Monday, March 12, 2012

Reinhart on financial repression

Via:    This is a follow-up to my post on “how long can interest stay low” (or “how long are we ZIRP’ed?”).

As they have before in the aftermath of financial crises or wars, governments and central banks are increasingly resorting to a form of “taxation” that helps liquidate the huge overhang of public and private debt and eases the burden of servicing that debt.

Such policies, known as financial repression, usually involve a strong connection between the government, the central bank and the financial sector. In the U.S., as in Europe, at present, this means consistent negative real interest rates (yielding less than the rate of inflation) that are equivalent to a tax on bondholders and, more generally, savers.

Continues here.  It’s a must read. The extraction of wealth from the lower socioeconomic classes continues.  It was interesting to read Niall Ferguson in one of John Mauldin’s recent blasts saying he feared for America unless a total “reset” of the system takes place.  That I can agree with.

The problem is the distribution, not aggregate demand.  But you can’t expect a mainstream economist to agree to that.

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