Dan Amerman: Will Our Private Savings Be Sacrificed To Pay Down The Public Debt?
Recently, an article by Daniel Amerman caught our attention. Titled Is There A “Back Door” Method For The Government To Pay Down The Federal Debt Using Private Savings?, it details the process known as financial repression, where sovereign debts are slowly paid off by syphoning private savings from an unaware populace.
In this week's podcast, Chris discusses the mechanics of the process, as well as its probability, with Dan:
To understand financial repression, we have to understand that we've been there before. Many nations have gone through periods in the past where they've had very high levels of government debt. And there are four traditional ways of dealing with that.
One of them is austerity. Everyone understands that. You raise the tax rates. You lower the government spending. This is a painful choice. It can last for decades. And what do you think the voters think about that?
There is another option and this we can call this the Argentina option. And that's defaulting on government debts. It’s radical. Everybody understands it. How do the voters feel about it?
There is a third option is rapidly destroying the value of currency. Creating high rates of inflation that very quickly wipe out the true value of a national debt. But that also wipes out the true value of everyone else’s savings and salaries and so forth. It is such an obvious process you can’t really hide it. So how do the voters feel about that?
Those first three – they all work. They've all been done before. But they're all very painful and make the voters very angry.
Now there is a fourth way of doing this. There's nothing controversial about its existence; it's not the slightest bit controversial for professional economists or people who have studied economics extensively. It's financial repression. And it works. It's what the advanced western nations did after World War II. It was a process that took 25 to 30 years, depending on the country. The West went from an average debt as a percentage of national economy from over 90% to under 30%. So we know it works in practice.
To understand what this fourth alternative is where governments like to go is that there are no political repercussions. It's actually just as painful for the population as a whole. You've got to get the money one way or another. But financial repression is, for most people, just complex enough that the average voter never gets it. And because they don’t get it, they're paying the penalty, but they don’t realize it. And they don't see anyone to blame. That's really good if you want to stay in office.
The key is a concept called negative real interest rates. If the rate of inflation is higher than the interest payments you are taking in, savers are losing purchasing power every year. Remember, this is a zero sum game between the borrower and the saver — with the saver funding the borrower. Every dollar in purchasing power that the savers, which are you and I, are losing every year — that goes to the benefit of the borrower, which in this case is the Federal government.
Click the play button below to listen to Chris' interview with Daniel Amerman (56m:04s):
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Dan Amerman: Will Our Private Savings Be Sacrificed To Pay Down The Public Debt?
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Chris Martenson: Welcome to this Peak Prosperity podcast. I am your host, Chris Martenson. Well, here we are – six years into the supposed recovery engineered by the Fed. And the only thing we can definitively say about that recovery is that the extremely wealthy got even wealthier. And the bottom quintiles got poorer. Now this is represented in the media as if it is some strange thing we perhaps ought to study and talk about as if it were some unexplained light in the Northern Sky and we were some primitive tribe. Even the Fed professes open puzzlement about the outcome in their testimony, but what actually happened is actually one of the great secrets of our time only in the sense that very few people know about the way in which the Fed steals money from one set of individuals and gives it to another, all with the complete blessing of the US Congress and Senate.
Now what we are here to talk about today is not some complicated natural mystery, but a well-known artifact of the exact program of financial repression that the Fed has been actively pursuing. The majority has been forced, not asked, forced to give to the few. And the Fed was behind it all with the explicit endorsement of Washington DC. To help us make all of this clear today is Dan Amerman, a chartered financial analyst, author and speaker with over 30 years of professional financial experience. As an investment banking vice president in the 1980’s, he did work in security originations and asset and liability management including portfolio restructurings for financial institutions as well as the creation of synthetic securities for institutional clients. He has been a speaker and workshop leader for sponsors including the Institute for International Research, New York University and many banking groups. He has got decades of solid financial expertise.
And what caught my eye was an excellent article he wrote that you can find on his website, danielamerman.com, called "Is There A Backdoor Method For The Government To Pay Down The Federal Debt Using Private Savings?" This article really clearly lays out the process of taking from the many and you really need to understand the process if you want to have any hopes of dodging the process.
Now, we have linked to that article and his website at the bottom of the podcast page at PeakProsperity.com. Dan, welcome to the program.
