A look at the winners and losers of financial repression
- Of the various mechanisms for addressing growing government debt, financial repression is compelling from the perspective of policymakers
- Traditional savers and bondholders, such as banks and pension funds, are some of the biggest losers from financial repression
- The crypto industry and its users stand to be one of the biggest winners, along with holders of other hard assets
- Contrary to some recent prominent comments supporting the fairness of financial repression, any stealth tax by definition is neither fair nor democratic
“When you have eliminated the impossible, whatever remains, however improbable, must be the truth”
– Sir Arthur Conan Doyle, stated by Sherlock Holmes
Last month we wrote about how any sudden US dollar crisis could trigger a massive financial crisis. A key potential driver of any future run on the US dollar are growing concerns over unsustainable US government debts, which stand at levels not seen since the time of the Second World War.
Many were already concerned about world record levels of indebtedness prior to the COVID-19 crisis (myself included). Now the US and other countries are facing double-digit percentage fiscal deficits as governments grope with the ongoing pandemic and depression-level economic damage wrought by an unprecedented lockdown.
So far historically low interest rates have kept debt concerns in check. While markets and policymakers are forecasting low rates for the foreseeable future, and no mathematical formula exists to tell us precisely how much debt is too much, we know debt levels cannot continue growing at current rates indefinitely.
At some point debt growth rates must decline or there will be a painful reckoning.
How best to achieve sovereign debt sustainability?
There are just seven distinct ways to address a public debt problem, each offering varying levels of political palatability (Figure 1).
Figure 1: Political preferences vary across the seven mechanisms for sustaining public debts
Growing out of a debt problem is the near universally preferred way to address overindebtedness. Similar to how strong store sales can bailout the manager of a retail shop suffering excessive shrinkage (theft) or other operational inefficiencies (the “sales cures all” principle in retail management), economic growth offers a trifecta of benefits:
- drives increased tax revenue (without requiring politically unpopular tax hikes).
- naturally reduces government spending on unemployment insurance and other automatic fiscal stabilizers.
- helps the bond market maintain confidence in the sovereign’s solvency, particularly if the economy’s growth rate remains above the government’s rate of interest on its debt.
But what happens if sufficient economic growth fails to materialize?
Pick your debt sustainability policy poison
After economic growth there is major dropoff in the political attractiveness or practicality of most of the remaining debt sustainability policy options:
- Fiscal consolidation: tax hikes can be one of the least politically popular moves a government can make to rebalance (arguments over who should pay more, how much more, etc.), while the years following the 2008 crisis demonstrated how spending cuts (austerity) can be just as politically painful.
- Financial aid: while grants or other unrestricted aid can be attractive, onerous loans or support from multilateral bodies like the IMF can be unwelcome as they typically come with strings attached, including micro-oversight and the aforementioned tax hikes and spending cuts.
- Asset sales: selling a country’s proverbial (or literal) crown jewels is an arguably underutilized tactic and can send a powerful signal to the bond market of the sovereign’s commitment to service debt, but selling assets can also be unpopular and lack credibility given the ability of governments to later expropriate domestic assets.
- Inflation: political thinkers as diverse as Keynes and Lenin agree (and history has frequently confirmed) that outsized inflation can lead to massive and catastrophic political upheaval. Any policymaker who chooses hyperinflation risks political suicide (or worse).
- Repudiation: the Greek debt crisis illustrated how even a relatively minor default (failure to pay interest and/or principal on schedule) can pose a systemic contagion threat and be blocked by creditors, and even relatively ancient defaults incurred under prior political regimes often remain unforgiven.¹
In the coming months and years some combination of the above policies may be implemented across various governments. For example, the UK Chancellor recently floated the idea of tax hikes, and some developing country foreign debt will probably need to be “restructured”, a euphemism for default.
Financial repression offers policymakers the debt sustainability path of least resistance
But there are mounting signs that policymakers will attempt to sustain massive government indebtedness in the US and elsewhere via financial repression.
Financial repression covers a wide range of multifaceted policies, but its key characteristic in advanced economies is artificially low or negative interest rates. These artificially low or negative interest rates help governments to continue servicing debts even in low-growth environments.
The preferred policymaker term for the artificially low interest rate aspect of financial repression is the much less sinister sounding “yield curve control”. While neither term is widely understood both are rising in use (Figure 2).
Figure 2: Google searches for “yield curve control” (aka financial repression) are on the rise
Part of the reason behind financial repression’s attractiveness to policymakers is its historical track record of aiding countries such as the US and UK in sustaining record levels of public debt following the Second World War. While the UK did suffer a number of serious financial crises and non-pecuniary defaults, both countries were able to avoid missing any interest and principal payments while also steadily decreasing their debt-to-GDP ratios from triple to double digits in the decades following the war.
