Subject: Policymakers learn a new and alarming catchphrase - FT
From: "Michael Andrews" <[email-masked]>
To: "Hunter Biden" <[email-masked]>, "Eric Schwerin" <[email-masked]>
Date: Fri, 20 May 2011 08:32:42 -0400

Hey guys,

I was heavily involved in discussions in Oslo that concerned fairness  
should be the argument. The Dems often are articulating a concern for  
the poor but have not effectively engage the debate of the moving  
spread between the rich  - those making more than $750,000 a year and  
the middle class 75,000 and 500,000.II think Democrats would gain by  
talking about fairness of load of costs.

Michael
Policymakers learn a new and alarming catchphrase

By Gillian Tett
Published: May 9 2011 19:43 | Last updated: May 9 2011 19:43
Another week, another wave of dismal fiscal gridlock in Washington.  
But as US politicians squabble about how to cut the debt, another  
concept with a catchy name is quietly starting to creep into the  
policy debate: “financial repression”.

A few weeks ago, Carmen Reinhart, a US economist who shot to fame two  
years ago by co-authoring an influential book on sovereign debt, This  
Time Is Different, produced a joint paper for the International  
Monetary Fund on the topic of “financial repression” in the west. And  
while this phrase is not yet mainstream news, it is starting to  
generate a buzz among the policy elite in Washington and in some  
European capitals.

EDITOR’S CHOICE
Money supply: Better news on US credit - May-09

Clive Crook: Now Obama must lead on the deficit - May-08

Editorial: Raising the roof on America’s debt - May-08

The issue at stake revolves around the question of where investors  
“choose” to put their money. During the past three decades, western  
savers have generally assumed they could put their money wherever they  
wanted, since financial markets were organised according to the mantra  
of globalisation and free market capitalism – and thus the price of  
money (or interest rates) was set largely by demand. But as Ms  
Reinhart and Belen Sbrancia, her colleague, point out, this freedom  
was unusual. In the 1920s, global capital markets were also pretty  
free. But, from the 1940s to the 1980s, western governments operated  
capital controls and interest rate caps that restricted financial  
flows, limiting investor choice.

It is often assumed that these controls were driven by a wave of  
financial reforms after the 1929 stock market crash (just as  
governments are implementing financial reforms now). And that is  
partly true. However, Ms Reinhart and Ms Sbrancia argue that these  
controls also had a crucial fiscal impact. After the second world war,  
the debt of the advanced economies spiralled to about 90 per cent of  
gross domestic product, roughly comparable to today, which meant  
western governments desperately needed to find investors to buy the  
bonds.

One consequence of the controls was they created a captive domestic  
audience for those bonds. Better still, because these bonds paid a  
yield lower than inflation, whenever those captive investors bought  
bonds, they effectively paid a hidden subsidy to the government,  
enabling them to reduce the debt.

Ms Reinhart and Ms Sbrancia argue the world has forgotten that the  
widespread system of financial repression “played an instrumental role  
in reducing or ‘liquidating’ the massive stocks of debt accumulated  
during World War II”. Between 1945 and the 1980s, they say the US and  
UK’s “annual liquidation of debt via negative real interest rates” on  
average amounted to 3-4 per cent of GDP per year, or 30-40 per cent of  
GDP debt reduction over a decade.

These days nobody is talking about introducing overt capital controls  
or interest rate caps in the west. And central banks appear determined  
to curb inflation. But some influential investors fear eventually the  
temptation to let inflation jump above bond yields will reappear.  
“While the ancient Romans used to shave metal coins in an attempt to  
monetise debts, our evolving financial system has used more  
sophisticated techniques [to cut its debt],” says Bill Gross, head of  
Pimco investment fund. “Bond prices don’t necessarily have to go down  
for investors to get skunked.”

Central banks such as the Federal Reserve have already been buying  
bonds. And there are now some intriguing hints that private sector  
institutions are being urged to hold more bonds. In the UK, the  
introduction of financial reforms has forced banks to purchase more  
gilts. Similar steps are afoot in other parts of Europe and in  
Washington some policymakers are quietly mulling whether US banks and  
pension funds could – or should – follow suit, especially if foreign  
buyers (who own half the US debt) stop buying US bonds.

Such moves horrify some free-market economists, who argue “repression”  
crimps private sector investments, thus undermining growth. But  
postwar politicians clearly decided this was a price worth paying to  
cut debt and avoid outright default or draconian spending cuts. And  
the longer the gridlock over fiscal reform rumbles on, the greater the  
chance that “repression” comes to be seen as the least of all evils;  
at least compared with others that may emerge from spiralling western  
debt.