Managing India's macroeconomics - lessons from the 2008 crisis and beyond

The years since the global financial crisis of 2008 have brought into sharp focus the
importance of managing financial stability in the Indian context.

Post the crisis, developed economies focused solely on fostering growth, relegating
fears around inflation and deficits into the background.

In India’s case, however, when we focused on growth, we allowed financial instability

from twin deficits, banking stress and inflation to set in. This led to our own economic
crisis of 2013.

Even today, our current framework does not pay sufficient attention to the quality of
our external and internal balance, and the weaknesses in our financial services
ecosystem. This keeps us vulnerable to shocks and stresses.

Developed market responses to the global financial crisis

As confidence and inflation collapsed after the global financial crisis of 2008, central
banks and governments across the developed world adopted extraordinary policy
measures to stave off panic and to bolster growth.

Central bank policy rates were slashed to historic lows. The US Fed Funds rate was
cut from 5% to 0%. Japan and Switzerland took policy rates below 0%.

Major central banks then undertook large-scale asset purchases, bringing down
long-term yields, expanding their balance sheets and flooding markets with liquidity.
The Fed balance sheet grew from US$ 800B pre-crisis to well over US$ 4 T. The
ECB balance sheet rose from EUR 1T pre-crisis, to over EUR 4.5T.

In addition, governments stepped in to spend. The US clocked a federal deficit of

9.8% of GDP in 2009, from 1.1% of GDP in 2007. The Euro area fiscal deficit,
likewise, moved from 0.7% of GDP in 2007 to 6.3% of GDP in 2009.

Looking back, on the positive side, global growth has largely returned, without any
sign of inflation as yet. On the flip side, much of the excess liquidity has moved into
stock markets, emerging markets and other risky assets, leaving the system still
vulnerable.

India’s policy response post-2008: the focus on growth

Post the 2008 crisis, as India’s growth and exports fell sharply, our policymakers
stepped in to support growth.

The Reserve Bank of India slashed policy interest rates from 7% to an effective low
of 3.25%. India’s 10y government bond yield dropped from 9% to 5% by end 2008.
Alongside, our central government expanded the fiscal deficit from 2.5% of GDP in
FY08 to 6% in FY09, and 6.5% in FY10.

As a result, India’s GDP growth rose to pre-crisis levels in 2010. This brought back
portfolio investments, and USDINR, having touched a high of over 50.00 in 2009,
recovered back to 44.00 by mid-2011.

But this is where the script went awry for India. Our recovery came at a severe cost
to financial stability – which in turn sparked a fresh crisis.

Fiscal spending alongside low interest rates stoked inflation and imports. After
dipping sharply in 2008, India’s WPI and CPI strayed into double-digits beyond
2010.

Likewise, our current account deficit (CAD) deteriorated sharply, from 1% of GDP in
FY06, to 4.8% of GDP in FY12.

Banking balance sheets grew sharply, with increased financing of long-term

infrastructure projects.

Eventually, rising twin deficits and inflation took a heavy toll. USDINR rose from
44.00 in August 2011 to 68.80 in August 2013. India’s 10y government bond yields
rose from 5% in late 2008 to 9% in late 2013. India’s economic growth slumped back
to pre-crisis level in FY12 through FY14. In many ways, India’s real economic crisis
came not in 2008-2009, but in 2012-2014.

While crude oil prices, political scams and policy paralysis complicated matters, all
things considered, we still paid a price for neglecting financial stability in our hunt for
growth. With the advantage of hindsight, perhaps we should have compromised on
short-term growth, and instead controlled our fiscal deficit, inflation and banking
system health better.

India’s policy framework now: the focus on inflation

We have now adopted a flexible inflation-targeting framework.

Fortunately for us, global crude oil prices subsided from 2014.

Yet, we did allow risks to financial stability build up.

First, inflation targeting has impacted our external sector. Real interest rates were
kept high in a bid to control inflation, even as our macroeconomic context improved.
That brought in reversible, carry-seeking currency inflows across FPI in debt, net
exporter hedging, unhedged ECB inflows and other speculative flows. Between
FY15 and FY18, $120B of such opportunistic flows came into the country.

