Tuesday, November 1, 2011

Financial Repression and Your Money


The concept of financial repression may be important for you to understand. Important for your outlook on how the system is currently geared and how your investments and savings are set to perform in the current environment and going forward.

When countries get into severe debt problems, their ability to repay that debt gets more difficult. That's obvious. One of the more subtle ways of dealing with too much debt is inflating it away. Now a country could overtly print money, thereby making the debt less valuable, or use other methods. In the US at present the preferred method is the stealth method of financial repression.

Financial repression (FR) includes direct lending to the government through banks and domestic pension funds or insurance companies and at the same time capping interest rates. To facilitate this, government brings in tighter controls and regulations between government and funds and banks. This leads to coercing these entities into buying government bonds. For this to work, the bond buying needs to occur when interest rates obtainable on those bonds are way below the inflation rate.

Or to put it another way and to use a New Zealand analogy, kiwisaver funds, and other money market funds, will be forced, through regulation, into purchasing low interest rate government bonds (in order to keep their debt and power orgy going) while the inflation rate is high. High inflation coupled with low interest rates equals negative relative returns. These 'returns' could be as low as negative 4% per year. Enough to wipe out diligent savers. People who listened to the advice of governments regarding kiwisaver and the like and trusted them with their funds

So the government gains with being able to borrow at low rates (say 2% and below) while their debt is whittled away with higher inflation (at around 4 - 5%).

Remember too, that the inflation rate is probably not as low as it reported. If you use the method that inflation was reported way back in the 1980s, inflation could well be around 9 to 12%. The reported inflation rate is around 4%. Even better for FR to work.

If FR was to occur in New Zealand (and it is moot as to whether it may be happening even now) then kiwisaver will be right in the line of sight as funds available to buy government bonds. And most people will not understand what is occuring.

Bottom line, the people lose their wealth; government gains it.


Gold in New Zealand dollars: $2128.34 per oz
Previous all time high: $2284.16 per oz (19 Aug, 2011)

Silver in New Zealand dollars: $42.34 per oz
Previous all time high: $59.19
per oz (30 Apr, 2011)
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