But some, including World Bank Chief Economist Carmen Reinhart, offer a perhaps more cynical take on why financial repression is such an alluring debt sustainability policy for officials: it is a stealth tax.
Financial repression’s winners and losers
Financial repression often occurs alongside above norm inflation, making suppressed interest rates especially punishing for traditional savers, who struggle to earn sufficient yield via bank deposits and money market accounts to maintain purchasing power over time.²
These inflation-related losses are one element of what can be a very significant and hidden financial repression tax: a stealth transfer of economic value from creditors (e.g. traditional savers and bondholders) to debtors (e.g. governments).
While traditional bank savings account customers are often one of the biggest losers from financial repression, shareholders of commercial banks and other investment entities conscripted into holding government bonds are often another major casualty.
On a more positive note, crypto offers a solution to the liquidation of traditional bank savings deposits in the form of nascent crypto interest markets, which have grown rapidly in recent months to approximately $10 billion in size.
Some crypto lending markets currently offer double-digit annual interest rates on US dollar stablecoin deposits and sometimes even greater yields (and risks) via various DeFi (decentralized finance) protocols. Both the crypto industry and its users stand to be one of the big if not biggest winners from financial repression.
Other likely winners in a world of suppressed interest rates include owners of hard assets such as gold and real estate. Stock equity holders have also benefitted from low interest rates, and many believe stocks will continue to be attractive in such an environment.
Can a stealth tax be “fair”?
The main focus here has been to draw attention to why financial repression appears compelling from the perspective of policymakers, and to point out some of the economic winners and losers.
However, in a world with major gaps in financial and economic literacy the morality of financial repression also warrants attention, particularly in light of some prominent comments made recently supporting the fairness of financial repression.
For example, the normally excellent Gillian Tett of the Financial Times recently suggested that financial repression is the “fairest, most democratic way to actually get a debt burden reduced”.
But how can a stealth tax be considered democratic?
Gillian herself even uses the term “stealth transfer” in describing financial repression, so she is under no illusion about the hidden nature of the financial repression economic tax.
Based on my experience researching financial repression over the past decade it is my view that the vast majority of people have little to no idea what financial repression is, or how it operates. Those who are economically less literate and less well-off will be especially challenged to defensively position themselves in a financially appropriate manner.
More transparent taxation, openly debated in legislatures and passed through normal democratic processes, stands a much better chance of passing a fairness test than any stealth taxation orchestrated largely by unelected technocrats that heavily impacts smaller traditional savers.
Dr Garrick Hileman is a visiting fellow at the London School of Economics and the head of research at Blockchain.com, the leading provider of cryptocurrency solutions and creator of the world’s most popular crypto Wallet and the Blockchain.com Exchange. You can read more of his analysis and research on Twitter @GarrickHileman and @Blockchain.
For Big Investors, the Recent Bitcoin Drop Presents More Buying Opportunities
Bitcoin has fallen deeply into a state of oblivion. Once trading for well over $64,000, the world’s number one digital currency by market cap has lost nearly $20,000 in value since last month and is presently trading for just over $47,000.
Bitcoin Is Still Being Bought Up
Among many analysts is an attitude of gloom and doom. Some consider the end of bitcoin to be near, while other largescale investors – such as Michael Saylor of MicroStrategy fame – think that this is the perfect opportunity to add more bitcoin to their private and company stashes and buy up.
Saylor has recently come out and admitted that not long after Elon Musk announced his company would not be accepting BTC payments for goods and services, his company purchased another $15 million worth of the digital asset. The recent dip can likely be attributed to Musk’s sudden dismissal of BTC payments, which a lot of people in the crypto space were relying on.
This was going to be a major push forward in the world of BTC. It would be seen as a legitimate and mainstream method of payment considering such a huge, billion-dollar company would allow its usage alongside fiat and credit cards.
Sadly, it does not look like this is going to pass, and bitcoin has suffered as a result, but for people like Saylor, the present conditions offer more opportunities to take advantage of. In a tweet, Saylor announced his company’s recent purchase:
MicroStrategy has purchased an additional 271 bitcoins for $15 million in cash at an average price of about $55,387 per bitcoin.
Thus far, the company has accumulated nearly $2.5 billion in BTC over the past nine months according to a filing with the Securities and Exchange Commission (SEC). MicroStrategy was one of the first major institutions to pledge public support to bitcoin and initially began buying the asset in August of last year.
