The Fed's Assault On Savers-----Backdoor Repudiation Of The Federal Debt

By Chris Martenson

.......It's really that simple. The Fed has openly and actively suppressed rates -- not to help the credit markets, as they claim, but to engineer a condition of Financial Repression. Because that's what the government needs to stealthily take your wealth to pay down the prior debts it accumulated.

Thus 'negative real rates' are the essential component of transferring wealth from the many to the few, with the 'few' being defined as the government, Wall Street, and others who exploit leverage and liabilities at sufficient scale to be on the right side of that wealth transfer.

This well-known phenomenon is a thoroughly accepted and well-described practice of governments and central banks everywhere. One of the better descriptions of it comes to us courtesy of the BIS in this working paper published in 2011.

From the abstract:

Historically, periods of high indebtedness have been associated with a rising incidence of default or restructuring of public and private debts.


A subtle type of debt restructuring takes the form of “financial repression.”


Financial repression includes directed lending to government by captive domestic audiences (such as pension funds), explicit or implicit caps on interest rates, regulation of cross-border capital movements, and (generally) a tighter connection between government and banks.


In the heavily regulated financial markets of the Bretton Woods system, several restrictions facilitated a sharp and rapid reduction in public debt/GDP ratios from the late 1940s to the 1970s.


Low nominal interest rates help reduce debt servicing costs while a high incidence of negative real interest rates liquidates or erodes the real value of government debt.

Thus, financial repression is most successful in liquidating debts when accompanied by a steady dose of inflation.


Inflation need not take market participants entirely by surprise and, in effect,it need not be very high(by historic standards).


For the advanced economies in our sample, real interest rates were negative roughly ½ of the time during 1945-1980. For the United States and the United Kingdom our estimates of the annual liquidation of debt via negative real interest rates amounted on average from 2 to 3 percent of GDP a year.


Let me decode that.

  • Step 1: Governments get into trouble by borrowing too much.
  • Step 2: Rather than pay this down honestly via cutting spending (unpopular) or by defaulting (even more unpopular), the government conspires with the central bank to slowly liquidate the stack of obligations by forcing negative real interest rates on everyone.
  • Step2bHang on one wouldn’t work if people could dodge the Financial Repression, so a ring fence has to be built out of capital controls and explicit rate caps on and across the whole spectrum of interest-bearing securities.
  • Step 3: Sit back and wait for everyone with savings to contribute their purchasing power to those who issued the debts, be those public or private entities.

And this is exactly what has happened. All of the talk about the Fed focusing on unemployment or inflation or whatever are red herrings. What the Fed is really trying to do is to create a set of macro conditions that will allow the federal government to slowly crawl out from under a pile of debt and entitlement obligations that it literally can not pay by honest, above board means.

I guess if we were to imagine a "Step 4" in the above process, it would be to wait for the head of the central bank to come out and deliver a speech in which she expresses a grandmotherly concern for the wealth gap that naturally results from all this, but to deflect attention away from this being a direct and understood consequence of the Fed's intentional goal of financial repression and towards some failure on the part of those who have been targeted to donate to the cause of bailing out the profligate and rewarding the borrowers.

Oh, wait. That did just happen. Here it is, Step 4, courtesy of Janet Yellen last week:

Why Fed Chair JanetYellenis “greatly” concerned about growing inequality


Federal Reserve Chair Janet Yellen on Friday expressed deep concern over widening economic inequality in the country and called for tackling issues such as early childhood education and encouraging entrepreneurship to help narrow the gap.


[Comment:Oh boy...must contain my emotions...did she really just deflect the consequences of the Fed's policy of financial repression towards 'early childhood education? Yep. That's like a burglar saying that we need to invest in better metallurgical processes as the means of preventing doors from being kicked in so easily.]


In a speech at the Federal Reserve Bank of Boston, Yellen said steady growth in inequality over the past several decades represents the most sustained rise since the19thcentury.Living standards for most Americans have been “stagnant,” while those at the very top have enjoyed significant wealth and income gains, she said.


[Comment: Glad the Fed finally noticed that those at the very top have been making out like bandits! This was something I said explicitly would happen as a consequence of future Fed printing back in 2008 in the Crash Course, before the printing even started. How is it that I knew that this would happen back in 2008 and the Fed is just now noticing this observationally? Is my research department better than theirs? In fact this is a very well known and easy to understand process. That the Fed is feigning ignorance speaks volumes about how ignorant they believe we all are. This is a sure sign that we are trapped in a dysfunctional relationship with an abusive partner.]


“I think it is appropriate to ask whether this trend is compatible with values rooted in our nation’s history,among them the high value Americans have traditionally placed on equality of opportunity,” Yellen said in prepared remarks.


[Comment: Once we accept that the Fed is openly and specifically creating the wealth gap as a matter of active and ongoing policy, which it is, then it's actually more appropriate to ask if the Federal Reserve is compatible with values rooted in our nation's history. The answer, obviously, is "no."]


