Friday, June 10, 2011

Marshalsea Prison: Financial Repression & The Fall from Grace

If you know how to spend less than you get, you have the Philosophers-Stone. -Ben Franklin Quotes from Poor Richard's Almanac

 The U.S. government has a technology, called a printing press (or today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at no cost. Ben Bernanke

 This is the way the world ends. Not with a bang but a whimper.-TS Eliot - The Hollow Men

Not with a bang but with a whimper that is how it shall end for the West: No Weimar like inflation, no Black Tuesdays, just the slow drip of our wealth trickling away. Like frogs in a pot of slow boiling water, our citizens gratefully slide into the warm bath that will slowly cook them.

Since recorded history, the brightest minds in the West have sought the Philosopher's Stone, a way to turn junk into nothing. In modern times, our debt addicted elites turn to Financial Repression for their salvation. To the financially responsible, recent central bank actions  appear insane but to a common street junkie their actions make perfect sense.  In order to understand what is going on, JohnQuincy kindly asks readers to put on their raincoats and follow me down the wormhole  into the mind of a debt junkie. 

 Marshalsea Prison - The Series

 Marshalsea Prison is a series devoted to the economic decline and fall of the West. Marshalsea Prison references this infamous debtors prison in London where Charles Dicken's father was incarcerated. In modern times, the debtors run the asylum that holds society hostage. Other posts in this series include:

The Prodigal Son

Before jumping into the topic at hand, Financial Repression, it is important to first go over two concepts
  • The Slow Boil
  • Frame of Reference and the Law of Inertia
The Slow Boil

In Hollywood movies, the villains and good guys battle it out in the open. In real, life evil often succeeds by slow permeation of a society lulled to sleep. This concept is often referred to at the Boiling Frog Metaphor.

Watch this fascinating video of a frog being happily slow boiled to death (for purposes of this post you can substitute the frog with the average saver/investor):

Frame of Reference and the Law of Inertia

Believe it or not, you are simultaneously spinning at roughly a thousand miles an hour and running a circle at roughly 67 thousand miles per hour:

The Earth's Rotation

The Earth rotates around once in 24 hours - that's a rate of 1000 miles per hour!. The time it takes for the Earth to rotate completely around once is what we call a day. It's Earth's rotation that gives us night and day.

The Orbital Velocities of the Planets

The average distance of the Earth from sun is 93.5 million miles. This means that in 365.25 days the Earth travels 587.5 million miles. This works out to about 67 thousand miles per hour. This is the speed we travel 24 hours a day, 365.25 days a year.

Likewise, the financial markets (including your savings) are currently spinning and circling around astronomical sums of debt.

It is your frame of reference that gives you the illusion that things are standing still:

frames of reference part 2
frames of reference part 3
frames of reference part 4

JohnQuincy Recap: By toying with our frame of reference, the elites are trying to make it appear that we are not wildly spinning around a mass of debt. They hope that investors/savors will not notice they are being fleeced using a technique known as Financial Repression. At its core, Financial Repression relies on persistent yet moderate inflation along with several other components to rob savers of their money to the benefit of debtors, mainly the Federal Government. The key to the technique is to keep the pilferage low enough per year that investors do not notice but that due to compounding adds up to a substantial amount over time.

Financial Repression
A Brief Overview

Here is the best article that JohnQ has found on the subject:

“Financial Repression” is currently a hot buzzword in the global economic community, and its effects are even worse than it sounds. Like other recent economic buzzwords such as “monetary sterilization” and “quantitative easing”, the average person will never understand the meaning, if they hear the phrase at all.  That is too bad, because governments around the world deliberately and methodically stripping wealth (and therefore security and retirement lifestyle) from hundreds of millions of people is the quite explicit objective of Financial Repression.