Daniel Amerman: Well, thank you, Chris. I sure appreciate you having me.
Chris Martenson: Well, let’s talk about this term I used before – Financial Repression – briefly, what is it? Before we get into the mechanisms, what is the definition? What is Financial Repression?
Daniel Amerman: Financial Repression sounds like a conspiracy theory.
Chris Martenson: It does.
Daniel Amerman: I mean who could really believe that is going on? But this is classic academics. It’s very well established. If you want to learn more about financial repression you do things like you go to the International Monetary Fund website. Or you study for a PhD in economics at Harvard or Stanford or a place like that. Financial repression has been around for a very long time. And what it really refers to, bigger picture is that over the centuries economies tend to go through cycles of economic liberalization and then repression. Basically, the cycle is the markets liberalize, bubbles build up, there are all sorts of things going on and the governments step in and they take control and that becomes the process of financial repression.
And the last time we saw a sustained period of financial repression before, somewhere between 2008, 2010 is when the latest round began was between 1945 and somewhere in the early 1970’s late 1970’s; it really depends on the nation. We are in this real predicament right now. If you look at the US national debt it is roughly equal to the size of the national economy. And one way that I like to look at that to make it more personal is if we take the $17.5 trillion and we divide it by the roughly 97 million households that are above the poverty line. On the assumption those are the only ones making positive contributions – that works out to about $180,000 per household. And that sounds just fantastic. What can possibly be done about it?
Well, to understand financial repression we have to understand we have been there before. Many nations have gone through periods in the past where they have had very high levels of government debt. And there is really four traditional ways of dealing with that. One of them is austerity. Everyone understands that. You raise the tax rates. You lower the government spending. This is a painful choice. It can last for decades. And what do you think the voters think about that, Chris?
Chris Martenson: Let’s ask the people in Greece.
Daniel Amerman: Yea, exactly. Exactly. They were rioting in the streets.
Chris Martenson: Oh. It’s awful.
Daniel Amerman: There is another option and this we can call this the South American option, although that might be a little unfair, Argentina anyway. And that is defaulting on government debts. It’s radical. Everybody understands it. How do the voters feel about it?
Chris Martenson: Oh, it’s awful.
Daniel Amerman: Nope. They don’t like it at all. There is a third option I would say a population at large is not as aware of, but I’m guessing your audience is, Chris. Very much so. And that is rapidly destroying the value of currency. Creating high rates of inflation that very quickly wipe out the true value of a national debt. But that also wipes out the true value of everyone else’s savings and salaries and so forth. It is such an obvious process you can’t really hide it. So how do the voters feel about that?
Chris Martenson: Well, we don’t like it. And I think the Fed tried it and it didn’t work and all they got was inflation without wages going up. Actually, it was counterproductive I think. I think they were hoping for it or more of it and it didn’t work. That is how I saw it.
Daniel Amerman: If the Fed wanted high rates of inflation we would have high rates of inflation. That is a relatively simple thing for them to do. That could be a topic for another time.
There is a fourth alternative here. Those first three – they all work. They have all been done before. They are all very painful and it makes the voters very angry.
Chris Martenson: Back up so – let me just say yea, you are right though. When inflation hits a certain level historically what we know is that leads to pretty profound political repercussions usually. If you think of Weimar, Germany as one example, Mexico in ’84. There are places where it really does lead to a lot of tumult. And I don’t think politicians really like it either very much.
Daniel Amerman: And that’s the point. They’re making the decisions – and I don’t mean to be cynical or anything – but are they going to tend to make decisions where they stay in power or where they lose power? The problem with those first three options of austerity, of default, high rates of inflation they all really hack off the voters. So there is a very good chance that the people who are in positions of power and privilege and all of the wealth that flows from that right now would no longer be in those positions if any of those three were chosen.
Now there is a fourth way of doing this. And again, there is nothing controversial about its existence. It is not the slightest bit controversial for professional economists or people who have studied economics extensively. And it is a process that as we said one of the names for it is financial repression. There are two key features of this if you are making decisions as a government official, as a Federal Reserve official that are very important. The first one is we know it works. That is what the advanced western nations did after World War II. And a process that took 25 to 30 years depending on the country. The West went from an average debt as a percentage of national economy from over 90% to under 30%. So we know it works in practice and we will get into more detail on how specifically that works.