The problem of inequality is an unusual topic for the leader of the Fed, if only because the central bank’s ability to address the issue is limited.


[Comment: Stop right there Washington Post! You've just inserted an assertion that might as well have come straight from a PR press release from the Fed. I, for one, refuse that claim and reject it completely right here and on grounds that hardly have to be substantiated, but I will just for fun. When the Fed buys 'assets' (really debt instruments) from major financial firms using freshly printed money they are,by definition, buying those assets at steadily increasing prices which means that those who hold the largest amounts of these assets get the richest. When the Fed secondarily targets the stock market as something to 'go up' and the top 5% own 82% of all stocks, then the Fed's role is anything but 'limited.' It is direct and proportional and they are 100% responsible for any and all gains that accrue to the top via the 'miracle' of asset inflation. Period. End of story. See also any of the innumerable charts plotting the S&P 500's rise along with the growth in the Fed balance sheet for further confirmation. Sorry Washington post, assertion denied!!]


Yellen listed four factors that can influence economic opportunity: investing in education for young children, making college more affordable, encouraging entrepreneurship and building inheritance.


[Comment:OMG. She just blamed the victims and did it in a very let them eat cake kind of way. How aggravating(!). According to Yellen, if people are finding themselves getting poorer what they need to do is stop scrimping on their kids, become an entrepreneur and then somehow go back in time and have rich parents. This statement of hers calls for pitchforks and torches. Literally. Without a shred of decency, she has shifted all blame from the Fed to the victims. How corrupt or morally adrift does someone have to be to blame their victims? In a criminal case this would be used as evidence of sociopathic if not psychopathic behavior and used by a prosecutor to call for a maximum sentence to prevent a dangerous individual from running loose in society. And rightly so. Such individuals are poor prospects for rehabilitation.]


Yellen did not address in her prepared text whether the Fed has contributed to inequality.


[Comment:No surprise there. Ted Bundy never acknowledged the harm he caused either.]


At this point, based on Yellen's testimony, I think it's time to say what everybody is already thinking: the Fed Chairwoman is literally displaying psychopathic tendencies by blaming her victims. I'm serious: if the Fed were an individual, we’d have no problem identifying its behaviors in psychologically pathological terms.

I understand that some, or perhaps many, will excuse this last point by saying that the Fed cannot possibly state the truth because doing so would create loss of confidence or public anger. But I submit that the so-called "white lie" defense is utter nonsense.

A greater harm is done by lying than by telling the truth. You can get away with small lies for a while, but they never actually go away, they just sit there corrosively undermining the very foundation of trust upon which civilized society rests. Large lies just do more damage over a shorter period of time, and that’s exactly where we are today. This explains much in terms of people’s general sense of unease despite an apparently reasonable economy and awesome living standards (by any historical measure).

Here's what truth would sound like if I were to re-write Yellen's speech:

My fellow Americans. Decades of poor fiscal restraint and accommodative monetary polices have brought us to an uncomfortable juncture.


My intention today is not to cast blame – there will be plenty of time for that later – but to take stock of where we are so that we can all decide on the best course forward, openly and honestly, as should be the case in a democracy.


There are no easy choices at this point, only a rather poor range of options spanning from somewhat unpleasant to potentially catastrophic.


The heart of the matter is simply this: the US government has built up an extraordinary amount of public debt, and an even larger pile of unfunded liabilities.


There’s simply no way for those to all be paid back under current terms. And given recent trajectories in play with respect to economic growth and deficit spending patterns, those debts and liabilities are only growing larger with time.


Quite simply our choices are these:

  1. Pay down the debt by taking in more revenue than expenses. This is also known as austerity and given the size of the debts and other obligations, several decades of severe belt tightening would be required. This program would be extremely painful for nearly everybody and would require massive tax hikes coupled to major spending cuts.
  2. Default on the debts and obligations. This simply means not paying people, investors, institutions and countries what we have promised to pay. Down this path lies the potential for massive destruction of our financial and political systems, so we have chosen to not entertain this path any further than to mention it exists.
  3. Do nothing and wait for a fiscal and monetary accident to happen. This is a guaranteed disaster that could result in the sudden and permanent decline of opportunity in this country that would be so painful we cannot even predict the possible outcomes.
  4. Engineer conditions where negative real rates of interest slowly allow the government’s obligations to fall relative to inflation. Over the span of decades this is the least painful route and our country has been down this path before.

We’ve selected path #4 as the least bad option. Since 2009 our policies have been geared towards #4 and we see no alternative besides staying on that path for as long as necessary. The alternative is the literal bankruptcy of our nation and we cannot and will not allow that to happen. Not on our watch.


While path #4 is the least objectionable of them all, it comes with its own share of unfortunate consequences and injustices. At its heart, negative real interest rates are an effective tax on savers and those whose incomes fail to keep pace with the inflation we are creating as an overt act of policy. This generalized and widespread loss of purchasing power takes a little bit from everyone, rather than a lot from a few systemically important institutions such as your federal government, which spreads the pain widely, and therefore causes the least disruptions to our daily lives.


