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'Financial repression' is gold price suppression
10:35p ET Thursday, December 29, 2011
Dear Friend of GATA and Gold:
Referring to Financial Times editor Gillian Tett's December 22 column, "Ties Between Sovereigns and Banks Set to Deepen," to which the GATA Dispatch called your attention the other night with the headline "Citing 'Financial Repression,' FT's Gillian Tett Sounds Like Jim Rickards and Rob Kirby" (http://www.gata.org/node/10828), a friend asks:
"Is the message here that governments have determined that the only way to stay in power is:
"-- To fund their excess through the banking system, at the expense of the private sector;
"-- And to go along with the gold price suppression scheme so that the only alternative to that system is not attractive either?
"If the Chinese, Indians, Japanese, and others buy into this power-preservation scheme, then it appears -- as you have long said -- there really is no true market left, and we're all screwed, no? This is not particularly what I want to believe, but if that's where we are, then I guess I need to deal with it."
... Dispatch continues below ...
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Your secretary/treasurer replied: "Yes, that's how I construe the comments about 'financial repression' made by Rickards, Kirby, Tett, and others. It's a matter of government's making it impossible for investors to make money except in undertakings specifically approved and designed by the government itself, undertakings that get narrower and narrower as government intervention in markets grows more pervasive.
"Economic circumstances and markets will keep trying to find ways to assert themselves, and the different interests of some countries may cause them to act against the 'financial repression' other countries try to impose, what Rickards describes in his new book, "Currency Wars" (http://www.amazon.com/Currency-Wars-Making-Global-Portfolio/dp/1591844495), so there's no assurance about how things will end up, just assurance of less democracy and more totalitarianism. That's what GATA has been fighting all along."
"Financial repression" was perhaps first foreseen by the British economist Peter Warburton in his 2001 essay "The Debasement of World Currency: It Is Inflation, But Not as We Know It" (http://www.gata.org/node/8303).
Warburton wrote: "What we see at present is a battle between the central banks and the collapse of the financial system fought on two fronts. On one front, the central banks preside over the creation of additional liquidity for the financial system in order to hold back the tide of debt defaults that would otherwise occur. On the other, they incite investment banks and other willing parties to bet against a rise in the prices of gold, oil, base metals, soft commodities, or anything else that might be deemed an indicator of inherent value. Their objective is to deprive the independent observer of any reliable benchmark against which to measure the eroding value, not only of the US dollar, but of all fiat currencies. Equally, they seek to deny the investor the opportunity to hedge against the fragility of the financial system by switching into a freely traded market for non-financial assets." [Emphasis added.]
That is, "financial repression."
As the idea reached her this month, Tett wrote incisively: "To understand this, it is worth taking a look at a fascinating recent working paper by Carmen Reinhart and M. Belen Sbrancia, published by the Bank for International Settlements but drawing on earlier work for the International Monetary Fund. ...
"... What Reinhart and Sbrancia argue is that if you want to understand how the West cut its debts during the last great bout of deleveraging -- namely, after the Second World War -- then do not just focus on austerity or growth. Instead, the crucial issue is that during that period, the state engineered a situation where the yields on government bonds were kept slightly below the prevailing rate of inflation for many years. This gap was not vast. But since asset managers and banks continued to buy those bonds at unfavorable prices, this implicit, subtle subsidy from investors helped the government to cut its debt pile over several years. Indeed, Reinhart and Sbrancia calculate that such 'repression' accounted for half of the post-Second World War fiscal adjustment in the U.S. and U.K., due to the magic of compounding.
"Now these days it is hard to imagine any Western government overtly calling for a second wave of such 'repression.' After all, as Kevin Warsh, a former Fed governor, recently pointed out, the drawback of financial repression is that it curbs private-sector investment and credit growth. And in any case it is a moot point whether such repression could even be implemented today, given the globalized nature of markets.
"Nevertheless, the political incentives to flirt with this concept are clear. After all, the beauty of a stealth subsidy is precisely that: It is too subtle for most voters to understand. It is also arguably a more equitable form of burden sharing, and thus less politically divisive, than, say, state spending cuts.
"Moreover, governments do not necessarily need to be 'repressive' to achieve the 'repression' trick. As the economist Alan Taylor observes, if investors are so terrified that they cannot see alternative investment choices, they may end up buying government bonds by default -- even at unattractive prices. [Emphasis added.] Indeed, that is arguably what is already occurring today in the Treasuries market or the world of Japanese government bonds. And, perhaps, in the eurozone too. After all, when eurozone banks were given E442 billion of European Central Bank money two years ago, they used half of this to buy government bonds -- without compulsion at all.
"Whatever you want to call it, then, the state and private-sector finance are becoming more entwined by the day. It is a profound irony of 21st-century 'market' capitalism. And in 2012 it will only deepen."
Thus Tett, like Warburton long before her, expressed perfectly the rationale for the gold price suppression scheme even as she explained why there would be little point in questioning central bankers about their implementation of "public" policy. ("Now these days it is hard to imagine any Western government overtly calling for a second wave of such 'repression.'") In mainstream financial journalism it is simply taken for granted that the purposes and objectives of central banking are not to be learned from central banks themselves but rather from academics, market analysts, soothsayers, or whoever else might answer the telephone when a central banker won't.
As a practical matter, this assumption of mainstream financial journalism is probably correct. But the world might begin to change, however slowly, if journalists tried putting the questions to central bankers in public settings anyway and reported their evasions or refusals to answer. Eventually investors and even the public might come to understand that great power, the power to control the prices of all capital, labor, goods, and services in the world -- that is, the power to control the price of everything, absolute power -- was being exercised in secret so that the world more easily might be expropriated, that democracy had been crushed, and that, as a mere high school graduate remarked a few years ago, "There are no markets anymore, only interventions." (http://www.gata.org/node/6242.)
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.
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