To understand what this fourth alternative is where governments like to go is there were no political repercussions. It was actually just as painful for the population as a whole. You got to get the money one way or another. But financial repression is for most people just complex enough that the average voter never gets it. And because they don’t get it they are paying the penalty, but they don’t noticed the signs, and they are feeling the penalty because the spending power isn’t there. But they got nothing to blame. That is really good if you want to stay in office.
When we want to talk about financial repression in the United States we are talking about Eisenhower. We are talking about Happy Days are here again. We are talking about Leave It To Beaver. Those are the days we are looking at and most people don’t see those as being times of repression. But what was happening the entire time is as we are about to get into when we look at these techniques here, the American public was on a very deliberate basis having billions of dollars slowly confiscated from them by the government on an ongoing basis. It lasted for decades.
Chris Martenson: So is it that pace that allows them to get away with it?
Daniel Amerman: Yes. And the pace can vary. The key, and we can get into more detail about how it is done. It often ties into multiple other things that are going on in the world – is a concept called negative real interest rates. And that is you have your stated interest rate, you have your nominal interest rate and you have a rate of inflation, which may be a different thing than the official rate of inflation. The idea is if the rate of inflation is higher than the interest payments you are taking in, even on a pretax basis, then a saver is losing purchasing power every year. And remember this is a zero sum game so to speak between the borrower and the saver. With the savers funding the borrower. Every dollar in purchasing power that the saver, which is you and I, are losing every year that goes to the benefit of the borrower, which in this case is the Federal government. That leads to classic financial repression.
Chris Martenson: Dan, let’s cover this in more detail because this is a really important point. I know that it is obfuscated constantly in the financial media; they talk about wealth as if it just magically appears in the stock market or just shows up. But really money and debt and markers for that are really just markers for real wealth. What you are saying is there a fixed amount of real wealth that grows at a very fixed pace out there. That is a real rate of wealth creation. But then the rate of interest and the tax rates and other things that sort of get layered on around that could leave us in a position where our actual claim on that real wealth is shrinking by some percentage every year in a negative sense. This is the part I want to get through – see if you can explain it better. I’m sure you can. Wealth is just an accounting identity. So by definition if one person is losing 3 or 4% a year the only question to answer is who is gaining that 3 or 4% a year. It is just going from point A to point B. Is that accurate?
Daniel Amerman: Yes. That is one way of phrasing it. And I’m glad you are bringing that up. You had pointed out that my background was one of being on the inside and being an investment banking vice president and working with all of these sorts of things. But I went into the dalian so to speak over 20 years ago because I strongly believed that the average retirement saver was essentially being sent a bill of goods. They are all being told they could simultaneously earn these 8 or 10% rates of return and have these rates of return exponentially compound at these fantastic levels. Even while the real rate of economic growth, what really matters, resources, goods and services were growing at a far slower rate. So these people behaved in a certain way. They saved a lot of money. That money went to the financial industry and the government, which enjoyed the benefits of that in real time. And now we're to this place — it doesn’t bring me pleasure to say it, but it is the place we have been heading the whole time where we have this reconciliation going on between paper wealth and real wealth. You have all of these 10s of millions of hardworking good people who have been doing the right thing. And they have been deferring gratification and been following the investment strategy they were supposed to. And now we are finding out they don’t know if they are going to be able to retire. Or what kind of standard of living they are going to be able to enjoy in retirement. It comes right back to this issue you were talking about the difference between real wealth and paper wealth.
And then the other thing that goes on besides that there is every change in wealth is really a redistribution of wealth and what has been going on to add insult to injury is not just the real wealth isn't there to support let’s say the retirements that people are hoping for. But quite a few of that has been redistributed from the retirement savers to the financial industry and the government in ways that are just complex enough — and financial repression is one of those ways that the average voter, average saver never quite catches on.
Chris Martenson: Fantastic, Dan. Than you so much for bringing it this way because when people ask me Chris if you only had one chart what would it be? I'd show them a chart of aggregate debt accumulation and a total credit market debt as one line and the second line on that chart is real GDP growth. And the debt is growing and compounding at a rate twice as fast as underlying – even nominal growth is growing faster, three or four percentage points faster than that. I just look at that and my eyebrows shoot up and I say how can you possibly be compounding the claims on wealth at twice the underlying rate of wealth accumulation? Does anybody else see the problem? So thank you for seeing it. It seems as simple as that to me.