JohnQ became intrigued by this subject while reading this article:

According to financial expert James Rickards, the Federal Reserve is playing an inflation game called “financial repression.”  The goal is to get the U.S. out from under at least $77 trillion in debt and future liabilities.  The Fed would like to cut the deficit in half in 10 years.  How do you do that without actually cutting anything?  Rickards said in a recent interview on King World News, “The answer is 4% inflation.  It doesn’t have to be that high, it just has to be persistent.  It’s like holding an ice cube in your hand.  It just melts away.  Well that’s what the Fed is doing, and that’s what financial repression is all about.” (Click here for the complete King World News interview with Mr. Rickards.) (Click here for James Rickards’ bio.)

Both articles rely heavily on he analysis of James G. Rickards (a.k.a. Jim Rickards), Senior Managing Director for Market Intelligence at Omnis, Inc.. Here he explains financial repression:

Here are the main points:

Debt Relief Tricks

There are three main ways that government can use to get out from under large debt burdens without actually paying them down:

Financial Repression

Financial Repression Summary

Since the heyday Financial Repression in the United States was in the 50s and 60s, many people have forgotten about it

Richards defines Financial Repression as the architecture of inflation: Getting out of your debt by inflating it away.

It is subtle and insidious. Subtle in that inflation is kept low enough to avoid widespread dissent but insidious in that it cheats savers and investors. It redirects investment from productive uses into whatever schemes politicians and their cronies can dream up to enrich themselves at our expense.

Components of Financial Repression


Even 4 percent inflation with compounding will cut the value of dollar in significantly over ten years. Inflation does not have to be high just persistent. Below is an example of how much the value of 10K dollars would be reduced with four percent inflation over ten years:

Interest Rate Caps

Besides inflation, Financial Repression also requires a cap on interest rates to prevent competitors from undercutting Treasury by offering higher interest rates. The goal is to trap savers from earning a fair return and push them into investing in government debt:

An example of this is Federal Reserve Regulation Q12 CFR 217 :

Quantitative Easing

Quantitative Easing is also an indirect way of capping interest rates:

What Will The End Of QE2 Mean? - Forbes

Quantitative Easing was pioneered by the Japanese as a way to combat persistent economic issues related to their "Lost Decade." It is a desperate gambit that many economists caution against attempting. At its heart, it involves printing huge sums of money and using that money to buy assets at above market value from financial institutions.

Here is an amusing explanation of Quantitative Easing:

...and a fairly decent explanation from NPR:

Quantitative Easing Explained - Planet Money, NPR

Captive Buyers

Beside driving people to buy government debt by artificially keeping interest rates low, it also helps to have a captive market:

Bail Out Banks = Captive Banks

Bailout Banks Buying Treasuries Help Keep Rates Low (Update2) - Bloomberg

Aug. 3 (Bloomberg) -- U.S. lenders bailed out by the government are returning the favor by stepping up purchases of Treasuries, helping to temper a rise in borrowing costs.

Perversely, this hampering any recovery because it is strangling loans to private business:

Banks Buying Treasuries Instead of Lending - Money News Dot Com

Government Control of Pensions

Beside the lavishly huge government pension plans, the government has also done its best to gain control over large private plans. These plans are then coerced into buying government debt, the consequences be damned.

Treasury to tap pensions to help fund government - Washington Post

The Obama administration will begin to tap federal retiree programs to help fund operations after the government lost its ability Monday to borrow more money from the public, adding urgency to efforts in Washington to fashion a compromise over the debt.

Capital Controls/Barriers to Entry

In addition to the other methods described, the elites have also imposed capital controls that force institutions to buy treasuries and have erected barrier that prevent new companies from entering the market that are not beholden to them. While there are many reasons for decline in the number of banks, what we have now is a much smaller number of large banks many of which have been bailed out and, therefore, beholden to the US Government:

Consolidation in the U.S. Banking Industry: Is the “Long, Strange Trip” About to End? - FDIC Banking Review

Financial Repression - A Stealth Tax

This is a tax caused by negative real interest rates. It is currently estimated to be 3 to 4 percent in the United States. The Federal Reserve and Treasury are taxing savers and investors. The winners are debtors with the primary debtor being the US Government

Inflation: The Stealth Tax we’re still too lazy to Avoid

This illustrates the insidious nature of inflation. It is taxation by stealth and because the nominal value of our money stays the same, or ticks up very slowly, we don’t see that we are losing our wealth at an increasingly rapid rate.

