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U.S. Financial Repression: How Much Longer?

ByThe National Bank of Canada
Published 03/13/2012, 02:06 AM
Updated 05/14/2017, 06:45 AM
A look behind the curve

From the mid 1950’s up to 1979, real interest rates were significantly lower than in the 20 years that followed Chairman Volker’s cold-turkey policy to cure the economy from high inflation. During the era of the Great Moderation, monetary policy maintained real rates relatively high in order to opportunistically keep inflation trending down and to anchor low inflation expectations. In contrast, some would argue that the low rates seen 50 years ago were part of a deliberate policy of financial repression aimed at reducing the real debt servicing costs (and debt/GDP ratio) of an indebted U.S. government. In the aftermath of the sub-prime crisis, public debt has surged and the unsustainability of fiscal policies around the world has been exposed. Although we applaud the resolve and ingenuity of the Fed in managing the financial crisis, current low rates make many fixed income investors feel that financial repression is back. Assuming long rates are some form of averages of expected short term rates, one can derived the implied 1-yearr rates from the current U.S. yield curve. Doing the same with the inflation swap curve, leaves the impression that fixed income investors could be facing negative real rates for 6 more years. While real wealth was transferred from borrowers to lenders during the Great Moderation, the pendulum has swung in the opposite direction and for the time being seems stuck in its new position.
US Financial

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