Daniel Amerman: What do you call it a problem for? It’s a feature. [Laughter] It’s a feature. That’s how it’s done. That is how the wealth is redistributed. I have been writing about this for a number of years. The Fed has been engaged in what I call a liability based bail out since at least 2007 where they are using control in the amount and terms of liabilities to massively redistribute wealth, from the average saver not just to the government but to the financial industry. Most people just don’t think in those terms, so they don’t really pick up what is going on. And they do see this fantastic growth in debt as being this, "how do you sustain it? This is leading to a very bad place" and so on and so forth, but what they are not seeing is the whole time this is building up there is a hand in their pocket that is picking out the contents of their wallet. And this is how it is being done.
Chris Martenson: So for all the people who particularly maybe, I don’t care which side of the aisle they are on, but they're noting, "oh my gosh look at the debt problem of the United States." We are going to reframe that. We are going to call that a debt feature. And what happens with this accumulation of these liabilities — and you are just talking straight debt. We haven’t even gotten to the unfunded liabilities and that stuff save that maybe for another time. Just the straight accumulation of debt both at the government side and the private market side, that accumulation is a feature. And one of the features that comes with that you are saying is that the average saver ends up donating a large portion of their purchasing power towards that system.
Daniel Amerman: Well, what financial repression does — we are going to have to go around a few more of the details there. But really what it does is it redistributes wealth from savers to borrowers. And I don’t know about you, but I was raised with kind of a moral way of looking at money and economics – which is you don’t want to be a borrower. You want to have assets that you are investing actually in other people’s liabilities. What’s a deposit? The liability of a financial corporation. What’s an insurance policy? Liability of an insurance company. What we are taught is we are to be the ones that provide the assets that then become liabilities of other people. People are just not aware how the Central Bank can set the situation up very intentionally where there is a redistribution of wealth with certain kinds of debt. Not all kinds of debt. Not most consumer debts. For instance, credit cards don’t apply to it in any way. But for certain kinds of debt financial institutions and governments like to use you have a steady, annual flow of wealth. The public doesn’t see what is going on. That it is steadily enriching the major corporations and the major banks.
Chris Martenson: Alright. So here we are in the story. There is a period of financial liberalization. A big growth phase. Debts pile up and then you have to enter a period of what is known as financial repression, it is well-studied, it is characterized, you can go get a degree in it, look it up on a website. It is a well-characterized thing. Let’s talk about the actual mechanisms of financial repression so that our listeners have a real concrete understanding of what this thing is. We know debt is involved and liabilities but help us really – how do we make this crisp?
Daniel Amerman: Well, there was a very well-known article that was put out by a couple of scholars; Carmen Reinhardt was the best of known of them – that was carried by the National Bureau of Economic Research and it is available on the International Monetary Fund website and it is kind of an academic study of five different features of historical financial repression. One of the things that I do in the article that is linked on your website is I take a much more intuitive and understandable look at what these things are and how they work together, so people will understand what is actually going on as opposed to academic jargon. And to understand financial repression I think an essential way of looking at it is you have to understand we the people are more or less the sheep. And we need to be sheered every year in a way we don’t understand. If we start to not like the being sheered every year, we start to understand what is going on, then as a matter of government policy, very deliberately, there need to be a series of fences set up. So participation is mandatory if you live in the nation.
And to understand the sheers, the two components of the sheers are inflation and negative real interest rates. If you don’t have inflation, if you’re not steadily destroying the value of the money then there is no fuel for financial repression. There is no redistribution of wealth. But what many people don’t understand is that they are only worried about inflation if it is something big and bold like 10% per year, 15% per year, 20% per year. Something that is really obviously destroying wealth. But if you take a look at how governments actually use inflation over the longer term, the way you do it and the way to slowly, steadily redistribute massive sums of wealth that nobody ever catches on and nobody ever gets voted out of office is you use much more moderate rates of inflation. That would be 3%, 4%, 5%, 6% that range works just fine for an extraordinary redistribution of wealth without, let’s say, that water in the pot getting so hot that the frog catches on what is going on. So people think they’re fine. "What are you talking about inflation for? I'm not worried about inflation." Well, that whole time as long as people are thinking like that that is perfect for the government.