While Saylor looks at the recent situation as something positive for men like himself, others are expressing disdain with Elon Musk and the fact that he is constantly saying things that have large effects on bitcoin and its competing altcoin cousins.
Maybe It’s Time to Think Before You Talk
Dennis Kelleher – CEO of Better Markets in Washington – explained to reporters:
The problem here is that a loose cannon CEO continues to shoot his mouth off about any number of potential market-moving events. It is clearly grossly irresponsible, but it may not be illegal.
For the most part, there is no evidence supporting the idea that Musk does what he does or says what he says on purpose. It could be that he just simply does not realize his power within the industry yet. However, perhaps it is time he takes a breather and really thinks about his next steps regarding crypto, as it clearly has an effect on the rest of us.
Litecoin Price Prediction: LTC/USD Goes Bearish on a Correctional Note
LTC Price Prediction – May 17
Currently, a downward correctional move is ongoing at a higher pressure in the LTC/USD market activities. The US currency forces its worth on the crypto since May 10 while the base instrument hit resistance around a high value of $400. With about a 10.07% reduction presently in the crypto market, price now trades at around the level of $266.
Resistance levels: $320, $360, $400
Support levels: $240, $220, $200
LTC/USD – Daily Chart
The LTC/USD daily chart showcases a heavy downward price correctional movement as most of the vital support trading levels breached to the downside. An intense bearish candlestick is being formed in the space between the SMAs. That has led to the breaking down of the bullish trend-line and the 14-day SMA trend-line to the south. The 50-day SMA indicator is being approached by current falling pressure at the immediate support value of $240. The Stochastic Oscillators are now in the oversold region slightly pointing to the south within it. That still calls for placing position with cautiousness as there may soon be a change of trend in no time.
Will the LTC/USD current fall-off reach for support of $240?
Going by the current pace at which the LTC/USD market operations as regards the downward correctional moves, it is most likely that bulls will await price to either closely average or briefly touch past the immediate support level of $240 before considering launching a pull-up. That said, a bullish candlestick formation is needed to back up a reliable return of an upward move at that trading zone.
On the account of contradiction, as regards the market’s upside, bears would now have to consolidate their stance in the market to forcefully break down the $240 support level in a continuation southward pushes to see through some lower support trading lines. The smaller SMA indicator may not play along with the furtherance of downswing at the first instance of heightening pressure.
LTC/BTC Price Analysis
As of writing, the comparison trading capacity outlook between LTC and BTC as shown on the chart depicts that the counter instrument has only been able to hold back the base tool in a convergent trading cycle at higher zones. Yet, the trend is having it to favor of LTC as placed with BTC. The 14-day SMA trend-line and the bullish trend-line are over the 50-day SMA. And, they are all underneath the cryptos’ trading point. The Stochastic Oscillators have slantingly moved into the oversold region with a brief-pointing posture to the south. That indicates that the possibility that the base instrument may soon begin a push further to the north.
Iranian government to penalize crypto miners using household power
The Iranian government has now warned of hefty fines for those who will be caught mining cryptocurrencies using power intended for domestic use.
This after authorities registered a significant spike in electricity consumption for digital currency mining, further straining the already stressed hydropower generation caused by insufficient rainfall in the country this year.
The government said the illegal mining operations for virtual currencies that rely on electricity intended for households cause transformers to be overloaded, damaging the power grid. According to Tehran Times, Iranian Ministry of Energy spokesperson Mostafa Rajabi Mashhadi said unauthorized miners “will be fined when identified and held responsible for the damages they cause to the electricity network.”
Mining rapidly expanding in Iran
Back in 2019, the Iranian government legalized cryptocurrency mining, classifying it as an industrial activity.
In 2020, over 1,000 mining licenses were issued by the Ministry of Industry, Mining, and Trade, and power companies were provided with an avenue to increase their profits through meeting the industry’s power demands.
Selling electricity to cryptocurrency miners was seen as an option to fill the gap between revenues and expenditures in the electricity industry. However, with the current energy crisis being faced by the country, this move is now also being questioned.
Power consumption through the roof
Per the latest available data, the cryptocurrency mining sector in Iran consumes up to 1,500 megawatts of electricity each day. Back in December, this figure only sat at 300 megawatts. Authorities revealed that only around 200 megawatts of the current average daily consumption are legal.
Chinese companies have taken advantage of low and subsidized electricity prices in Iran to establish mining operations in the country’s Special Economic Zones.
The Ministry of Industry, Mines, and Trade estimates around $660 million worth of cryptocurrency is mined annually by unlicensed facilities in Iran.
Image courtesy of Cointelegraph News/YouTube
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