Take my friend for example, his current account pays 1% interest and his money has been sitting in that account for six months. Already he has lost £850 worth of purchasing power. In just 5 years he will have lost £7,941. Sure his bank statements will still say £50,000 but the reality is he will only be able to buy £42,000 worth of stuff.

Besides the effects of this Financial Repression tax caused by lost investment income, stealth taxes will also increase due to bracket creep:

The Return of the Inflation Tax

We also know what has happened with the Alternative Minimum Tax. Passed to hit only 1% of all Americans in 1969, the AMT wasn't indexed for inflation at the time and neither was Bill Clinton's AMT rate increase in 1993. The number of families hit by this shadow tax more than tripled over the next decade. Today, families with incomes as low as $75,000 a year can be hit by the AMT unless Congress passes an annual "patch."

Relic of the Golden Past

While Paul Krugman has high hopes that the government can successfully fleece savers and investor via Financial Repression, he bases his hopes on a paradigm that no longer exists. The 50s and 60s were the golden age of financial repression, an  age of steady moderate inflation accompanied with growth.

Problem 1 Wheres the Growth?

For Financial Repression to be palatable to the general public, it must be accompanied by high growth. Where is the growth?

US GDP per capita change

Problem 2: Zero Inflation by Fed Measures

While you and I get hit face with inflation everytime we go to the supermarket, the Fed requires at least 4% persistent inflation under their measurements for Financial Repression to work and they are not getting it (not for lack of effort).

Inflation By Year - Misery Index

Problem 3 - The sheer immensity of our debt.

Post WWII our debt was roughly 100 percent of GDP, today if you include unfunded liabilities it is more like 700 percent. Plus WWII had an end but our wild spending will likely continue into the distant future.

Here is our official debt not including unfunded liabilities:

While it is surprising that our official debt is now roughly equal to what it was after fighting a world war, it still could be paid off with a lot of blood, sweat and tears. The problems lies with the unfunded liabilities which dwarf the size of the official debt.

Unfunded Debt Storm

Storms on the Horizon - Richard W. Fisher, Dallas Federal Reserve Board, Remarks before the Commonwealth Club of California San Francisco, California on May 28, 2008

Add together the unfunded liabilities from Medicare and Social Security, and it comes to $99.2 trillion over the infinite horizon. Traditional Medicare composes about 69 percent, the new drug benefit roughly 17 percent and Social Security the remaining 14 percent.

Keep in mind that this 100 trillion figure does not include massive guarantees to Freddie, Fannie, Student Loans, Pensions and other assorted fiascos which could easily double this amount. Can you say doomed?

Problem 4 - Our new creditors such as China will not be as compliant as our old ones like Japan

While in the old days, Europe and Japan would take a little screwing around with repayments. Here is Nixon announcing Bretton Woods (Hey Japan, instead of gold, how about some US Dollar toilet paper.):

Our new creditors are not going to be pushovers particularly because they have their own military:

China ratings house says US defaulting: report

A Chinese ratings house has accused the United States of defaulting on its massive debt, state media said Friday, a day after Beijing urged Washington to put its fiscal house in order.

Problem 5 People Can Buy Hard Assets

It is no longer illegal to for US citizens to own hard assets like gold:

Problem 5 John Q Public is now allowed to buy and hold hard assets such as gold:

Financial Repression
A Brief History

Irving Fisher - Deflation and Monetary Policy

The roots of Financial Repression theory go back to the Great Depression with the work of Irving Fisher.

The Debt-Deflation Theory of Great Depressions

Here is what Milton Friedman said about Irving Fisher in Reflections on the Great Depression By Randall E. Parker:

Edward S. Shaw & Ronald I. McKinnon - Financial Deepening

Edward S. Shaw and Ronald McKinnon analyzed "financial repression" as a substantial barrier to successful economic development. In the 1960s and 1970s, ongoing price inflation combined, with numerous government interventions to set interest rates and direct the flow of credit, had shrunk the deposit base for domestic bank lending throughout the developing world.