This caused INR overvaluation. Alongside, from $15B in FY17, our CAD rose to
$49B in FY18, and is now projected above $70B in FY19. This is not only on account
of higher crude oil prices. Our exports and manufacturing have struggled, and our
imports of electronics and gold have risen. An overvalued rupee also likely
contributed to this rising CAD. We are effectively borrowing expensive, fickle foreign
exchange to fund our oil, gold and electronics purchases.

Second, our fiscal position remains unhealthy as well. While overall central fiscal
deficit was arguably under control at 3.5% in FY17 and FY18, the quality of the
deficit deteriorated. Our revenue deficit rose from 2.0% of GDP in FY17 to 2.6% in
FY18, and could slip even more in the election year FY19. Our absolute capital
spending reduced from INR 2.90T in FY17 to INR 2.64T in FY18. Our government is
effectively borrowing money to pay for current expenditures including subsidies and
loan waivers.

Lastly, stressed banking balance sheets remain the soft underbelly of the Indian
economy. We continue to kick the can down the road on complete bank
recapitalization, resolution of stressed assets, and reform of the banking sector.
Relatively high real yields, particularly post demonetization, also added to the
banking sector stress.

Oil prices have now retraced back to $75 a barrel. They are still well shy of the levels
seen in 2012-2014, and yet, our vulnerabilities are already showing up. Inflation
control using interest rates is not the lone panacea – we must still consider and
balance across all metrics including external balance, internal balance, and health of
the banking sector.

Summary

Economic policymaking is complex. In our Indian context, each time we try and
simplify this by focusing on one metric alone, we risk aggravating overall financial
stability.

Post-2008, our over-arching focus on growth allowed the twin deficits and inflation to
take hold.

Likewise, inflation targeting using interest rates is no panacea – in fact, it may have
actually contributed to the current external imbalance.

We may have no option but to consider financial stability as a whole – across

external balance, fiscal health, and health of our financial sector, besides growth and
inflation. We also need a coordinated effort from the government and the central
bank, to optimize and address financial stability as a whole.
Five Little-Known Tools That
Governments Use To Reduce
Large National Debts - And
The Impact On Our Money
By Daniel R. Amerman, CFA

The United States government is currently about $20 trillion in debt,

which is roughly the size of its annual economy. When it comes to
savings and investment decisions, the most common way of dealing
with this problem – is to completely ignore its existence. As if to say
that this wasn't anticipated in the usual financial planning models,
and it looks quite bad, so we will all just pretend it doesn't exist.

For understandable reasons, the national debt seems somewhat

abstract to most people. But what history shows us is that how
nations reduce debts is deeply personal and even life changing for the
individual citizens of that nation. For this has happened before in one
form or another many times in many nations over the centuries, and
we know that each time the national debt is repaid or otherwise
reduced – the personal lives of the people are changed, sometimes
dramatically.

Participation in this process is not optional, it is mandatory, and

pretending it does not exist – offers an individual no protection
whatsoever.

A historical example that is highly relevant for today is what happened

with the United States between 1947 and the early 1970s, when the
federal debt (measured as a percent of the economy) fell from near
100% down to about 30%.
This reduction in the effective level of debt was no accident and it
wasn't free, not by any means. Instead, the powerful tools deployed by
the government dominated interest rates and bond markets for
decades, and every saver in America helped to pay through a steady
decline in the value of their money.

Now the United States is quite suddenly back up to a national debt

equal to about 100% of the size of the national economy, and it is far
from alone, as many other nations have also become heavily indebted
in recent years. While there are unique aspects to the current situation
– the core tools for reducing national debts remain the same.

Listed below are the four primary methods which nations use in
practice to pay down huge government debts when they have
borrowed in their own currency. Which particular method the
government chooses could end up being the number one determinant
of the value of your savings, as well as your long-term financial
security.

1) Decades of austerity with higher taxes and lower government

spending. This drastic measure can lower economic growth rates for
decades, and fundamentally change investment returns – meaning we
all pay together. It is also overt and clearly understood by
voters, and can thus have devastating political implications.

