financial repression

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pages: 361 words: 97,787

The Curse of Cash by Kenneth S Rogoff

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The most important concern probably relates to whether negative rates might create greater temptations to engage in severe financial repression. In classic financial repression, the government sets the interest rate at a positive level, then inflates and forces captive savers to accept a significantly negative real rate of interest. With the option of negative nominal rates, the government could collect large financial repression revenues without having any inflation. And yes, this temptation could be a problem for revenue-starved governments, and could in principle lead to significant distortions. True, modern advanced economies have by and large learned to strike a balance between necessary financial regulation and distortionary financial repression, and it seems unlikely that negative rates would decisively tilt that balance. Nevertheless, it is an issue to be monitored.

A developing country under extreme fiscal duress and with a very small financial system might contemplate such a trade-off (as table 12.1 illustrates), but modern advanced countries really cannot, albeit many experienced extremely high inflation rates in the immediate aftermath of World War II.7 There is one way that an advanced-country government can reliably engage in partial default: through what is sometimes termed “financial repression.” Financial repression in this context means quite simply that the government rams debt down the private-sector’s throat without paying market interest rates. At low inflation rates, this tactic doesn’t accomplish very much very fast, but if the inflation rate is 8% and the government forces banks, insurance companies, and pension funds to hold large amounts of nonmarketable government debt at a controlled interest rate of 2%, then financial repression can bring the real value of government debt down very fast. If you think this doesn’t happen, think again: a combination of interest rate controls and inflation played a huge role in helping advanced countries bring their debt-to-income ratios down after World War II.8 The widespread view that advanced countries escaped their debts mainly through high growth ignores the massive implicit taxes that financial repression imposed on government debt holders.

If you think this doesn’t happen, think again: a combination of interest rate controls and inflation played a huge role in helping advanced countries bring their debt-to-income ratios down after World War II.8 The widespread view that advanced countries escaped their debts mainly through high growth ignores the massive implicit taxes that financial repression imposed on government debt holders. It is true that the existing literature does not encompass the case where the government has the option of setting interest rates at a negative level, and it is an open question whether the additional option could make a difference. At first blush, it would seem the answer is no. Both printing currency (which increases supply) and administratively lowering the interest rate on currency (which lowers demand) will create an incipient excess supply and ultimately lead to a higher price level. (If there are short-run nominal price rigidities, then short-run output and employment effects also exist.)


pages: 576 words: 105,655

Austerity: The History of a Dangerous Idea by Mark Blyth

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The first path is usually known by the pejorative sobriquet of financial repression. Carmen Reinhart and M. Belen Sbrancia recently discussed this possible path.36 They concluded, by examining episodes of past high indebtedness, that states restructure their financial systems in periods of crisis in such a way as to allow them to create “captive audiences.” Banks, pension funds, and other long-term debt holders are “encouraged” through capital controls, interest-rate ceilings, and other devices to hold a large amount of government bonds. The government then pays a low nominal interest rate on the bond while running a near-balanced budget with a positive but small rate of inflation. This creates an effective negative real interest rate on the bond such that the value of the debt shrinks over time. Financial repression is basically a tax on captive bondholders and it works best when you have banks over a proverbial barrel—such as when they are losing money and are dependent upon state funding, just like today.

Policies such as this “played an instrumental role in reducing or liquidating the massive stocks of debt accumulated during world war two.”37 Reinhart and Sbrancia find that the “liquidation tax” generated from financial repression amounted to, in the cases of the United States and United Kingdom after World War II, the equivalent of 3 to 4 percent of GDP a year.38 Raising such funds would facilitate a significant debt reduction over time, and it would obviate the need for a corresponding period of extended austerity—austerity that wouldn’t work anyway since it would cause the debt to get bigger, not smaller. So we are talking taxes, which no one likes. But since I found out that in 2010 I paid more taxes than the General Electric Corporation—really, I did, and so did you—I’m willing to give financial repression a chance.39 Yes, it will greatly limit my opportunities to buy and trade exotic derivatives and engage in international financial arbitrage games, but you know what?

