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A Century of Financial Repression

by on March 10, 2012

Since 1910 we have been living in a world of financial repression. Initially the reason was to fund a World War, yet since 1936 there has been an inflation bias, and fiscal expansion has become widespread. As Steven Kates wrote on the 9th of March:.

 

“In 1844, and indeed all the way up until 1936, the idea of using government spending as a stimulus was maintained only by economic cranks. Now, of course, it is the mainstream”

Analysing historical consumer price data in The Netherlands issued by CBS Statline, we can see that inflation is very much a modern phenomenon before the first World War prices were relatively stable for more than a century. Technological advances and the increase in global trade, made products, that were previously expensive, (bread, tea, sugar, coffee and rice) cheaper. Since then, however, policy makers have consistently had an inflationary bias leading too a increase in prices and a decrease in the value of money. 

On Friday Paul Mason wrote an excellent article on “financial repression”. In which he illustrates the incentives of governments to get rid of the debt through inflationary policies. As Carmen Reinhart and Bellen Sbranica show capital controls are needed to do this in an open economy, so that people can not easily move their money away to another country. Governments have solved this by forcing pension funds and other institution to hold a certain amount of home government bonds.

In the Economic Consequences of Peace, Keynes realized the incentive for policy-makers to drive-up inflation and warned of the consequences, as he stated:

“By a continuing process of inflation, government can confiscate, secretly and unobserved an important part of the wealth of their citizens.”

 It is a shame that his followers did not listen. 

(please click on the graph to see it in full size)

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