2) Defaulting on government debts. This radical option can devastate

bond and stock portfolios, bank deposits and retirement accounts –
also meaning we all pay together. It is also clearly understood by
voters, and thus can have devastating political repercussions.

3) Inflating away the value of the debt through rapidly slashing the
value of the currency. Very high rates of inflation rapidly reduce the
value of salaries, savings, and retirement accounts – again meaning
we all pay together. Because collapsing the purchasing power of
savings and salaries powerfully impacts the day-to-day lives of
voters, this can have devastating political implications.

4) Use five tools together to create a combination of very low interest

rates and somewhat higher rates of inflation that effectively uses
private savings to pay down public debts in a manner that is complex
enough that the average voter never understands how it works, thus
allowing governments to use this potent but subtle method of taking
vast sums of private wealth, year after year, decade after decade, with
almost no political consequences.

This fourth method that nations use to control or reduce the real value
of debt is a process which economists refer to as "Financial
Repression", and it is by far the least known or understood by the
general public. Not coincidentally, it is also the most common method
of national debt reduction that has been used in the modern era. So if
the "very low interest rates" part of the recipe sounds familiar – it
should.

The use of the five tools of Financial Repression has strong advantages
for the government. First, it works in practice – and professional
economists understand this very, very well indeed. As published in a
working paper on the IMF website, Financial Repression is what the
US and the rest of the advanced economies used to pay down
enormous government debts the last time around, with a reduction in
the government debt to GDP ratio of roughly 70% between 1945 and
the early 1970s.

Second – and of crucial importance – is that there was almost no

political damage, even while most major nations deployed it over a
period of 25+ years to pay down the debts of World War II. So
Financial Repression is proven not only to be effective, but in practice
to carry very few if any negative political consequences, quite unlike
the better known "high drama" solutions of austerity, default or high
inflation.

This avoidance of any political cost is also proven by current events

since 2010, for even while the major components of classic Financial
Repression have been reappearing for the first time in decades in the
United States and other nations – there has been relatively little
media coverage or general discussion.

To understand this "miracle" debt cure for governments requires

understanding the source of the funding. That is, the essence of
Financial Repression is using a combination of inflation and
government control of interest rates in an environment of capital
controls to confiscate much of the purchasing power of a nation's
private savings.

Rephrased in less academic terms – the government methodically

destroys the value of money over a period of many years, and uses
regulations to force a negative rate of return onto investors (in
inflation-adjusted terms), so that the real wealth of savers shrinks by
an average of 3-4% per year (in the postwar historical example).

Indeed, over time Financial Repression can be every bit as destructive

to wealth building through savings and retirement accounts as is
austerity, default or high rates of inflation.

And because of the sheer size of the problem – most of the population
must be made to participate, year after year. Financial Repression
therefore uses an assortment of carrots and sticks to ensure that
investors have little choice but to participate – on a playing field that
has been rigged against them as a matter of design – even if they are
among the small minority who are aware of what is being done to
them.

This analysis is part of a series of related analyses, an overview of the

rest of the series is linked here.

Understanding Financial Repression

Financial Repression and its devastating impact on retirement
investors was the subject of a Bloomberg article, and it has also been
previously covered by the Economist magazine, which included the
following summary:

"... political leaders may have a strong incentive to pursue it

(Financial Repression). Rapid growth seems out of the question for
many struggling advanced economies, austerity and high inflation
are extremely unpopular, and leaders are clearly reluctant to talk
about major defaults. It would be very interesting if debt (rather
than financial crisis or growing inequality) was the force that led to
the return of the more managed economic world of the postwar
period."
The phrase "Financial Repression" was first coined by Shaw and
McKinnon in works published in 1973, and it described the dominant
financial model used by the world's advanced economies between
1945 and somewhere between 1970 to 1980 (the specific duration
varied by nation). While academic works have continued to be
published over the years, the phrase fell into obscurity as financial
systems liberalized on a global basis, and former comprehensive sets
of national financial controls receded into history.