Any savings that could be made through cuts now could simply be given away as yet another tax cut in the near future without any corresponding payoff to coming generations. A refusal by the United States to recycle foreign savings could be just as deleterious to the global economy as the excessive borrowing of foreign money, since the ability of the rest of the world to run a surplus against the United States, necessary because of its export-led growth models, would be compromised.23 Finally, financial repression, what Krugman implicitly advocates, does have some costs as well as benefits.24 I do worry about the debt, but for different reasons. I worry because most discussions of government debt and what to do about it not only misunderstand and misrepresent cause and effect, they also take the form of a morality play between “good austerity” and “bad spending” that may lead us into a period of self-defeating budget cuts.


pages: 466 words: 127,728

The Death of Money: The Coming Collapse of the International Monetary System by James Rickards

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This condition of modest negative real rates for a sustained period of time also worked its wonders on the debt-to-GDP ratio. During this golden age of financial repression, national debt declined from over 100 percent of GDP in 1945 to less than 30 percent by the early 1970s. By the late 1960s, the game of financial repression was over, and inflation became too prevalent to ignore. The theft of wealth from traditional savers had become painful. Merrill Lynch responded in the 1970s with the creation of higher-yielding money-market funds, and others quickly followed. Mutual fund families like Fidelity made stock ownership easy. Investors broke free of financial repression, left the banks behind, and headed for the new frontier of risky assets. The problem confronting the Fed today is how to use financial repression to cap interest rates without the benefit of 1950s-style regulated bank deposit rates and captive savers.

For example, a nominal 2 percent interest rate with 3 percent inflation produces a real interest rate of negative 1 percent. In normal markets, bond buyers would demand higher interest rates to offset inflation, but these are not normal markets. The bond market may want higher nominal rates, but the Fed won’t permit it. The Fed enforces negative real rates through financial repression. The theory of financial repression was explained incisively by Carmen Reinhart and M. Belen Sbrancia in their 2011 paper “The Liquidation of Government Debt.” The key to financial repression is the use of law and policy to prevent interest rates from exceeding the rate of inflation. This strategy can be carried out in many different ways. In the 1950s and 1960s it was done through bank regulation that made it illegal for banks to pay more than a stated amount on savings deposits.

Historically the Chinese counted on large families and respect for elders to support them in their later years, but the one-child policy has eroded that social pillar, and now aging Chinese couples find that they are on their own. A high savings rate is a sensible response. But like savers in the West, the Chinese are starved for yield. The low interest rates offered by the banks, a type of financial repression also practiced in the United States, make Chinese savers susceptible to higher-yielding investments. Foreign markets are mostly off-limits because of capital controls, and China’s own stock markets have proved highly volatile, performing poorly in recent years. China’s bond markets remain immature. Instead, Chinese savers have been attracted by two asset classes—real estate and structured products.


pages: 183 words: 17,571

Broken Markets: A User's Guide to the Post-Finance Economy by Kevin Mellyn

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The good news is that financial repression works in both making high debt levels affordable and in reducing them over time. The bad news is that it massively redistributes wealth from savers and investors to the government. Financial Repression Made Simple In a recent paper for the National Bureau of Economic Research (NBER), The Liquidation of Government Debt (NBER Working Paper 16893, March 2011) Carmen Reinhart and M. Belen Sbrancia make the case that between 1945 and the 1970s, almost all advanced countries practiced “a subtle type of debt restructuring,” financial repression, to achieve “sharp and rapid” reduction of public debt as a portion of their economies. Financial repression has three key pillars: • First, governments directly or indirectly set interest rates that are below what the market would set. From the 1930s to 1982, this was done explicitly with the imposition of caps on how much interest, if any, banks could pay depositors.

Most often, crises are followed by the systematic imposition of “financial repression”—a regime in which the state systematically suppresses market forces in finance—especially interest rates—in order to direct credit for political ends and hold down its own funding costs. This regime leaves itself open to democratic crony capitalism at best. At worst, it leads to socialism or “corporatism”—the organization of society into collective interest groups such as big business and labor, all subordinate to the state (as with Italy and Germany and even some aspects of the New Deal). Financial repression is how banking works in China today, and once in place, it is very hard to change. The Banking Act of 1933 ushered in an age of financial repression (and so-called utility banking) in the United States that lasted almost 40 years, until the rise of the euromarkets in London during the 1960s and 1970s allowed US banks and their corporate customers to create a parallel unregulated dollar market outside of US jurisdiction.

