Three Reasons Why "Financial Repression" Is Doomed To Failure

Tyler Durden's picture

Anyone who has been following US fiscal policy over the past three years, which by implication means US monetary policy since Congress and the president have dumped everything in the lap of the Fed, which by implication means the Fed's guide to investing in the Russell 2000, knows too well that it can be summarized in two words: financial repression. Read the attempt to force everyone out of "riskless" assets such as Treasurys and mortgages and into risky assets such as Amazon and its 200+ P/E. All else equal, there has been one huge error with this policy which is akin to the Fed attempting to herd cats: instead of pushing investors into other asset classes, all the Fed has achieved is to get everyone to front run it in buying whatever bonds the Fed has not committed to monetizing just yet as we showed before. The other problem is that all else is not equal, and as SocGen shows Financial Repression, even by construct assuming practice and theory were the same, will not be sufficient due to the following three reasons.

  1. Firstly, countries that currently benefit from financial repression still have primary deficits that are inconsistent with debt stabilisation.
  2. Secondly, the demographic time bomb means that a further deterioration of the primary surplus will appear in the future unless reform is undertaken.
  3. Thirdly, we believe there is a limit to how far central bank asset purchases can go. If this were not the case, the government could in extremis stop collecting taxes and just let the central bank buy all the bond issuance required to cover public spending! This is reminiscent of the story of German hyper-inflation under the Weimar Republic (albeit not the only historical episode of hyper-inflation).

And assuming we ever get across the chasm, there is the other side to consider: what happens when central bank balance sheets have to be unwound:

Managing exit strategies from asset purchase programmes will be a challenge and will in our opinion ultimately carry either a growth and/or an inflation price tag. Inflation expectations are key in this respect and for the present remain fairly well anchored.



The most immediate channel from QE to inflation is the currency channel. The credit channel is an additional factor; at some point economic agents may seek to lock in what is perceived to be exceptionally low interest rates – this can be helpful for the initial stages of recovery, but left untamed a new credit bubble could well prove inflationary not to mention destabilising for the economy. Ultimately, inflation expectations are a question of credibility and here government actions become important. Should economic agents lose confidence in the ability of governments to manage public finances, inflation expectations could soar.

In other words: damned if you do and damned if you don't. That's a great corner you have pegged yourselves into, dear central planners.

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LMAOLORI's picture



Well we're getting close to number 3 right now unless this has changed since March? 


WSJ: Fed Buying 61 Percent of US Debt

Hedgetard55's picture

Regarding Ben, his statement today regarding student loans deserves a post from the Tylers all on it's own.

Precious's picture

The sun could scorch the earth into a charcoal briquette and Bernanke would still say there's no crisis.  It's the same reason Obama plays golf, eats ice cream and throws big parties.  

Let's just pretend everything is okay.

BigJim's picture

Everything is OK... for them.

Totentänzerlied's picture

,,, the same BSBernanke who said, in March of 2006: "Strong fundamentals support a relatively soft landing in housing. I think we are unlikely to see growth being derailed by the housing market."

<No f'ing comment.>

Daily Bail's picture

Or we could just print until things get so bad that we need the tanks that were rolling thru SoCal yesterday.

Hundreds Of Tanks Move Through Burbank: "Holy Shit, Dude! This Is The Weirdest F-ING Thing I've Ever Seen!"
yrad's picture

And in this corner, weighing in at 16 Trillion pounds... Our debt!

Trichy's picture

Well the US won´t have a problem paying back the debt the Venetian way at least :)

Daily Bail's picture

Ron Paul decided to ask Geithner about direct monetization of the debt a few weeks ago in Congress:

Ron Paul Asks Tim Geithner: 'Why Doesn't The Fed Eliminate The Middleman And Just Buy Debt Directly From The Treasury?"

marathonman's picture

Turbo Timmay has a tough job.  Keeping the whole farcical scam going when more and more people see that it is a total scam.  In wrestling terms Ron Paul just pile drived him into the concrete outside the ring and Turbo Tim had to stagger back to the ring so he wouldn't get DQ'ed.  That was great entertainment.  It's okay Ron Paul and his delegates got bitch slapped by the RNC during the primaries so he has no need to keep the gloves on anymore.

