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'financial Repression' Mentioned In Mainstream Media!

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http://www.telegraph.co.uk/finance/comment/rogerbootle/10407535/Financial-repression-may-stave-off-default-but-the-cost-to-savers-will-be-high.html

QUOTE 'Financial repression’ may stave off default, but the cost to savers will be high

Inflation will probably still be higher than the paltry interest rates available on many savings instruments – particularly after tax.

All being well, pretty soon workers will start to see the real value of their earnings rise as inflation falls back. And about time, too.

But sadly I doubt that savers will have much cause to rejoice. Inflation will probably still be higher than the paltry interest rates available on many savings instruments – particularly after tax.

This will continue for some time. The authorities are engaged in policies which inflict real losses on savers. This is nothing new. It is what happened in Britain and America after the war and it played a leading part in enabling both countries to reduce their debt burdens after they had been inflated by massive wartime borrowing.

The UK is again suffering from a serious problem with the public finances. Last week’s figures on the Government’s deficit at last showed a chink of light. But, make no mistake, the debt is still rising.

This year, it will probably be about 80pc of GDP. We will be lucky if it peaks below 85pc. In itself this is not a disaster, but we have to be careful. A prudent manager of the nation’s affairs would seek to reduce this ratio to well below 50pc.

The orthodox way of reducing the deficit, namely through fiscal austerity, has been implemented and still has further to run. But on its own it cannot make that much of a dent in the debt ratio. As long as there is any deficit at all, then the stock of debt still rises.

Some countries, including some in the eurozone, that are struggling with debt ratios above 100pc, will probably eventually default. But that route is not open to us. The British don’t do default. Or at least, not outright default.

In the past, British governments have done quite a lot of implicit default through inflation. I argued last week that Japan may be forced into taking the inflation route, but this would be resisted in the UK, at least initially.

Growth is our hope. It isn’t only that growth will produce higher tax revenues and thereby reduce the deficit, or even eventually turn it into a surplus, but also that a given amount of debt will represent a smaller share of GDP.

In this way, the debt burden can be reduced painlessly. But it will take decent growth rates, sustained long after Mr Osborne has left office, to bring the debt down to manageable levels. And there is a worry that the cost of servicing the debt – paying interest on it – could overwhelm the benefits of continued austerity and economic growth.

That is where “financial repression” comes in. The term is used to cover a variety of measures that have the effect of forcing interest rates and bond yields lower than they would be in normal free market conditions. This reduces the cost of government borrowing while not directly harming economic growth. Indeed, it should encourage it.

So far, neither the Government nor the Bank of England has openly said that it is engaged in a policy of financial repression. And, to the best of my knowledge, neither has any other government or central bank. Rather, financial repression has resulted from policies being justified in other ways.

The policy of Quantitative Easing (QE), which involves the Bank of England buying huge quantities of government bonds, is supposed to boost the economy by reducing long-term interest rates and flooding the system with liquidity, thereby increasing asset prices and encouraging finance to flow into productive uses.

But in so far as it has kept down the rates of interest on government bonds, which you would presume it has, it has also reduced the cost of financing the Government’s deficit, compared to what it would otherwise have been. This has been very welcome at a time when the Government has to finance a deficit of £120bn and is forking out £30bn a year in debt interest.

Similarly, banks, pension funds and insurance companies are obliged to hold a high proportion of their assets in safe form, ie government debt, for “prudential” reasons. Nevertheless, this has the effect of boosting the demand for this debt and thereby keeping the rates on it low.

The policy of holding interest rates at 0.5pc has the same result. The policy exists primarily for macroeconomic reasons, that is to say, it is believed to stimulate aggregate demand and hence boost the economic recovery. But it also has the effect of keeping down all short-term interest rates, including on government bonds.

We know that in economics there is no such thing as a free lunch. In economic policy, it is usually a matter of weighing up costs against benefits.

Of course, apart from economic growth, all ways of reducing the debt burden inflict losses on someone, but over and above this they can also be economically damaging. When a government defaults, it is obvious who bears the losses – the holders of government debt.