Their frustration with the markets rather than the government picking economic winners and losers based on the irrational preferences of mere consumers is quite understandable. So is their belief that so many successful entrepreneurs and executives lack their education and high mindedness. Markets often make the stupid and the swinish rich. This is obviously terribly unfair to really smart people who have the right academic credentials. I know this, as a holder of multiple Harvard degrees who has managed to escape becoming rich! Financial repression stealthily confiscates accumulated wealth and adds to governments’ ability to “make investments”—that is, spend public money on things (many of them legitimate, such as defense and basic research) that would not be funded by the market. The direction of credit and investment linked to industrial policy (and social policy) is simply how choices get made. Subsidized green energy is but an extreme example, since the Eisenhower national highway system, subsidies for home ownership, and student loans are all examples of using the financial system for essentially nonmarket, noneconomic ends.


pages: 378 words: 110,518

Postcapitalism: A Guide to Our Future by Paul Mason

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By 1950, bank loans across fourteen advanced capitalist countries equalled just one fifth of GDP – the lowest since 1870, and much smaller than the scale of bank lending during the pre-1914 upswing. The result created a form of capitalism that was profoundly national. Banks and pension funds were required by law to hold the debt of their own countries; and they were discouraged from making cross-border financial trades. Add to that an explicit ceiling on interest rates and you have what we now call ‘financial repression’. Here’s how financial repression works: you hold interest rates below inflation, so savers are effectively paying for the privilege of having money; you prevent them moving money out of the country in search of a better deal, and force them to buy the debts of their own country at a premium. The effect, as the economists Reinhart and Sbrancia have shown, was to shrink the combined debts of the developed world dramatically.17 In 1945, because of war spending, the public debts of the developed countries were close to 90 per cent of GDP.

The Cambridge economist Andrew Glyn believed the extraordinary success of the post-war boom could only be explained by ‘a unique economic regime’.22 He described this regime as a mixture of economic, social and geopolitical factors, which operated benignly throughout the upswing until they began to clash and grind in the late 1960s. State direction produced a culture of science-led innovation. Innovation stimulated high productivity. Productivity allowed high wages, so consumption kept pace with production for twenty-five years. An explicit global rules system amplified the upside. Fractional reserve banking stimulated a ‘benign’ inflation which, combined with financial repression, forced capital into productive sectors and kept speculative finance marginal. The use of fertilizers and mechanization in the developed world boosted land productivity, keeping the cost of inputs cheap. Energy inputs were, at the time, also cheap. As a result, the period 1948–73 unfolded as a Kondratieff upswing on steroids. WHAT CAUSED THE WAVE TO BREAK? There is no dividing line in economic history clearer than 17 October 1973.

For the left, however, the explanations have varied over time: in the late 1960s, high wages were seen as responsible; in the following decade, economists of the New Left tried to apply the Marxist overproduction theory. In fact, 1973 can best be understood as a classic phase change on the Kondratieff pattern. It occurs about twenty-five years into the economic cycle. It is global in scope. It heralds a long period of recurrent crisis. And once we understand what caused the upturn – high productivity, explicit global rules and financial repression – we can understand how it became exhausted. The post-war arrangements had effectively locked away instability into two zones of control: relations between currencies and relations between classes. Under the Bretton Woods rules, you were not supposed to devalue your currency to make your exports cheap and boost employment. Instead, if your economy was uncompetitive, you could either protect yourself from international competition through trade barriers, or impose ‘internal devaluation’ – cutting wages, controlling prices, reducing the amount spent on welfare payments.


pages: 327 words: 90,542

The Age of Stagnation by Satyajit Das

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Problems of excessive debt can only be solved by growth, inflation, austerity, or default. Growth following the crisis has been stubbornly low. Inflation is below target levels in many countries. Austerity is proving self-defeating. Default or restructuring of debt would wipe out savings and trigger another financial crisis. With policy options limited, governments have turned to financial repression: policies to channel savings and funds to the public sector, lower borrowing costs, and avoid default on borrowings. Financial repression entails higher taxes, in combination with reductions in the level of state benefits or public services provided. Wealth or estate taxes may be reintroduced. Government spending is decreased through means-testing or co-payment schemes for public services, user-pays surcharges, and special levies. Retirement benefits are reduced by delaying the eligibility age for pensions, lowering benefit levels, linking payments to the contributions made by individuals over their working life, and delaying or eliminating cost of living indexation.

It facilitates potential financial repression on an unprecedented scale. These measures damage the rule of law. In November 2011, Jens Weidmann, president of the German central bank, the Bundesbank, criticized the European Central Bank's decision to effectively finance governments in breach of EU treaties: “I cannot see how you can ensure the stability of a monetary union by violating its legal provisions.”3 The policies also punish frugality and thrift, and reward borrowing, profligacy, excess, and waste. Debt monetization and the erosion of the purchasing power of savings is a tax on holders of money and sovereign debt; it redistributes wealth over time from savers to borrowers and to the issuer of the currency. The political and social response to financial repression is unclear. Following the announcement of Abenomics, Japanese analyst Ryoji Musha was triumphant: “Pessimists and skeptics have no ammunition.