John Law Lives's picture

The Fed can not overcome this... though I'm sure Chairsatan will try...


Over 100 Million Now Receiving Federal Welfare
By DANIEL HALPER, Aug 8, 2012

100% FUBAR.

Totentänzerlied's picture

............. Bush's fault. Oh no, wait, this is a progressive's wet dream, so Obama will take credit. Oh no, wait - Obama didn't build that, someone did that for him.

ghostfaceinvestah's picture

Point 1 is key - financial repression won't work if you are still racking up major primary deficits.  The hole just keeps getting deeper.

buzzsaw99's picture

Excellent writing up until the mild stumble at 3. There is no limit to what the central bank can do and will do. their position never needs to be unwound and will be rolled over ad infinitum. In fact, we don't need the central bank at all. The fed's only purpose is to make sure the parasitic new york bankers get a piece of everything. abolish the fed, end the tyranny of the money maggots.

mick68's picture

Incorrect. Factor in an ever increasing debt via deficit and it won't be long before even at .5%, the govt won't even be able to make the minimum payments. Nothing is infinite, there is always a limit, whether we see it or not. 

buzzsaw99's picture

Nothing is infinite? Did you go to school at "the earth is flat academy of dumbasses?" hahahahahahaha!!!

BigJim's picture

 ...Nothing is infinite, there is always a limit, whether we see it or not. 

Oh yeah? I suggest you research the history of the Hungarian Pengo

jeff montanye's picture

well isn't that a limit of sorts?  a worthless currency?

there will eventually be a recovery most probably.  when it occurs the unwinding of the enormous and financially questionable assets on the fed's balance sheet will be an economic drag via higher interest rates if sold or a spur to inflation expectations if not.  higher price levels usually mean higher interest rates, again a drag on the economy.

sessinpo's picture

"Excellent writing up until the mild stumble at 3. There is no limit to what the central bank can do and will do. their position never needs to be unwound and will be rolled over ad infinitum."


If this were true, we would have not had empires and central banks go bust in the past.

Getting Old Sucks's picture

Their problem is still the very people they're trying to bust.  Savers.  We're losing thousands a year ( 20-30K in my case, and perhaps 50K when inheritance comes), but we're not co-operating.  We are seniors with most of the cash wealth in the country.  We have enough to last us and if they inflate, they have to carry us along with the banks, government and anyone else who would benefit by it.  They're NOT GOING TO SUCCEED!  They will have to debase the USD and break the entire nation and the entire economy, Banks, FED, Treasury, and all Pension Funds.  Benny Boy, take note!  We, unless you kill us we will outlast you! 

Winston Churchill's picture

Thats what the ACA is for.

You don't think its there for your health do you ?

Silly you.

Getting Old Sucks's picture

Yup, I know.  But even now, I tell the Doc I'm feeling fine cause I don't want them finding anything.  I want to live till I die and not have to live with a death sentence.  They say that the BIG ONE is the best way to go and I hope that's the way it happens.  Think about it, in 30, 40, 50, 70 years from now, what does it matter to you.  You will be as though you were never born.  Never existed.  Accept that.

Winston Churchill's picture

My grand father always used to say in regards mortality"all be the same in one hundred years".

He was right, and wrong.Its going to be very different,but hard lessons will be forgotten again

in a hundred years.

Plus ca change.


Getting Old Sucks's picture

You think well, Grandpa was wise.  Best wishes.

Winston Churchill's picture

You also.

What does not kill you, makes you stronger.