The economic costs of default are also pretty clear, namely that this may damage a government’s reputation and thereby impair its ability to borrow in future, as well as possibly inflicting serious damage on banks and other financial institutions that are vital to a healthy economy.

When a government lets inflation erode the real value of its debt, the losses are not so obvious – but they happen just the same. They are borne by all those who have assets that are not protected against inflation, including conventional government bonds. Inflation causes damage because it distorts the price mechanism and requires a recession to bring it down again.

A policy of financial repression does not involve any sort of default as such because no promise is breached. But the results are much the same. Anyone with savings in forms where the interest rate is flexible, and people doing new saving, will find that they receive less than they normally would. As umpteen pensioners know only too well, low gilt yields have caused annuity rates, which govern entitlements to pension payments, to come down, too.

The damage done by financial repression consists of the distortions to financial markets and the risk that low interest rates and bond yields will cause bubbles in asset prices that, when they burst, cause serious losses.

You can see this risk building now, especially in interest rate-sensitive assets such as residential and commercial property. For the time being, this is a risk worth taking – but not forever. END QUOTE

Roger Bootle is managing director of Capital Economics roger.bootle@capitaleconomics.com

It's good to see the term 'Financial Repression' being (at long last) used in the media. As Roger Bootle says in his article"

"So far, neither the Government nor the Bank of England has openly said that it is engaged in a policy of financial repression. And, to the best of my knowledge, neither has any other government or central bank. Rather, financial repression has resulted from policies being justified in other ways."

It's up to us (yes us) to make up for our so-called free press not pushing Ministers and ALL political parties on this issue -

The Great Financial Repression continues........

History will judge the decade from 2008 as 'THE GREAT REPRESSION'. A time when the prudent were sacrificed to bail out the reckless and the feckless.

So just what is Financial Repression? Between the 1940's &1970's successive government's intentionally inflated away the debt of WW2. Given that generations suffering tax/inflation AFTER the war benefited from the sacrifice of the 40's generation there was perhaps some moral justification for this economic policy. But can ANYONE justify the theft of savers ( plus pensioners / excluded home owners

etc) hard earned (and taxed!) funds being given to bankers and feckless borrowers?

Open peoples minds by using the term THE GREAT REPRESSION when ever

possible. Lets try and make the term part of the lexicon for 2013!

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Was looking savings accounts at the weekend.

For an easy access savings account you are looking at 1.6% and for a bond 2.2% if you sign up for 3 years.

The money people have ACTUALLY WORKED FOR is being taken to profit the speculators and spivs WHO DO NOTHING BUT LIVE OFF THE WORKERS BACKS.

This surely can't go on much longer.

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Was looking savings accounts at the weekend.

For an easy access savings account you are looking at 1.6% and for a bond 2.2% if you sign up for 3 years.

The money people have ACTUALLY WORKED FOR is being taken to profit the speculators and spivs WHO DO NOTHING BUT LIVE OFF THE WORKERS BACKS.

This surely can't go on much longer.

I agree with the OP. After five years it's nice to see the term used explicitly. Financial repression will go until it can't since the alternative - default/hyperinflation - is so much worse.

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I agree with the OP. After five years it's nice to see the term used explicitly. Financial repression will go until it can't since the alternative - default/hyperinflation - is so much worse.

Default OR hyperinflation surely?

Dont know why default is such a dirty word. Its not rare or unusual. Happens all the time. The young and future generations should not pay for decisions they never made.

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Was looking savings accounts at the weekend.

For an easy access savings account you are looking at 1.6% and for a bond 2.2% if you sign up for 3 years.

The money people have ACTUALLY WORKED FOR is being taken to profit the speculators and spivs WHO DO NOTHING BUT LIVE OFF THE WORKERS BACKS.

This surely can't go on much longer.

It did in Japan for 25 years. And it still is.

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French savers seem to have mobilised quickly last week:

France's Socialist government on Sunday backed away from plans to increases taxes on popular savings programmes, after the move sparked anger among savers.

The plan would have harmonised tax rates on interest from several kinds of savings plans at 15.5 percent, raising an extra 600 million euros ($830 million) in revenues to help France rein in its budget deficit.