However, since the financial crisis hit hard in 2008, there has been a
resurgence of interest in how governments have paid down massive
debt burdens in the past. And in 2011 a fascinating study of Financial
Repression, "The Liquidation of Government Debt", authored by
Harvard economics professor Carmen Reinhart and M. Belen
Sbrancia, was published by the National Bureau of Economic
Research.

The paper was circulated through the International Monetary Fund,

and to understand why it has caught the full attention of global
investment firms and governmental policymakers, take a look at the
graph below:

The advanced Western economies of the world emerged from the

desperate struggle for survival that was World War II, with a total
stated debt burden relative to their economies that was roughly equal
to that seen today. The governments didn't default on those staggering
debts, nor did they resort to hyperinflation, but they did nonetheless
drop their debt burdens relative to GDP by about 70% over the next
three decades – and the very deliberate, calculated use of Financial
Repression was how it was done.

The Five Tools Of Financial Repression

The specifics of Financial Repression have taken somewhat different
forms in each of the advanced economies, but historically they each
come down to two fundamental components: A) creating a mechanism
for "shearing", i.e., a way to transfer wealth from savers to the
government on an extraordinary scale – but without ever explicitly
saying that is what is being done; and B) using the government's
control over laws and regulations to erect a series of "fences", making
it very difficult for investors to escape the "shearing" pen, but again,
without ever explicitly saying that this is being done.

As covered in the IMF working paper / governmental tutorial, this

combination of shearing and fencing in the postwar era shared four to
five core characteristics: 1) inflation; 2) governmental control of
interest rates to guarantee negative real rates of return; 3) the funding
of government debt by financial institutions; 4) capital controls; and
5) discouraging (or even outlawing in some cases) precious metals
investment.

As further explored herein, most of these historical components have

reappeared since 2010, in response to the extraordinary rise in
government debt levels which resulted from the attempts to contain
the damage from the 2008 crisis. The specifics for how the modern
version works are in some cases quite different from the well studied
postwar example, but they share the following features:

1) Inflation (Shearing #1). First and foremost, a government that

owes too much money destroys the value of those debts through
destroying the value of the national currency itself. It doesn't get any
more traditional than that from a long-term, historical
perspective. Without inflation, Financial Repression just doesn't
work.

Historically, the rate of inflation does not have to be high so

long as the government is patient, but the higher the rate of inflation,
the more effective Financial Repression is at quickly reducing a
nation's debt problem.

For example, per the Reinhart and Sbrancia paper, the US and UK
used the combination of inflation and Financial Repression to reduce
their debts by an average of 3-4% of GDP per year, while Australia and
Italy used higher inflation rates in combination with Financial
Repression to more swiftly drop their outstanding debt by about 5%
per year in GDP terms.

The first blade of the shears is shown in isolation below, and the
graphic illustrates how inflation works in combination with normal
market conditions, i.e. normal interest rates which are above the rate
of inflation.

By themselves, the normal low to moderate "background" rates of

inflation that have been created around the world by central banks as
a matter of policy for most of our lifetimes are not fun and they do
slow the rate of wealth creation. But they don't stop it – normal
savings still steadily build wealth over time for most people (at least in
pre-tax terms).

Conversely, because governments pay their debts back in dollars (or

other currencies) that are worth less than they were at the time of the
borrowing, inflation does lower their real cost of borrowing. But there
is still a true cost to borrowing, so long as the interest rate paid is
greater than the rate of inflation.

In other words, the real building of wealth via interest receipts for
individuals requires a real cost of debt for governments.

2) Negative Real Interest Rates (Shearing #2). Shears and

scissors each rely on having two blades. Where one blade might be
close to worthless in cutting wool or paper, squeezing two blades
together can accomplish the same task with remarkable ease and
efficiency.

The second blade of paying down government debts with private

savings is that of forcing interest rates below the rate of inflation, with
near zero interest rates (such as those we have right now) being
particularly effective.

The graphic below isolates the second blade, that of very low interest
rates. While the blue bars show the usual building of wealth with
compound interest during times of normal interest rates, the red bars
show how very low interest rates can remove almost all of the financial
benefits from long term savings. As all too many retirees and
retirement investors have been finding out for themselves in recent
years.
But by itself, the second blade of very low interest rates doesn't
destroy wealth. There is still positive wealth creation, just at a very
slow rate.

