Do I look like I need saving?
My social media is full of advertisements from some sort of international rescue company.
‘What’s your out?’ is their tag line. I guess you pay them a fee and they’ll come rescue you…if the worst should happen on your travels.
I shouldn’t laugh. Some local heavies did rescue me from a gold-digging hospital in Turkey in 2015.
That’s a story for another day.
These new advertisements are amusing given I’m only in Japan for a few months.
And Japan is looking far safer than Australia right now. There are no knife wielding assassins here. The Japanese are already worried about snakes, dingoes and drop bears, visiting Down Under. Now they’ll be asking me about knives too…
As always, it’s the risk you don’t see coming that gets you. And it’s my job to foresee them, predict them and point them out to you. We had better stick to the financial realm though.
The financial risk I want to warn you about today is unusual.
It’s insidious and hiding in plain sight.
People don’t notice it, even when it’s happening to them. It’s the lack of awareness makes the scam so effective.
I’m talking about financial repression.
What is financial repression?
Market historian and analyst Russell Napier was the first to warn about the coming era of financial repression. Well, back then it was ‘coming’.
In 2020 it arrived.
Napier describes it like this: ‘stealing money from savers and old people slowly’.
The more complex explanation is that governments and central banks conspire to keep interest rates below inflation.
This results in what’s called negative real interest rates. The premise is simple. Negative real rates inflate away the government’s impossible debt load…slowly, over time.
The context of this trend is that, globally, governments have too much debt. We are already beyond the point of no return.
In fact, the debts are so large that normal monetary policy can’t be pursued. Central banks can’t raise interest rates any more to slay inflation because government budgets would collapse.
Financial repression is here in Japan already.
Government debt is over 260%. And inflation peaked at 3.6% a few months ago. The Bank of Japan has rates at between 0 and 0.1%.
You can see how raising interest rates from even this tiny level would be dangerous. If the Japanese government had to borrow at, say 4%, the interest bill skyrockets.
And so, inflation is running much higher than interest rates. That’s financial repression.
Bond investors are getting robbed, slowly. How so?
Prices are rising faster than their investment returns.
No wonder the yen is crashing. Nobody wants to own a currency that devalues at 3.6% while paying 0.1% interest…
Japan may be the extreme case. But the West isn’t far behind this eventuality…
How financial repression ‘works’
Given the impossible amounts of government debt, what is to be done about it? The options are all awkward.
There’s austerity — slashing social spending — which is not popular at all and therefore not viable politically.
There’s default, which works on a small scale like Greece or Argentina…if the IMF is willing to help.
And then there’s financial repression.
The burden of the government’s impossible debt can be reduced by devaluing the money it is denominated in.
But it only works to the extent that inflation is higher than interest rates.
In that situation, governments issue bonds, and over time, investors are robbed of the purchasing power of their money.
Their bonds pay them, say, 2%. But prices are rising, say 4%.
Just as bond holders lose 2% in real terms, the government gains that 2%.
And so, over a period of many years, such financial repression can fix a government debt problem.
Many people refuse to believe the government and central bank would do this.
Don’t they have an inflation mandate and our best interests at heart?
Wasn’t the inflationary outburst of 2021–23 just a ‘whoopsie’?
Weren’t central bankers as surprised as the rest of us when inflation turned out to be a lot less transitory than expected?
I don’t believe any of those explanations. I think it was a deliberate attempt at financial repression.
As the villain in Pirates of the Caribbean tells the heroine, ‘You best start believing in ghost stories, Ms. Turner. You’re in one.’
Investors had best start believing in periods of financial repression. We’re in one.
What could possibly go wrong?
All this talk of bonds and rates might sound obscure. Why do you care?
The purchasing power of your savings and your wages are robbed just the same in this scenario.
For example, AU$1,500 bucks, a while ago, bought you an ounce of gold.
Now it buys you half an ounce.
The gold didn’t change. It’s just a piece of metal. Your buying power went down.
You could buy a decent house for half a million once. Now you need double — for the same house in the same spot. Prices rise, but wealth does not.
Financial repression also distorts the economy and the business cycle. You end up with a never-ending boom bust cycle, crises of confidence, inflation, capital controls…the works.
What you don’t get is a stable economy, lots of jobs and investments…and a peaceful, stress-free retirement.
How to protect yourself from financial repression
There are many ways to react to this threat.
The gold price is surging now because more and more people want an ‘out’. They want to ensure some of their savings are secured outside of the financial system and within their direct and immediate control.
That’s why gold sales at Costco in the US are going bananas, for example. US$200 million a month means something is going on.
But gold is not the only way to diversify anymore. It may not even be the best these days.
Because it is, ultimately, a lump of metal. It can’t do very much, other than protect your wealth. It may be an ‘out’ from the monetary system. But you’re sacrificing a lot of versatility when you buy it.
Cryptocurrencies may be a better option. They afford many of the same protections as gold, without making the same sacrifices. You can still transfer and use bitcoin.
There’s also lots of capital spending and development in the crypto space in general. It’s not all about bitcoin.
Financial repression is coming as governments move to control more of the financial system to hold their finances together.
Gold is one out. Cryptos are another.
Even better, right now, the infamous bitcoin ‘halving’ is upon us.
Find out why it creates the perfect entry point into bitcoin, here.
Until next time,
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Nick Hubble,
Editor, Strategic Intelligence Australia
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