of the model. In the richest countries that
Austerity: The History of a Dangerous Idea
by Mark Blyth · 24 Apr 2013 · 576pp · 105,655 words
rest of the world to run a surplus against the United States, necessary because of its export-led growth models, would be compromised.23 Finally, financial repression, what Krugman implicitly advocates, does have some costs as well as benefits.24 I do worry about the debt, but for different reasons. I worry
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it is not as if the other options on the table are great for them either. Those alternative choices are, first, what is known as financial repression, and second, a renewed effort to seriously collect taxes on a global scale. These efforts to get us out of this mess may not be
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they are, as Churchill said about democracy, the worst options except for the alternatives. The first path is usually known by the pejorative sobriquet of financial repression. Carmen Reinhart and M. Belen Sbrancia recently discussed this possible path.36 They concluded, by examining episodes of past high indebtedness, that states restructure their
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small rate of inflation. This creates an effective negative real interest rate on the bond such that the value of the debt shrinks over time. Financial repression is basically a tax on captive bondholders and it works best when you have banks over a proverbial barrel—such as when they are losing
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in reducing or liquidating the massive stocks of debt accumulated during world war two.”37 Reinhart and Sbrancia find that the “liquidation tax” generated from financial repression amounted to, in the cases of the United States and United Kingdom after World War II, the equivalent of 3 to 4 percent of GDP
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out that in 2010 I paid more taxes than the General Electric Corporation—really, I did, and so did you—I’m willing to give financial repression a chance.39 Yes, it will greatly limit my opportunities to buy and trade exotic derivatives and engage in international financial arbitrage games, but you
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the confessional is unlikely, and the other options, inflation and default, are even worse, it is pretty much inevitable that over the next few years financial repression and higher taxes on top earners will become a part of the landscape. The ongoing (at time of writing) negotiations over increasing taxes as part
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, 2009). 24. They might turn out to be quite small, at least for anyone not in the financial sector. I return to the issue of financial repression in the conclusion. 25. For a typical example, see the two-page spread from the Peter G. Peterson Foundation, “For a Stronger Economy, Deal with
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the Trade Cycle and Other Essays, ed. Richard M. Ebeling (Auburn, AL: Ludwig von Mises Institute, 1996), 30. 46. Ibid. 31. 47. There is also “financial repression”—we turn to this in the conclusion to this book. 48. Ludwig von Mises in Ebeling, Austrian Theory, 33. 49. Gottfried Haberler, “Money and the
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by William Jennings Bryant as the agricultural equivalent of the industrial workers’ demands for unions to control wages. 8. Five, including the special case of financial repression. See conclusion. 9. Again, if you are thinking Eurozone here, you are not wrong. 10. Eichengreen, Golden Fetters, 9. 11. Miguel Almunia et al., “From
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Fama, Eugene, 55 Fannie Mae, 121 Farrell, Henry, 55 Federal Deposit Insurance Corporation (FDIC), 24 Feldstein, Martin, 55, 78 Ferguson, Niall, 72 Figaro, Le, 201 financial repression, 241 Financial Stability Board, 49 Financial Times, 60 Fisher, Irving, 150 Fitch Ratings, 238 Flandin, Pierre-Étienne, 202 fractional reserve banking, 110 France, 4 and
Postcapitalism: A Guide to Our Future
by Paul Mason · 29 Jul 2015 · 378pp · 110,518 words
were discouraged from making cross-border financial trades. Add to that an explicit ceiling on interest rates and you have what we now call ‘financial repression’. Here’s how financial repression works: you hold interest rates below inflation, so savers are effectively paying for the privilege of having money; you prevent them moving money
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pace with production for twenty-five years. An explicit global rules system amplified the upside. Fractional reserve banking stimulated a ‘benign’ inflation which, combined with financial repression, forced capital into productive sectors and kept speculative finance marginal. The use of fertilizers and mechanization in the developed world boosted land productivity, keeping the
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global in scope. It heralds a long period of recurrent crisis. And once we understand what caused the upturn – high productivity, explicit global rules and financial repression – we can understand how it became exhausted. The post-war arrangements had effectively locked away instability into two zones of control: relations between currencies and
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nation it is a good indicator of the economy’s overall health. The chart above shows the debt of states compared to their annual GDP. Financial repression combined with inflation wiped out their war debts over twenty-five years of sustained growth. Then, in the face of crisis from 1973 onwards, the
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debts is approaching $300 trillion. It would be more sensible to combine controlled debt write-offs with a ten- to fifteen-year global policy of ‘financial repression’: that is, to stimulate inflation, hold interest rates lower than the inflation rate, remove people’s ability to move money into non-financial investments or