The power of shears and scissors is created by two blades coming

together, and the graphic below shows the surprisingly powerful
impact on savers when the blade of low to moderate inflation is forced
against the blade of very low interest rates.

The real return on investment turns negative for savers, and wealth
building inverts into wealth destruction. And the longer the time we
savers invest, then the more time the scissors have to work on
reducing the value of our savings.

(This is a difficult concept for many people to initially grasp, but the
implications can turn retirement planning and other investment
strategies upside down. A full length, step by step tutorial on how this
works and the multiple reasons why governments are currently
creating this situation can be found here.)

Now, in a theoretical world, some would say that governments can't

inflate away debts because the free market would demand interest
rates that compensate them for the higher rate of inflation. Sadly, this
theoretical world has little to do with the past or present real world.

For if we look at the current market, the substantial majority of US

government debt is outstanding at rates that are less than even the
official rate of inflation. This has been true for some years now, even
as it was true (on average) for decades in the past.

The scissors were steadily cutting away at private savings from 1947 to
1970 – and as shown above, the benefit was passing through to the
government. The national debt appears to grow (before inflation), and
there were many expenses, including the Korean and Vietnam wars.
But the two blades were working away that entire time, and indeed
grew more powerful as wartime higher rates of inflation increased the
sharpness of the blades.

So the national debt in simple (nominal) dollar terms was higher in

1952 than 1949, and much higher in 1970 than it was in 1967. Yet, the
inflation-adjusted value of the debt was lower in 1952 than 1949, and
lower in 1970 than in 1967. Even as the real value of the national debt
was substantially less in 1970 than it had been in 1947.

For that to happen required two blades, and in the past there were
formal government regulations that determined the maximum
interest rates that could be paid. As an example, Regulation Q was
used in the United States to prevent the payment of interest on
checking accounts, and to put a cap on the payment of interest on
savings accounts.

In combination the two blades did something remarkable.

In the United States and other advanced economies, the national

debts were completely out of control by the end of World War II. And
by using the two blades of low to moderate inflation and still lower
interest rates, the debt was held in place and even forced down in
inflation-adjusted terms. Even while economic growth soared. The
combination meant the debt monster was tamed.

But there was a price to this "miracle", which was slowly taking real
wealth from the savers of each nation in a multi-decade process, which
combined two blades and year after year of patience. Which meant
year after year of savers losing real wealth, even if the overwhelming
majority never understood what was happening, or that it was
deliberate, or why it was being done.

Now, Regulation Q is long gone, but government control of short,

medium and long term interest rates has nonetheless been near
absolute since 2010 in the United States. Even with the very small
Federal Reserve increase in December of 2015, interest rates are still
far below historical averages, and well within the range where
Financial Repression is highly effective.

So long as the Federal Reserve maintains control, there is no need for

explicit interest rate controls – or even necessarily for ongoing
Quantitative Easing (QE). However, should the Fed begin to lose
control, there is a strong possibility that either interest rate controls or
another sharp increase in QE will return to the US financial landscape,
with similar controls or changes in monetary policy returning in other
nations.

3) Funding By Financial Institutions (Fence #1). With this

component of Financial Repression, the government establishes
incentives for financial institutions such as banks, savings and loans,
credit unions and insurance companies to hold substantial amounts of
government debt. This can be publicly phrased as "mandating
financial safety", instead of the more accurate description of
mandating that investments be made at below-market interest rates to
help overextended governments recover from financial difficulties.

This funding is sometimes described as a hidden tax on financial

institutions, but let me suggest that this perspective misses the
important part for you and me. Which is that as financial institutions
operating within a country are effectively subsidizing this liquidation
of government debt by accepting less than the rate of inflation on
interest rates, the gross revenues of all financial institutions are
depressed, and therefore less money can be offered to depositors and
policyholders.

Then, because financial institutions make their money not on gross

revenues, but on the spread between what they pay out and take in,
then arguably, the guaranteed annual loss in purchasing power is not
absorbed by the financial institutions, but rather passed straight
through to depositors and policyholders, i.e. you and me, as further
explained here.