MeelionDollerBogus's picture

Sounds like your gramps would have loved Zerohedge had it been around then - just begging for "on a long enough timeline the survival rate for everyone drops to zero"

Papasmurf's picture

Don't kid yourself.  With determination, they will BK you.

resurger's picture

It really sucks to be a Central Planner now.

q99x2's picture

Blood Sucking Parasites must have blood.

kito's picture

SocGen shows Financial Repression, even by construct assuming practice and theory were the same, will not be sufficient due to the following three reasons...........


ahh...yes...lets get our advice from socgenitalia......kinda like getting advice from a pig before the slaughter....."dont fatten me up too much....i just may explode"....................

Neethgie's picture

I could cut all the deficits on the back of a fag packet, i wouldnt get elected again, but my theory has always been its the leaders job to use office not to hold office, 4 years or 8 years it doesnt matter if you get things done.

cutting britains deficit is so ridiculously easy any child could do it.

foreign aid 9 billion - gone

leave the EU - 20 billion gone.

Freeze all benefits  (dont even need to remove them what?)

Remove child benefit starting yesterday, 10 billion cut.

Cut green energy programmes 6 billion.

45 billion swing swing, and i havent even begun to get cutting the shit...

its so easy just impossible to get elected after doing so...

Hype Alert's picture

I'm thinking German History books probably had a chapter or two on The Weimar republic.  Those people don't want to go there ever again as it was imprinted in their memory and will resist.  Bernanke is arrogant enough to think he can walk to the event horizon step across, grab the ring and then jump back over.  Maybe he wants to be the first.  Maybe he wants to be knighted.  It will be bad either way, once he's across WE'RE not coming back.  Even if he could come back, the Krugman's of the world would be forever chanting "Print, Print, print", not that they don't now, but it would become worst.  Moral hazard.  The only benefit I see would be the abolishment of taxes as we could just print our way to prosperity.  Why didn't we think of this before?

Winston Churchill's picture

Uncle Ben's event horizon,sucks in assets instead of  light.

Bohm Squad's picture

"At some point economic agents may seek to lock in what is perceived to be exceptionally low interest rates..."


This will be one of the first signs that higher prices caused by the inflation of money and credit will be accelerating from that point on.  It will also be a vindication for those who forego current spending in lieu of PM purchases, too!  ;)

Hondo's picture

Boston Fed president says print until there are no more trees left....he has a small mind cluttered from eating junk food.

Ponzi_Scheme's picture

We better wake up and notice that these people ruining things are all of the same faith.

MeelionDollerBogus's picture

You mean the Shinto of Japan or the Christians of Russia? Or the Jews of most of Europe's banking cartel & the USA? How about the supposedly atheist Chinese PBOC?

I think maybe you need to wake up.

There's but ONE "faith" in central banking - the faith that the Supreme Leaders should shear the sheep. It's not a spiritual religion but it is a holy war.

Dareconomics's picture

Hyperinflation in Weimar Germany started with QE.

Germany needed money to pay war reparations pursuant to the Treaty of Versailles. These war payments were simply too expensive, and I daresay vindictive. Germany never had a chance to repay those debts, and the financial markets knew this.

Germany could not borrow money at decent interest rates, so it decided to print money. People had lost trust in the German financial system and currency during the war. When the Reichbank began printing money, it did so in an atmosphere of no trust. This is why the currency rapidly lost its value. People had been primed to distrust the system because of heavy inflation during the war.

The Federal Reserve still has a lot of credibility with the public, so it has been able to get away with money printing so far. However, you're only one scandal away from losing credibility. Once you lose credibility in the financial system, it is gone forever. Just ask the former employees of Bear and Lehman.

sessinpo's picture

Repression, another misused word like austerity.

Both repression and austerity come, regardless of government intervention. These two items, repression and austerity are market forces and therefore implemented by the market. If anything they are successful if they eliminate waste and unproductive ventures in both the private and public sector. That includes bankruptcies of private companies and and nations as well as revolutions to change the political situation, such as bailing out bad companies like banks, which should have never happened. It is interesting that there is a thread on disinformation. The misuse of repression and austerity is disinformation.