Source: mises.org
by Rodion Giniyatullin Vincent Steinberg

The Western welfare states know many ways to get rid of their enormous sovereign debt — at great cost of their citizens. Once the debt burden becomes unbearable, the government simply reforms the currency. Then, the government debt will be “adjusted” with the private wealth of the citizens. This is when the citizens will notice that their government’s sovereign debt is their own debt.

But the government does not always need to make use of these large torture devices. More subtle ways, such as financial repression, are possible.

What Is Financial Repression?

“Financial repression” describes a set of tools with which the government can intervene in the market and keep its refinancing cost (the interest on its debt) artificially low. As a consequence, savers and investors are suffering from negative real interest rates because the nominal interest rates are below the inflation rate. The mathematical difference between the savers’ nominal interest rates and the inflation rate is the loss of wealth, the rate at which savers and investors are forced to contribute to the debt financing of their governments.

Under normal circumstances, increasing amounts of government debt would cause a rise in interest rates. But due to the mandated artificially low interest rates, the government merely needs a small nominal growth in order to slowly get rid of its debt – at the cost of savers and investors. Using financial repression, wealth is being redistributed in a covert manner — away from the savers and investors and towards the government.

The negative real interest rates are caused by, among other things, the politically mandated low interest rate policies of the central banks since the sovereign debt crisis, and the actions to save the euro. At the same time, investors’ money flows from the crisis countries to those states which are (still) considered to be safe, which causes their interest rates on money to decline further.

The often-made claim that low interest rates are revitalizing growth and the business cycle has been proven to be wrong in reality.

Savers and Investors Are Losing this Battle

As of now, savers and investors all over the world are losing more than a hundred billion euros per year because inflation rates exceed the interest rates in many countries. 23 countries are now suffering from negative real interest rates. Even German savers alone are losing roughly 14 billion euros a year by using money market accounts, giro accounts, and savings accounts. This is shown in calculations by the Frankfurt Dekabank and the Institut der Deutschen Wirtschaft (IW).

In the reverse case, when the citizen owes (tax) money to the government, the currently low interest rates are not playing any role. The bond-issuing state is still demanding 6 percent annually — and at a considerably low risk, because, unlike private lenders, the government can foreclose the property of the debtor at a moment’s notice.

The Middle Class Is Suffering

Financial repression — also called a “savings account tax to overcome crises,” is currently hitting the middle class much harder than the truly wealthy because the pensions of the middle class (life insurance, savings plans) in particular are suffering. Funded pension insurance systems become unattractive because savers are no longer finding investments which provide substantial rates of return. The problem which already exists with the pay-as-you-go pensions today can no longer be solved by private pension plans. Interest rates and compounded interest rates are so low that they don’t contribute as much to capital accumulation as, for example, it was envisioned when the ”Riester pension” was introduced in Germany. In that case, even the government subsidies to ”Riester pensions” are not useful. Thus, a massive provision gap exists now.

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