Here is the Stanford University Memorial Resolution to Edward S. Shaw:

Carmen M. Reinhart - Financial Repression

Carmen Reinhart has expanded on this work by explaining how the US used Financial Repression techniques to pay off its WWII debt. Here is the paper she wrote on the subject:


Here is Carmen speaking about  the current economic recessions on C-Span:

Falling from Grace

Recently many pundits with the Clinton and Weiner sex scandals would have us believe that personal character is of no importance to job performance. If that is so, how come American exceptionalism is so closely associated with the Protestant Work Ethic. Here is a good BBC1 documentary on Max Weber's work, The Protestant Ethic and the Spirit of Capitalism:

The Grace of God

In a cold hard universe, humanity distinguishes itself by the choices made with the expectation of no earthly reward.  It is that quality of character that allowed the Puritans to carve America out of a wilderness. Allow me to begin this section with two quotes:

One from the bible...

Who hath saved us, and called us with an holy calling, not according to our works, but according to his own purpose and grace, which was given us in Christ Jesus before the world began -Timothy 1:9

and another one from popular music...

If I should fall from grace with God
Where no doctor can relieve me
If I'm buried 'neath the sand

Let me go, boys
Let me go, boys
Let me go down in the mud
Where the rivers all run dry

-The Pogues, If I Should Fall from the Grace of God Lyrics

It is odd that the Pogues allude to the river running dry because, although it refers to a failed romance, JohnQ often associates falling from the grace of God with this song, which also refers to the river running dry:

Hank Williams Sr - Long Gone Lonesome Blues

Perhaps a better, a country reference to the concept of falling from God is this song:

Johnny Cash - God's Going to Cut You Down

It was recently used in the remake of True Grit by the Cohen Brothers, which in turn was used as the basis for this remarkable opinion piece from the New York Times (remarkable all the more because it appeared in the Times):

Narrative and the Grace of God: The New ‘True Grit’ - Stanley Fish, NYT, Opinion Page

Here are some brief snippets to give one the flavor of this extraordinary piece (please read it and the excellent comments to it):

In the movie we have just been gifted with, there is no relationship between the two; heroism, of a physical kind, is displayed by almost everyone, “good” and “bad” alike, and the universe seems at best indifferent, and at worst hostile, to its exercise.

The springs of that universe are revealed to us by the narrator-heroine Mattie in words that appear both in Charles Portis’s novel and the two films, but with a difference. The words the book and films share are these: “You must pay for everything in this world one way and another. There is nothing free with the exception of God’s grace.”

A third sentence, left out of the film but implied by its dramaturgy, tells us that the latter reading is the right one: “You cannot earn that [grace] or deserve it.” In short, there is no relationship between the bestowing or withholding of grace and the actions of those to whom it is either accorded or denied.

Here is a trailer for the movie:

Whether one agrees with the article or not, it does open up a an interesting debate on the place of man in a cold indifferent universe.

JohnQ concurs with the reader who comments:

I don't see why everyone is so confused about the correlation between how one conducts their life and how God does or doesn't bless them, in this life. God has, per New Testament (NT) teaching, given man free will, to choose to follow Jesus or not: The choice is up to you. Perfectly free will means that man is a free agent and therefore there is an element of randomness

There is also an element that most people choose to leave out of their attempts to explain God's behavior: Satan. If you are going to take the Bible as an expert source, on God, then you have to account for Satan, who is the ruler of this world (he offers Jesus all power over this world, if Jesus would bow down before him and Jesus doesn't disagree that Satan has that power). So if bad things happen to people that are, at least trying to be good, maybe Satan should get some credit. That doesn't mean that Everything bad is Satan's fault (there is some randomness built in remember) but why blame God for everything when the big book says that man's shortcomings is what got the Devil his booking here on earth?

