Marc Chandler is the global head of currency strategy for a Wall Street firm and is an associate professor at NYU's Center for Global Affairs.From Jacobin:
Radical critique from an unexpected source — the head of currency trading at a major Wall Street firm considers global capital markets.
In response to the end of the credit cycle, policy makers and central bankers in the high-income countries have exponentially increased their presence in the capital markets. Debt issued by governments has soared and central banks are pursuing unorthodox policies — the aim of which varies from country to country.
The purpose of quantitative easing in the US, especially the latest reiteration, is to accelerate employment growth. The European Central Bank’s Outright Market Transactions is to ensure a proper transmission of its monetary policy to countries that agree to EU/IMF conditionality and have access to the capital markets. Japan’s asset purchase program, through which it buys not only government bonds, but also ETFs, REITS and corporate bonds, is to fight deflation.
Initially, the Swiss National Bank bought foreign bonds as a way to arrest the franc’s appreciation that was fueling deflationary forces in Switzerland. When this failed, it moved to formally cap the franc. The SNB now buys sufficient foreign currencies to defend it. The Bank of England’s gilt purchase program seemed aimed at strengthening the economy, though it is much less concerned about the labor market than is the Federal Reserve.
Some economists call this “financial repression.” It occurs, they say, whenever a sovereign interferes with free market activity and the pricing of debt or currency. Of course, such a broad definition means that financial repression has been around forever. For example, it is akin to shaving some precious metal from coins in ancient Rome.
By artificially lowering the cost of debt below what would prevail in a free market, quantitative easing has been called a “stealthy default” by PIMCO, one of the largest bond investors in the world. It also suggests that it is a sneaky form of taxation: “a gentlemanly way for modern countries with fiat currencies to stiff creditors while still ostensibly paying interest and principal in full.”
There are two problems with this narrative despite its widespread acceptance. First, the financial repression thesis (FRT) imagines a state of nature in which the market exists, but the state does not. This view implies that the market is natural and the state artificial. But if this is the case, any action by the state in the financial markets falls under the expansive definition of financial repression.
The factors of production — land, labor and capital — were not always regarded as commodities that can be traded and bought in the market place. Karl Polanyi traces this development in his classic The Great Transformation: The Political and Economic Origins of Our Time. The point is that modernity was co-created by the rise of the modern state and the market economy. The two were inseparable.
A strong state was needed to overturn the reciprocal rights and responsibilities that limited the scope of the markets in traditional societies — think feudalism, for example. Each of the factors of production sought to escape the omnipresent market by organizing. Individual capitalists organized through various forms, like pools, trusts, cartels, and corporations. Labor organized in industrial and trade unions. Farmers organized in cooperatives, collectives, and political parties....MOREHT: Counterparties
Previously in the Financial Repression series:
Research Affiliates (Rob Arnott) "Financial Repression and Real Rates"
Financial Repression Phase II: "Is The IMF Now Recommending Capital Controls...?"
UPDATED--Talk About Financial Repression: It's Now Illegal to Mention Foreign Currency in Ukrain
Allianz on Repression: "Welcome to a RIGGED Future in a World of Financial Repression "
Rothschild Wealth Management: "Investing in an era of financial repression"
Rabobank on Financial Repression and What Bernanke is Up To
IMF: "The Good, the Bad and the Ugly: 100 Years of Dealing with Public Debt Overhangs" (Policy Responses to Debt/GDP Over 100%)
"Investing When Fundementals Don't Matter"
Cyprus: "Beyond financial repression"
And from the big daddy of recent research, Carmen M. Reinhart and M. Belen Sbrancia's "THE LIQUIDATION OF GOVERNMENT DEBT":
...The pillars of “Financial Repression
The term financial repression was introduced in the literature by the works of
Shaw (1973) and Ronald McKinnon (1973). Subsequently, the term became a way of
describing emerging market financial systems prior to the widespread financial
liberalization that began in the 1980 (see Agenor and Montiel, 2008, for an excellent
discussion of the role of inflation and Giovannini and de Melo, 1993 and Easterly, 1989
for country-specific estimates). However, as we document in this paper, financial
repression was also the norm for advanced economies during the post World War II
and in varying degrees up through the 1980s. We describe here some of its main
features....