The goal of this third element is to make sure that all savers are
lending to the government at artificially low interest rates – even
though the great majority of them never directly purchase a
government security. One way of doing this is savers making deposits
which pay very low rates of return, with banks using those very low
cost deposits to purchase government debt that also pays a very low
rate of return.

While little remarked upon, that is exactly what has been happening
on a multi-trillion dollar scale in the United States, as part of the
Federal Reserve's Quantitative Easing program. This can be clearly
seen in the graphs below:

The Federal Reserve has purchased about $2.5 trillion in US

Treasuries at extremely low interest rates – and it has financed these
purchases by borrowing about $2.5 trillion from US banks at (on
average) even lower interest rates. Which the banks are financing by
paying virtually no interest rates at all to depositors.

On a net basis, the banks and the Fed drop out of the middle, and
savers are left financing the US Treasury, with essentially no interest
income gained, and an annual reduction in the value of the investment
principal within an environment of ongoing inflation. This is a classic
example of Financial Repression on an effective basis, even if the
specific tools being deployed take a different form this time than they
did in the postwar example.

In 2015 and 2016 the forced participation of savers in funding the

national debt is substantially increasing again. Fidelity Investments
has changed to 100% of their $115 billion Cash Reserves fund, the
world's largest money fund, being invested in US government debt as
of December of 2015. It is expected that many other money fund
companies will also change their policies and invest only in US
government and agency securities, because of a change in regulations
that will occur in October of 2016.

Now, another textbook element of Financial Repression is that the

forced funding of government debt is presented as being mandated by
the need to increase safety for the public. As explored here, by
tightening the regulations on money funds, another $1 trillion of saver
money may soon be exclusively invested in US government debt at
very low interest rates. And sure enough the public justification for the
regulatory change is that it is needed for the safety of investors, the
change is for our own good.

There is still another new twist on keeping saver money going to the
government, and that is the recent creation of MyRAs, the user-
friendly "my retirement accounts" for small investors, that are
presented as being one part of the campaign to help close the income
and wealth disparity gap in the US.

To help close this gap the United States Treasury is offering a no-fee
and very convenient means for low income and middle class investors
to build retirement wealth, with initial contributions as low as $25,
and ongoing contributions as low as $5. And of course, the money will
always be safe - because the retirement accounts have to be 100%
invested in US government obligations, as a matter of law.

4) Capital Controls (Fence #2). In addition to ongoing inflation

that destroys the value of everyone's savings and thereby the value of
the government's debts, while simultaneously making sure that
interest rate levels lock in inflation-adjusted investor losses on a
reliable basis, there is another necessary ingredient to Financial
Repression: participation must be mandatory. Or as Reinhart and
Sbrancia phrase it in their description / recipe for Financial
Repression, it requires the "creation and maintenance of
a captive domestic audience" (underline mine).

The government has to make sure that it has controls in place that will
keep the savers in line, while the purchasing power of their savings is
systematically and deliberately destroyed. This can take the form of
explicit capital and exchange controls, but there are numerous other,
more subtle methods that can be used to essentially achieve the same
results, particularly when used in combination.

This can be achieved through a combined structure of tax and

regulatory incentives for institutions and individuals to keep their
investments "domestic" and in the proper categories for manipulation,
as well as punitive tax and regulatory treatment of those attempting to
escape the repression. A carrot and stick approach in other words, to
make sure that investor behavior is controlled.

For a modern example, we can go back to the Affordable Care Act and
one crucial element that was slipped in there with zero public debate.
That is FATCA, which has been changing the flow of capital for US
citizens on a global basis. FATCA makes it dangerous for foreign
institutions to deal with US savers and investors.

They are forced into onerous reporting requirements on the financial

activity of US citizens that could be administratively difficult to do,
and require changing their internal procedures on a wholesale
basis. If they don't comply in exactly the way that the US government
wants – then these foreign institutions face potentially severe
penalties.

So what are a lot of foreign institutions around the world doing?