Path #4 has a name: Financial Repression. This policy combines negative real interest rates with various forms of capital controls and tax policy to assure that nobody can evade it.


Obviously this is not fair, nor is it in alignment with our national narrative of prudence and hard work being rewarded because, truth be told, it rewards the profligate and those who produce nothing of real value but can play the game of high finance well. Yet here we are without any better options before us, and so we reluctantly chose Financial Repression.


One other distasteful ‘feature’ of the program of financial repression we’ve been putting you all through is that the rich get richer. Until or unless there is a massive change to the taxation and wealth re-distribution programs of the federal government, the Federal Reserve’s program of Financial Repression will continue to deliver an ever-larger gap between the wealthy and everyone else.


Such is the nature of the compounding function combined with the inequity of who gets first access to the newly created funds we make available in order to drive the interest rate curve into negative territory.


Are there any risks to this program? Well, the largest of them really needs to be discussed. Financial Repression has worked in the past, but it has only worked because we experienced both inflation and economic growth in equal measures.


Today, for reasons that we are still studying, neither the wage growth necessary to incite the sort of inflation we need nor economic growth have arrived as we thought they would.


If economic growth does not return, then the entire program of financial repression could well fail, and fail spectacularly. Everything depends on a return of economic growth sufficient to service the vast increases in debts that will result from the program.


But if that growth does not materialize? If the world is now stuck in a ‘New Mediocre’ of low growth then one risk is the possibility of a crisis that will be rooted in a permanent loss of confidence in debts of all forms, but government debt specifically. Down that road lie currency crises, and a wide variety of related financial upheavals the final result of which is what most will experience as a massive destruction of wealth.


We are working hard to assure that these risks are well contained, but you should be aware that they exist


After all, this is all of our futures that we are experimenting with and we do not have a playbook that we can follow here in 2014. We are in wholly uncharted territory. The exact arrangement of conditions we see across the global landscape is brand new.


We’re sorry to have to be in the position of engineering Financial Repression, but we felt there were no other options before us and we hope that you agree that a slight yearly discomfort to almost everyone is preferable to a major disruption to our way of life, our political system, and the possibility of worse things.


Is this fair? No. Was it avoidable? Yes. Is there anything we can be doing differently today? Not that we are aware of. The choices are between bad, worse and utterly terrible. We're choosing the bad path, and we hope you’ll agree that this is the best we can do at this point.


But you deserve the truth because it’s already completely obvious and available for anybody with access to a computer. Since we are all in this together and we’re all being asked to sacrifice in some way, it's much better that we all agree on the treatment plan.


It’s not a perfect plan, far from it. But considering the alternatives, this is the best one on the table.


If you want to make it more fair, more equitable, and with an eye towards building to a future in which we can all share some hope, you’ll need to turn to your policy makers and ask them to work from the fiscal side to correct what they can. Without a profound realignment of priorities, we’ll just get more of the same and, truth be told, eventually more of the same turns into a fiscal and monetary disaster about which nothing can be done except absorb the pain and loss that it will bring.


Context is everything. The growing gap between the very wealthy and everyone else is a consequence of Fed policy.

Whether you decide to be shocked, angry, or scared by Janet Yellen’s recent speech is up to you. Personally, I'm pissed off at being lectured to that falling further behind the super wealthy is my fault for not investing enough in my kids, not being entrepreneurial enough, and not having wealthy parents.

That level of ‘blame the victim’ is psychopathic, utterly appalling, and I reject it on every level. Worse, the level of trust destruction that happens with such a tone-deaf speech stains our entire national leadership. It is the modern version of Let them eat cake.

Once an institution, be it royalty of old or the Fed today, gets so far off the rails that they cannot locate their own role in the misery they see around them, it’s a sign of a huge problem for that society.

Ms. Yellen should not be allowed by anyone to get away with such a patently and provably false set of arguments. She should have been soundly booed off the stage and the President should be asking for her resignation immediately.

But we’re so far down the rabbit hole that almost nobody blinked an eye at the speech, and thought it perfectly normal.

For you personally, you need to be aware that the debts, deficits and liabilities across the entire OECD world are continuing to grow at a far faster pace than GDP, and far faster than oil production and discoveries of low-cost oil reservoirs (those schooled in net energy understand this to be the real issue), and that the most likely outcome, someday, will be an extraordinary financial accident.

It will be called something else -- a period of wealth destruction -- but for those who can see it coming, it will actually be period of massive wealth transfer.

And we'll keep up our efforts on how to see clearly amidst the intentional obfuscation, to help those aware to the situation avoid ending up on the wrong side of that transfer.


David Stockman's Contra Corner is the only place where mainstream delusions and cant about the Warfare State, the Bailout State, Bubble Finance and Beltway Banditry are ripped, refuted and rebuked. Subscribe now to receive David Stockman’s latest posts by email each day as well as his model portfolio, Lee Adler’s Daily Data Dive and David’s personally curated insights and analysis from leading contrarian thinkers.

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