- Frank Byrd, CFA, CFP®
Financial Repression Explained
"If the origin of the problem was too much debt, how can a policy that encourages the private and public sectors to accumulate more debt be part of the solution?"
- Claudio Borio, Head of Monetary & Econ Dept, BIS*
Half Right It's lucky that we have thick skin. Last summer, when consumer price inflation was peaking at almost 9%, Fielder said we weren’t concerned about near-term inflation. (See Inflation Head Fake.) Many of you thought we were crazy. Thankfully, we weren’t. Inflation has declined ever since, surprising markets and sending them higher. But our crystal ball wasn’t perfect. We had also predicted that the Federal Reserve would capitulate on raising rates at the first sign inflation was cooling. Fed Chairman Powell ended up having a backbone and remained steadfastly hawkish to clean up the inflation mess (which he helped create). What Now? Though we haven't been worried about near-term inflation, we remain concerned about longer-term inflation. You can get details on why in the following video:
Ultimately, we believe that governments are locked into a policy path of "financial repression". Policymakers need to orchestrate artificially low levels of interest rates in order to both inflate asset prices and reduce the interest cost on the federal debt. Otherwise, interest costs would continue to balloon to a level that would crowd out spending for Social Security, Medicare, defense, and other critical needs. It may not be the moral high-road, but for most elected officials, it's the only way to make the math work. If interest rates on US Treasuries remain at ~5%, we project that Washington's cost of servicing its debt will increase to almost 30% of its annual budget.
To learn what this ultimately means for investors, you can learn more HERE or by clicking the above video.
As always, we welcome any questions or contrary thoughts.
Yours in the Field,
Frank Byrd, CFA
*From BIS Working Papers #353, "Central Banking Post-Crisis: What Compass for Uncharted Waters?" by Claudio Borio. (Hat tip to Ed Chancellor for flagging this quote in his excellent must-read history of interest rates, The Price of Time, Atlantic Monthly Press, 2022.)
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