Financial salvation not repression

There have been a lot of investors and commentators talking about financial repression. The fact that nominal interest rates are set at or close to zero, and the subsequent transmission of these low returns along the yield curve means that returns in both nominal and particularly real terms are historically scant. This is seen as a government and central bank policy that is punishing savers.

However, in many cases savers have been helped  and not punished by governments. Whether that be the humble saver in Northern Rock who was bailed out, or at the other extreme sophisticated funds who loaded up on debt issued by Fannie Mae or Freddie Mac in the US. These savers were not repressed but were saved as governments and central bank actions (like the implicit subsidy of banks) protected the value of their capital investments. Total returns have been boosted to savers versus a free market outcome which would have resulted in significant losses.

Commentators seem to have forgotten how much savers have been and continue to be protected by the authorities, which are providing financial salvation and not repression.  Unfortunately we may now be coming to the point where some authorities are no longer able to save the savers. Investors would then be faced with actually losing capital as opposed to getting a meagre return. That is when the salvation gets replaced with repression.

The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.

Categorised as: macro and politics
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Discuss Article

  1. Clive Hale says:

    Richard – what utter tosh! I can only assume you have just been nominated for the soon to be vacant position at the BoE!

    Posted on: 01/06/12 | 8:45 pm
  2. Trevor Rothermere says:

    It’s bond holders who’ve been saved, while deposit holders have been repressed.

    Deposit holders have never been at risk, as there has always been sufficient capital in the hands of bond holders to absorb all losses. But, the authorities (in the main) bottled it, and chose to bail out bond holders at taxpayers’ (society’s) expense, because they were afraid of the negative consequences of bond holders not being kept whole.

    That was the great error.

    And all that has happened is that the authorities have traded one set of negative consequences for, now, an even worse set of negative consequences.

    Posted on: 06/06/12 | 10:54 am
  3. Sean Fernyhough says:

    To what extent should savers expect to increase their financial wealth when GDP is still below the level it was four years ago – and by some way?

    To what extent is that possible for any length of time?

    I would argue that wage and salary earners have been suppressed through unemployment and declines in purchasing power.

    Posted on: 13/06/12 | 7:52 am
  4. Don West says:

    Your article jumbles together disparate concepts: the fed v. government; ZIRP v. bailouts. Bailouts have nothing to do with the fed’s low interest rates. Savers are being hurt by the fed’s policies, that is a fact. Savers do not want to be protected by bailouts or from making poor investing decisions. Savers get a negative real return on cash and are understandably unhappy about it. I agree with your comment to Clive, why didn’t you just say that in your article?

    Posted on: 14/06/12 | 5:50 pm

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