They're not allowing US citizens to open accounts. The easiest and

most risk-free thing for the bank to do is to simply not open the
accounts. Which is effectively a form of capital controls.

Extraordinary Timing
The timing of events in the last few years is fascinating.

When did Quantitative Easing 2 (QE2) appear with the Federal

Reserve's overtly taking control of US medium and long-term interest
rates, forcing rates ever lower beneath the rate of inflation?

It was November 2010.

When did the surge in bank asset reserves begin with QE2, with an
ever greater percentage of bank assets going to the Fed, which used
the money to acquire very low- rate US government debts?

That was 2010.

When was FATCA made a matter of law, fundamentally reducing the
ability of US citizens to move their money out of the country (albeit
not to become effective until 2014)?

That was 2010.

With no press releases, and after an absence of about four decades,

three of the core components of Financial Repression almost
simultaneously were brought back into play (with the fourth
component – inflation – having been there the entire time). Even
while federal debt was soaring when measured as a percentage of the
economy, returning to levels not seen in almost 60 years. Indeed,
debt levels have not been this high since the last time Financial
Repression had been used.

Coincidence?

5) Precious Metals Controls (Fence #3). Now there is a fifth

component that is very important as well. This one's a little more
optional, but it's part of classic Financial Repression in the United
States as well as the UK and other nations.

And that is if the government is creating inflation, and as a matter of

law it's not allowing citizens the ability to protect themselves from that
inflation, then investors will be tempted to seek refuge in precious
metals.

So the fifth component of classic Financial Repression is to either

make illegal or discourage investment in precious metals. To some
extent that's already true in the US when we look at our collectibles
tax treatment as compared to other investments, which strongly
penalizes investments in precious metals, as explained here.

At this stage, there have been fewer changes with regard to precious
metals than with the other categories of Financial
Repression. However, it is worth keeping in mind that the more
successful precious metals investors are in dodging Financial
Repression – then the more likely the return to Financial Repression
for precious metals investors. After all, the underlying theory is based
upon not allowing savers to escape the pen.
A "Low Drama" Approach To Systematically
Cheating Investors
The governments of the world are in deep financial trouble, and would
naturally prefer to avoid the "High Drama" approaches of overt global
defaults, very high rates of inflation, or comprehensive austerity
coupled with massive tax hikes – if possible. For each of those radical
routes is highly unpopular, and could lead to political turmoil that
would remove the decision makers and the special interests who
support them from power. A more subtle approach sounds far more
attractive, particularly since it has worked before over a period of
decades, with an almost boring lack of political turmoil.

To get out of trouble by way of Financial Repression, the governments

must wipe out much of the value of their debts, without raising taxes
to the degree needed to pay the debts off at fair value. In other words,
they must cheat investors on a wholesale basis. There is nothing
accidental going on here, all that is in question are the particulars of
the strategies for cheating the investors, meaning the collective savers
of the world.

Again, the time-honored and traditional form that heavily-indebted

governments use to cheat investors is to devalue the currency. Create
inflation, and tax collections will rise with that inflation but the debts
won't, and meanwhile the savers of the world will be paid back in full
with currency that is worth less than what was lent to the governments
in the first place.

When many people think of inflationary dangers, they think of high

rates of inflation, perhaps 10% per year or more. They take a "High
Drama" approach, and think that if rates of inflation are more
moderate, then there isn't that much to worry about.

Ironically, however, this belief could not be more mistaken, for what
history shows is something else altogether. "Moderate" rates of
inflation have historically been quite effectively used over a period of
decades to redistribute wealth from individual savers to national
governments on a massive scale with virtually no political costs –
because the taking of wealth is being done slowly, subtly, and through
a process that the general public has historically not understood. The
U.S. national debt is likely to change our daily lives in multiple ways
over the coming decades, some of which are little understood by
savers and investors. As shown in the first row of analyses in the
matrix which is linked here, heavily indebted nations have major
challenges when it comes to interest rates, inflation, financial stability
and the ability to make Social Security and Medicare payments in full.
As is examined in the second row of analyses, each of those national
challenges can directly translate to life-changing personal challenges
as well.