Financial Repression Watch

If you have not read the seminal piece on financial repression ("FR") by Carmen Reinhart (http://www.imf.org/external/np/seminars/eng/2011/res2/pdf/crbs.pdf), you are missing something big. It was released in March 2012 and, in my opinion, is the most important piece in recent memory. This is because it gives the road map to how the over-indebted economic super powers are going to avoid bankruptcy. Former chairman of Citicorp Walter Wriston famously said "Countries don't go bust", several times in 1982 and 1983 on the eve of the last major pan-Latin American debt crisis. Had he said "Reserve currency countries don't go bust", he would still not have been proven wrong. [Amazingly, both the hubris and timing of that quote was exceeded by his successor Chuck "We're Still Dancing" Prince 25 years later in 2007. So, as ridiculous, poorly timed and financially ruinous as Walt's quote was, it was not even the most ridiculous, most poorly timed and most financially ruinous quote by a Citicorp CEO in 25 years!] In the above-cited Reinhart piece, she shows how current debt overhangs in developed countries closely approximate the levels that existed shortly after WW2. She then goes on to show how these governments used forms of FR to bring that debt/ GDP ratio of about 100% to 25% by 1970. [Please read the piece for details of what the tools of FR were. For my purposes below, the forms of FR I focus upon is the governing authorities' diktat of short-term rates as a means to allow the refinancing of the debt load at interest rates at as far below the rate of growth in nominal GDP and tax receipts as the markets will bear.] We are back to that 100% level again and, according to Reinhart, history and simple logic, the only way out is through FR. As self-evident as these points may appear to me (please do not judge me harshly until you have read the piece), the investors' course of action is not obvious. The primary means of FR in the last go round included, but were not limited to, fostering unexpected inflation, imposing currency controls mandating interest rate limits. For a multitude of reasons, these levers will prove more difficult to apply this time than last. This makes Mark Twain's attributed quote the "history doesn't repeat itself, but it rhymes" operative now. Do not expect the authorities to do the same things as last time, but expect them to seek the same ends as last time. Read the piece and understand the practice, philosophy and simple lack of an alternative behind FR. Understand how the cabal of central bankers and regulators pursued FR last time and then you may be able to imagine how they will try to pursue it next time. I encourage you to do this as more than an intellectual exercise. And time is of the essence because the question of whether they will seek to practice FR is no longer in doubt. In the last few weeks unprecedented steps have been taken in the direction that can only be explained by the FR playbook. Even better, these steps make somewhat obvious what the investor should be doing.