It was approved as part of a budget vote in the lower house National Assembly last week but came under fire from groups representing savers, the right-wing opposition and even some Socialists.

Budget Minister Bernard Cazeneuve announced in Le Journal du Dimanche that the government had dropped the plan and the tax increase would apply only to certain life insurance policies.

"We have heard the concerns of small savers," Finance Minister Pierre Moscovici said on Europe 1 radio.

http://uk.finance.yahoo.com/news/french-socialists-back-away-contentious-113400773.html

Deposit Interest Retention Tax in Ireland up to 41% from Jan 1st.

http://www.citizensinformation.ie/en/money_and_tax/tax/tax_on_savings_and_investments/deposit_interest_retention_tax.html

An extra tax on unearned income next in the UK?

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Financial Repression can be compared to 'clipping' coinage. Obviously it is 'unfair' *

Thing is what can be done about it? To my way of thinking the 'Powers That Be' are suppressing any public debate on whether or not it is Government policy and perhaps we should try and be proactive in raising the matter.

It would be a good 'question' for BBC's Question Time. Ask the panel whether or not Financial Repression is official Government Policy? And if it is justify it!

* 'unfair' - unless you are a banker benefiting from borrowing from present and future taxpayers, risk free at 0.5%

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French savers seem to have mobilised quickly last week:

Deposit Interest Retention Tax in Ireland up to 41% from Jan 1st.

http://www.citizensinformation.ie/en/money_and_tax/tax/tax_on_savings_and_investments/deposit_interest_retention_tax.html

An extra tax on unearned income next in the UK?

Bl**dy hell, so if you are 50 something in Ireland, not working, living off your savings whether interest or draw down, they will take 41% off your interest coupon in tax and you cannot claim it back through your personal allowance........wow..........

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http://www.independent.ie/business/budget/double-tax-blow-for-families-with-savings-and-rental-property-29670170.html

From January, thousands of workers who have non-PAYE income, such as rents and savings interest, will have to pay social insurance on this income.

It comes as DIRT (deposit interest retention tax) on savings is set to jump to 41pc in January – making it one of the highest savings rates in the world.

The Department of Finance has clarified that anyone with income of over €3,174 from rent and savings will have to pay PRSI (pay-related social insurance) on the interest.

SAVINGS

This will mean that many in middle Ireland will be hit by a double whammy of DIRT and PRSI of a combined 45pc on their savings.

For example, the move to impose DIRT and PRSI will see someone who had a deposit of €200,000 after being made redundant, getting hit with a tax bill of €2,460 from their annual interest of €6,000.

It was also confirmed that non-PAYE income also includes dividend and investment income.

The move means people with buy-to-let properties are likely to be pushed into paying PRSI on their savings, as well as their rental income.

They will have to file an income-tax return, according to the Departments of Finance and Social Protection.

Thousands of families that have been forced to rent out their homes because they cannot afford the mortgage are set to be the biggest losers from the new double-whammy tax move.

These so-called "accidental landlords" will now have to include any interest they get from their savings along with rental income and make a return to the taxman.

Others who bought a buy-to-let during the boom to boost their pension will also be hit by the new double tax measure, as their rental income may mean they already have to make a tax return.

There are some 273,000 rental properties registered with the Private Residential Tenancies Board.

Buy-to-let owners are able to deduct some of the interest they pay and some expenses from the rent for tax purposes.

But the rest will have to be declared as rental income. It will now attract income tax and PRSI if it is above €3,174.

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This will mean that many in middle Ireland will be hit by a double whammy of DIRT and PRSI of a combined 45pc on their savings.

I was going to reply to your other post saying it's actually worse than just DIRT because they also have to pay something else but I couldn't remember the name (PRSI).

Q. I am paying DIRT on my savings. Do I also have to pay the new PRSI charge?

Yes provided that you are over 16 and under pensionable age and that you are a chargeable person in accordance with the Revenue definition of a chargeable person

http://www.welfare.ie/en/Pages/Frequently-Asked-Questions-on-the-Broadening-of-the-Income-Base-for-PRSI-.aspx

Are the Irish doing a bit of forward thinking? If/when interest rates go up.... they will receive more DIRT/PRSI income. So then they have some income to spend on bailing out those with increasing debts.