The Fall

Wienergate - Does Morality Matter

He knows not how to rule a kingdom, that cannot manage a province; nor can he wield a province, that cannot order a city; nor he order a city, that knows not how to regulate a village; nor he a village, that cannot guide a family; nor can that man govern well a family that knows not how to govern himself; neither can any govern himself unless his reason be lord, will and appetite her vassals; nor can reason rule unless herself be ruled by God, and be obedient to Him.
- Hugo Grotius

In the below post, JohnQ already delved into narcissism and the relevance of demanding that our public officials have moral character:

Ever War: President Lancer and the Honeytrap

At a time when we are being told that political character does not matter, it is interesting ponder the case of Anthony Weiner:

Weiner uplifted by poll - won't resign

A Politician’s Character Doesn’t Matter, Weiner vs. Bachmann

Believe it or not, former President Bill Clinton officiated at Anthony Weiner's wedding to Huma Abedin:

So it is not surprising that Anthony called Bill to apologize:

Embattled Democratic Rep. Anthony Weiner called former President Bill Clinton Monday to express regret for his actions, CNN has confirmed.

Unless, you consider that Bill Clinton is guilty of similar indiscretions:

Juror: Did you and the president ever engage in sexual relations using cigars?

Lewinksy: Yes. Just once. Just once ...

It is rumored that the whole Abedin/Weiner marriage is being used to cover up an lesbian affair between Abedin and Bill Clinton's wife Hillary:

As I recently said on MONICA CROWLEY’s radio show, whisper campaigns are claiming that HILLARY CLINTON is GAYLE KING–ing her aide de camp, the glamorous HUMA ABEDIN, an Indian/Pakistani goddess from Kalamazoo, Michigan. In other words, Hillary may be putting Huma out there in the press and purposely making her more visible as a pre-emptive strike that amounts to her hiding in plain sight. This way, no Republican can later say, “Who is this gorgeous babe who spends so much intimate time with Hillary that the Observer called her Hill’s ‘body person’? Was GENNIFER FLOWERS’s book right about Hillary’s sexual taste?”

At this point you may be asking yourself: What does this have to do with Financial Repression?

Well it turns out that Hillary Clinton is secretly pushing to head the World Bank:

The scenario, they said, goes like this: with Christine Lagarde, the finance minister of France, apparently on track to replace Dominique Strauss-Kahn as managing director of the International Monetary Fund, the Obama administration is under pressure from lawmakers in Congress to ensure that the World Bank continues to be led by an American, in line with a longstanding arrangement that has been challenged by up-and-coming economic players like Brazil, India and China.

You may recall that Christine Lagard took over the IMF from Dominique Strauss-Kahn who is accused of raping a hotel maid:

 The alleged victim has maintained, according to police, that she was cleaning Strauss-Kahn's room at midday thinking it was empty when he emerged from the bathroom naked and assaulted her, attempting to pull off her stockings, locking her in the room and forcing her to perform an oral sex act.

At this point, you may really be asking yourself what does this have to do with Financial Repression. Well, it is the IMF that sponsored a paper on Financial Repression that is currently a hot topic amongst the elite. In this article, Paul Krugman, who seemingly has never met a tax or spending proposal that he did not like, gushes about it:

I’ve been getting questions about Carmen Reinhart’s new paper on financial repression (pdf) in the aftermath of large debt buildups, which asserts that said repression was a large part of the way the US and UK, in particular, dealt with their war debts.

JohnQuincy Recap: Here we have a corrupt institution headed by people, who cannot even manage their personal affairs properly, appointing someone with no apparent qualifications for a job to oversee a policy that is detrimental to world finances without any accountability to an electorate.


Joel Raupe said...

Excellent overview of the subject. A good outline. Thanks for the periscope up into reality.

John Quincy said...

Thank you for taking the time to comment.

Like any saver/investor, JohnQ has spent quite a bit of time trying to fathom why our elites seem hell bent on punishing us at every turn.

My problem was not putting myself in their (squanderer/debtor) shoes.

When I did, the scales fell away.

Like any addict, there is a method to their madness (or madness in their method) no matter how frightening it may be.