Now, the other half of the sheers is having very low interest rates that create negative real interest rates. So if you have let’s say money in a checking account right now or money in a savings account and you are earning a quarter of 1% per year, okay? And if we go on official inflation rate let’s call that 2.25% maybe somewhat less, somewhat more depending on the country and the time. And then each year you get a quarter of 1% in income, pretax. The purchasing power of your money loses 2.25%, you have a 2% negative real interest rate. So you are down 2%. It is a zero sum transaction. The borrower is up 2%.
And if you look at the post-war example in the United States and the United Kingdom between 1945 and the early 1970’s, they actually used about a 3 to 4% negative real interest rate. Some nations like Australia and Italy were using more like 5%. And if we take a more reality based inflation rate right now, which I would say is closer to 4 to 5% maybe a little more, then we've got that full measure right there. We got 4 to 5% annual loss in purchasing power for someone who is just keeping their money in cash, they’re keeping a checking account, they are keeping it in a Money Market fund, whatever the case is. And that is uncomfortable, but it is not the kind of thing to slap you in the face every day and call your attention to it, like it would be if it was say 15% per year.
Chris Martenson: Right. But at 5% if my math is right roughly every 14 years I have lost half of my purchasing power.
Daniel Amerman: Yep.
Chris Martenson: Ouch.
Daniel Amerman: Yea. Yea. I mean it is a steady process. So much of politics and economics is it is not what it is it is what people think it is, because that is what they base their behavior upon. That is kind of an ideal situation for a government just a little bit patient. Every year that goes by you are doing substantially better off. Every year that goes by your cronies are following some quite different ways of investing and making wealth and the general population has been told it is good for them then you are going to do a little bit better.
The other thing and by the way with interest rates, we used to have explicit controls on interest rates. For instance you could not have interest earnings in a checking account. Per regulation Q you were limited on the amount of money that would be paid out if you had a savings account. So that was very explicitly set up as a matter of statutory law that the interests rates that are being paid out on the instruments to the public would invest in, in fact, did not keep up with the rate of inflation. And again this is the time of Happy Days, Leave It To Beaver and financial repression. They all went along together.
Chris Martenson: Now hold on, Dan. The Federal Reserve told me that they ran interest rates all the way down to zero on the short end because they cared about unemployment and they wanted to stimulate the credit markets. When I hear the European ministers talk about dangerously low rates of inflation, they are very, very worried about deflation as a concept. What you are saying is the actual reasons that we have these interest rates is because they needed to get to negative interest rates and the real fear of a deflationary environment is they don’t know how to go below zero on interest rates yet, so that takes away one of their sheers doesn’t it?
Daniel Amerman: Well there are levels within levels there and we only have the time to go so far. But there is a complimentary thing that is going on right now. That is there is a great deal of concern among economists — and this is all so devastating for investments over the longer term — that we may be in an area of secular stagnation, is one of the terms used for it. The new mediocre is another term that has come out recently –
Chris Martenson: The new mediocre.
Daniel Amerman: Yep. What a name. From the head of the IMF no less. But the concern is: well how do you emerge from a deep structural unemployment around the world that is no longer being counted in headline unemployment statistics because of changes in workforce participation rates? Well the way you do that, conveniently enough – major economists agree – is that you force negative real rates of return on savers. So, conveniently enough, the exact mechanism for purportedly improving economies is the exact mechanism that redistributes wealth from savers to the government.
Chris Martenson: That’s just a coincidence I’m sure.
Daniel Amerman: It’s absolutely a coincidence. As well as all of the different ways by using different techniques than what we are typically taught to use as investors this works strongly to the benefit of major banks and corporations.
Chris Martenson: Mmhmm.
