Financial repression occurs when a government prioritizes its financial concerns over those of its citizens, hindering investment opportunities. This can be done through tactics such as interest rates and government bonds, and is often seen in heavily indebted governments. The line between economic stimulation and financial repression is difficult to define.
Financial repression is any government policy that hinders the investment opportunities of its citizens while improving the government’s overall fortunes. Proponents of this theory believe this happens whenever governments get significantly into debt and need finance to extricate themselves. The theory states that governments use tactics such as interest rates, government bonds and the banking system to effectively act as a system of indirect taxation on the citizens of these countries. Those people who find the theory of financial repression to be cynical at best and scrupulous at worst argue that it is simply a backlash against the government’s necessary interaction with the economic machines.
There are very few cultures throughout history that have existed without some sort of intervention by governing bodies on their monetary systems. Most of these governing bodies have argued that such intervention is necessary for the betterment of society at large, but the opportunity for corruption in such cases is obvious. In the modern world, such total government corruption would be difficult to implement. However, some experts believe that there is a more subtle form of government misbehavior in the form of financial repression.
While difficult to pin down, financial repression essentially occurs whenever a government places its financial concerns ahead of those of its citizenry. This can be done in ways that are hard to detect. In some cases, the methods of achieving such an effect may even be perfectly legal, even if the spirit of the government action in question may be perceived as deceptive.
One specific way to achieve financial repression is through the manipulation of interest rates. If interest rates are kept low while inflation rises, it means that the real value of the interest rate is negative. By keeping savings options limited to only the banks that offer these interest rates, the government can limit citizens’ prospects. Additionally, a government can get banks to funnel their money into government bonds, thus reducing government debt in the process.
It is difficult to draw the line between where simple economic stimulation ends and financial repression begins. Many who believe in this theory point to times when it was practiced by governments of developed countries emerging from costly wars that left them heavily in debt. On the other hand, those governments were often forced to take drastic action to rebuild their countries’ economies.
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