The Cash Crucible & the Acceleration of Financial Repression
“Cash is a Legitimate Asset Class for the First Time in Decades, Investors are piling into products that shield them from losses in a rising rate environment.”[i] So said a recent article in Bloomberg. Any headline-hailing investors “piling” into anything should trigger instant paranoia.
Consistent with history, our research over 12 years has demonstrated that the crowd may be comfortable, but it is rarely the right place to be. Reading that the hot spot du jour is cash, with nominal rates of 3.25% and a -5% real yield, is a testament to the financial repression underway.[ii] This paper builds on a 2015 study of the Financial Repression used to help liquidate government debts in the 35 years following World War II.
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Summary: the nominal comforts of cash may come at a steep price for investors’ newfound risk aversion.
- Buyers of Treasuries are betting against history, the Fed’s playbook & the interests of the US government
- Explaining the liquidation of government debts between 1945-1980, Reinhart and Sbrancia highlighted the re-emergence of policy tools that mechanically transfer wealth from savers to the government in a “policy tax” dubbed “Financial Repression”
- Specifically: “…we document how in the post [Great Financial Crisis] debt-laden environment financial repression has once again resurfaced in its many forms among the advanced economies through a variety of regulatory changes, implicit (or explicit) nominal interest rate ceilings, and in some cases, capital controls, and “moral suasion” to induce domestic institutions to hold more government debt.”
- 2009 – 2020 was a period of severe financial repression that not only failed to liquidate government debts, as occurred in the post-WWII period, but actually left us more indebted than any time in history
- History, recent policy, and the unsustainable current trajectory of US deficits suggest Treasuries will become a “comfortable” method of transferring your savings to the US government
KCR has been writing about these risks since June 2020 when we penned 60/40: Buying a Ticket on the Titanic. The recent return of nominal bond yields and the correction in equities has improved the optics of 60/40 strategies. Unfortunately, history suggests the risks could be accelerating rather than abating.
As usual, we will not be making forecasts here. Merely explaining where we are through the lens of financial history. Take a look at the quote below.
“…deficit reduction usually involves highly unpopular expenditure reductions and (or) tax increases … the relatively ‘stealthier’ financial repression tax may be a more politically palatable alternative to authorities faced with the need to reduce outstanding debts.”[iii]
That is from a paper published by the IMF. Do you think the world’s developed economies, lumbering under the weight of wholly unpayable debts, is worried about your purchasing power? We think not.
We encourage our readers to keep in mind that the policy initiatives explained over the next few pages are openly being endorsed as a means of reducing debt. There’s nothing subtle about this. The federal government’s incentives are diametrically opposed to investors. Act accordingly.
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October 28, 2022 |
| Authors: Matthew Malgari, Nathan Przybylo, Dr. Sanjeev Bhojraj and John Durkin
October 28, 2022
Authors: Matthew Malgari, Nathan Przybylo, Dr. Sanjeev Bhojraj and John Durkin