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growth and an inflation target on the high side of the recent average. This would provide the tools to stimulate a socially just form of financial repression, aimed at a controlled write-down of the massive debt overhang. In a global economy made up of states, or currency blocs, this is going
Profiting Without Producing: How Finance Exploits Us All
by Costas Lapavitsas · 14 Aug 2013 · 554pp · 158,687 words
role of productive capitalists.1 The regulation of finance was an integral part of the dominant Keynesianism of the period, summed up as ‘financial repression’.2 The system of financial repression had its roots in the great crisis of the 1930s which ushered in major regulatory changes with the aim of placing finance under
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Glass–Steagall Act encapsulated the dominant approach to financial regulation until the gradual emergence of financialization had signalled the second great wave of financial ascendancy. Financial repression was also spurred by the vast accumulation of public debt by mature countries in the course of the Second World War. The leading states of
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public debts that were held by both financial institutions and households, adopted administrative measures regulating interest rates, often forcing real interest rates into negative territory. Financial repression effectively worked as a subsidy to states allowing for the gradual reduction of public debt. The system of regulation applied to both money and finance
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sheets were administratively set, including reserves to deposits, and credit was often directed to selected industries and areas of economic activity. Thus, the backbone of financial repression was provided by controls over prices and quantities of credit, even if there were significant variations among developed countries. Second, there were controls on the
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range of functions that financial institutions were allowed to undertake. This aspect of financial repression again varied according to the historical and institutional trajectory of particular countries, but several features were in common across both mature and developing countries. Commercial
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outright prohibition on acquiring foreign assets, applying differential exchange rates to financial as opposed to commercial transactions, and taxing foreign financial returns. The content of financial repression was particularly clear in the context of developing countries. Countries in Asia and Africa that emerged from colonialism in the 1950s rapidly acquired national financial
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created, often publicly owned, and central banks were established to act as arms of the state, even in the absence of a domestic money market. Financial repression was the norm across developing countries, including controls on interest rates, credit flows and functional specialization of financial institutions. Financial systems, furthermore, tended to be
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bank-based, assigning a weak role to stock markets, or often lacking stock markets altogether. Theoretical justification for financial repression in developing countries was typically sought in the dominant Keynesianism of the time but also reflected the particular evolution of development economics. More generally, and
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, the system of market-negating regulation after the Second World War transformed the returns of financial institutions partly into rents that had state backing.6 Financial repression in both developed and developing countries began to unravel in the late 1960s and collapsed in the 1970s as the ascendancy of Keynesianism came to
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began to emerge spontaneously within the financial system. From the perspective of Marxist theory of finance discussed in Chapter 4, it is hardly surprising that financial repression eventually undermined itself. The financial system is an outgrowth of capitalist accumulation mobilizing idle money and organizing trade credit. The imposition of controls on prices
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. The result would be tension among financial institutions pivoting in the first instance on systematic divergences in returns. The second reason for the decline of financial repression was the collapse of the Bretton Woods Agreement in 1971–73. Its demise was due in part to the accumulation of US dollars abroad which
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policies began a trend in development finance that eventually led to the Washington Consensus in the late 1980s the underlying principle of which is that financial repression is counterproductive not least because it leads to weak and inefficient investment. From this perspective, the appropriate approach to finance in developing countries is to
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the World Bank and the IMF. To be sure, in all instances of financial liberalization there has been a domestic constituency favouring the abolition of financial repression; however, the driving force has often come from the outside. The lever for the imposition of financial liberalization has typically been conditionality attached to international
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, Money, Interest and Banking in Economic Development, London: Johns Hopkins University Press, 1988. For a devastating and prescient critique, see Carlos Diaz-Alejandro, ‘Good-Bye Financial Repression, Hello Financial Crash’, Journal of Development Economics 19:1–2, 1985. 13 Both the shift to a different regime of financial regulation and the proliferation
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Risk, Liquidity Creation, and Financial Fragility: A Theory of Banking’, Journal of Political Economy 109:2, 2001, pp. 287–327. Diaz-Alejandro, Carlos, ‘Good-Bye Financial Repression, Hello Financial Crash’, Journal of Development Economics 19:1–2, 1985, pp. 1–24. Dixon, Adam D., ‘The Rise of Pension Fund Capitalism in Europe
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