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It did in Japan for 25 years. And it still is.

....I thought Japan recently started their own QE programme to turn into growth.....deflation turning slowly into inflation.

....savers do nothing for short-term growth figures, don't want people storing and hoarding for a rainier day.....want them spending and working....you know it makes sense Rodney.

I would have thought Europe is the culprit more likely to deflate..... ;)

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I've seen quite a few commentators saying recently they expect wages to start rising soon.

Anyone got a view on that?

Edited by oldsport

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I've seen quite a few commentators saying recently they expect wages to start rising soon.

Anyone got a view on that?

....they will for some, those nearest the money and with the greatest influence......but rising by how much? it's not only how much extra money you get, it is how much extra work you get or get taken away, also other benefits that can make up a good proportion some are tax free, and how much tax you pay.... therefore you could get a pay rise but still be worse off after you got it. ;)

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....I thought Japan recently started their own QE programme to turn into growth.....deflation turning slowly into inflation.

....savers do nothing for short-term growth figures, don't want people storing and hoarding for a rainier day.....want them spending and working....you know it makes sense Rodney.

I would have thought Europe is the culprit more likely to deflate..... ;)

Abenomics' public goal is for a steady 2% inflation but that will barely make a dent in the country's quadrillion yen debts. To do that inflation will need to be much higher, more like 6-8%. However, should the yield on JGB's rise much more than 100bp then Japan's regional banks will be wiped out and the govt no longer able to finance its debt interest repayments. Abe is therefore likely to introduce some kind of yield peg to hold down JGB yields. Since the Japanese have their accumulated savings invested in JGBs (yielding nothing *forever*) the resultant financial repression will be at least as severe as the UK's, assuming there's no run on the yen, of course, in which case it will be very much worse.

Don't worry about EU deflation. Another round of LTRO from the ECB will be here soon.

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Abenomics' public goal is for a steady 2% inflation but that will barely make a dent in the country's quadrillion yen debts. To do that inflation will need to be much higher, more like 6-8%. However, should the yield on JGB's rise much more than 100bp then Japan's regional banks will be wiped out and the govt no longer able to finance its debt interest repayments. Abe is therefore likely to introduce some kind of yield peg to hold down JGB yields. Since the Japanese have their accumulated savings invested in JGBs (yielding nothing *forever*) the resultant financial repression will be at least as severe as the UK's, assuming there's no run on the yen, of course, in which case it will be very much worse.

Don't worry about EU deflation. Another round of LTRO from the ECB will be here soon.

Ha....all this tinkering, kicking and tweaking..... playing one against another, eventually we will all end up going down the same swanny, only a matter of time, could if all strings things tie up drag it along for a fair length of time yet....you can't default destroy it because for every killer winner there will be a whole lot more losers. ;)

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I've seen quite a few commentators saying recently they expect wages to start rising soon.

Anyone got a view on that?

They built a machine called Globalisation in order to suppress wages- a machine they do not know how to turn off without breaking the system.

Killing the unions was a good idea from many points of view- but if you have a strategy that depends on inflation to shrink debt unions might come in handy by supplying the upward pressure on wages such a strategy requires- but outside of the public sector unions are mostly either gone or totally ineffectual- capital is just too agile and deregulated to allow itself to be caught that way.

I think the expectation that across the board wage rises will materialize are based on a kind of 'folk memory' of the 70's- in fact in many people's minds the idea of inflation and wage hikes are synonymous. Some people will even tell you that wage rises are what cause inflation!

To me it appears as if the two great strategic objectives of UK PLC are on a collision course- the first being the plan to inflate away our debt and the second being the plan to create a low wage 'competitive' work force- how a workforce of cheap and flexible workers will service their debt as their incomes are subject to the twin downward pressures of price inflation and global wage arbitrage is not entirely clear.

But what is clear is that if prices inflate but wages do not then the debt burden on the population does not shrink it grows larger as there is less money available to them to service their debts.

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