Daniel Amerman: Anyway, let’s talk about our fences. The first fence is funding by financial institutions. The deal is that most people don’t directly lend money to the US Government. At least not anymore. Savings bonds used to be the most common way of doing it. That is what my dad did. Every month he would take any extra savings they had they would buy a savings bond. That is kind of what you were taught to do. But most of the public doesn’t do that. That is particularly true these days. So in order for the government debt to be funded, what they want to do is they want to force financial institutions effectively to fund the government. And how the financial institutions do that, well, they take in liabilities, they take in deposits from the general public. And because the financial institutions are making much less money that means they pay much lower rates to the people who are depositing money with them. But making financial institutions or encouraging them to participate, that means that everybody who has a deposit in the bank is participating in the financial repression even if they are never directly buying a treasury bill or anything like that.
A fascinating coincidence is — something I have a couple of charts on in the article on my website, these are from a FRED too, Federal Reserve Bank of St. Louis — what it does is they track the US Treasury Securities held by the Federal Reserve along with the excess reserve of depositories institutions. And this gets into kind of the heart of how quantitative easing really works. And what is going on is of course the Federal Reserve is a central bank, can create money at will. And what they have been doing is they have been purchasing mortgages and securities from the banks in the United States and they have been creating what is called excess asset reserves to pay for them – which is just newly created money. And then the bank is strongly encouraged to hold onto the excess asset reserve. What has happened is we now have about $2.4 trillion in US Treasury Securities that is held by the Federal Reserve and that is funded by about $2.4 trillion that the banks have provided to the Federal Reserve that is being held as excess asset reserves. So when you look at those two charts you are seeing an almost perfect picture of classic financial repression where financial institutions provide the assets to the Federal Reserve, which then provide the assets to the US Government. And what happens effectively is that the Federal Reserve and the financial institutions are netted out and you and I having money in a savings account or checking account are funding the US Government at effectively 0% return.
Chris Martenson: So that comes full circle. So we are the sheep that are then effectively funding the rates of return that are so low that we are in negative territory.
Daniel Amerman: We have no idea that we are funding the federal government. And we have heard this term probably for most people, quantitative easing, have no idea what it means. It sounds really technical. All we know is we have our money at the bank. Well, if we have our money at the bank, the bank has their money at the Federal Reserve. The Federal Reserve is funding the US Treasury. Those two intermediaries drop out and we are the ones who are funding the US Government.
Now there are a couple of other types of classic capital controls. One of them is we used to live in the world of between the mid 40’s and the early 70’s of pervasive capital controls. It used to be very difficult to move your money from one country to another. Then that got real easy to do for quite awhile. It no longer is and I don’t know if you have discussed FATCA with your readers before?
Chris Martenson: We have and I believe that was – wasn’t that tucked into the Affordable Care Act?
Daniel Amerman: It was. It was. It was part of this massive package that nobody really talked about.
Chris Martenson: Just so everybody remembers, FATCA is this act that forces foreign institutions to have to cough up information about US investors. It is very onerous and many foreign institutions have decided to not participate and interact with US customers anymore. This was nominally so we can track tax cheats was the idea.
Daniel Amerman: Yea and it has got a great big stick involved with it too when it comes to foreign financial institutions for most of them around the world, unless they have major US operations, are quite logically declining to participate. Which I would argue might have been the US Government’s goal in the first place. They basically have to any time the IRS says "jump" say "how high?" So if you are financial institutions anywhere else in the world you are almost obligated now to keep an eye on the US Internal Revenue Service and US laws or you could get hit with devastating sanctions which have to do with punitive tax rates being put on any investments that you have in the United States. So around the world financial institutions are quite logically making one of two choices: One of them is they are refusing to take deposits or any form of investment from US investors, which is really wreaking some havoc with expatriates living overseas right now. They are getting their checking accounts shutdown and so forth. And simultaneously for those institutions that are deeply part of the US markets and are willing to do this the IRS now has the best information they have had. Either way it reduces the ability of money to flow outside of the pasture, so to speak, to leave the sheering.
Now there is a fifth component as well and again, it is funny you hear about this and people think you are talking conspiracy theory again. No. This is how the world worked between 1933 and 1974 and that was having controls on the investment ownership of precious metals.
Chris Martenson: Mmhmm.
Daniel Amerman: Because if you have ongoing inflation that you can’t get compensation for in a bank account there will be a tremendous temptation to do this through holding precious metals. It used to be that it was flat out forbidden for all of those years, at least in the United States and the United Kingdom, and that these days we have a punitive collectibles tax treat
– Peak Prosperity –
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