Argentina seized pension funds and central bank foreign exchange reserves, and renationalized the YPF oil company, allowing the government access to US$1.2 billion of annual profits. Bolivia nationalized the power-grid company Transportadora de Electricidad. Indian authorities retrospectively clarified tax regulations, resulting in additional liabilities for foreign companies and investors. Financial repression also entails more explicit standover tactics. Many beleaguered governments delay or refuse to pay overdue bills to businesses, in a shell game that gives the appearance of reducing budget deficits and debt levels. In several countries, banks must report large cash transactions. Some require information on how the money withdrawn is to be used. National governments are increasingly trying to eliminate physical cash altogether.


pages: 868 words: 147,152

How Asia Works by Joe Studwell

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In five years in the late 1980s, urban real estate prices quadrupled and stock prices tripled.14 It was as if the whole country decided to make up for three decades of developmental graft by going on a speculative binge. This was the period when the eldest son of Nishiyama Ko¯ichi, the diary-writing Niigata farmer, lost the family’s entire accumulated wealth playing the stock market. Financial deregulation, coming after a period of financial ‘repression’ that focused resources on developmental objectives, had an inevitable wealth effect as asset prices rose. Japan was suckered by this increase in paper wealth into thinking that it was different. The term nihonjinron, meaning ‘Japanese exceptionalism’, was used to justify sky-high asset valuations. But Japan was not different and hubris – that most powerful enemy of sustained economic transformation – derailed its advance, just as it has in so many other societies.

Equally, independent central banks are not appropriate to developing countries until considerable economic progress has been made. Ultimately, a finance policy based around control has diminishing returns, just as household farming and infant industry planning do. However, financial control that keeps money aligned with agricultural and industrial policies is essential in the formative stages of development. Retail savers and borrowers have to be asked to pay the price of what economists call ‘financial repression’ for as long as is necessary to promote basic technological upgrading. The real problem is that we understand so little about how and when nations should optimally move on to more open, deregulated financial systems. There is no doubt that Thailand and Indonesia and, before them, the Philippines were shunted into extremely premature deregulation. Korea, on the other hand, offers an intriguing case study of forced IMF deregulation at a much later stage of industrialisation.

Second, this repressed financial system in combination with capital controls has allowed the country to run a high debt level to support development without either creating domestic instability or suffering speculative international attacks. (China’s debt profile is less risky than Korea’s was in the 1990s because it does not involve borrowing from foreigners.) And third, the acid test of financial policy is how much acquisition of technological capacity can be achieved in industry before the window of opportunity afforded by financial repression closes. China has made considerable gains, but there is much more to be done. The main problem for China is that its structural rate of growth is beginning to slow as it gets richer and reduced population growth is cutting the supply of new labour to the workforce. This means the government will be less able to rely on growth going forwards to shrink its debts relative to the size of the economy.


pages: 355 words: 63

The Elusive Quest for Growth: Economists' Adventures and Misadventures in the Tropics by William R. Easterly

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Then a depositor who reinvested interest earnings in a savings account would still have real savings declining at 20 percent a year. The nominal interest rate minus the inflation rate is the real return that depositorsget on their savings. If this real interest rate is sharply negative, that will certainly lower the incentives to put money in the bank. People are much more likely to put their money abroad or into real estate or not save at all. A negative real interest rate policy is usually called ”financial repression,” because it represses financial savings in banks. 227 Governments Can KillGrowth 3.0% 2.0% 0) 2 D I p" 2 1.0% .e b U 2 .e 0 P 3 E til S 0.0% B .M 8 a -1.0% -2.0% <-20 <-l0 <-5 Budget balances as percentage of Figure 11.1 Budget deficits and per capita growth, 1960-1994 <O GDP >O 228 Chapter 11 Table 11.2 Examples of severely negative real interest rates Years Real interest (%) Country Argentina Bolivia Chile Ghana Peru Poland Sierra Leone Turkey Venezuela Zaire Zambia -2.2 1975-1976 1982-1984 -3.6 1972-1974 -2.9 1976-1983 -1.4 1976-1984 -8.6 1981-1982 -1.9 1984-1987 -3.1 1979-1980 -2.7 1987-1989 -6.0 1976-1979 1985-1988 Per capita growth (Yo) -69 -5.2 75 -1.8 24 -61 -35 -19 -33 -44 -35 -24 -34 Banks trying to keep savings with a negative real interest rate are in effect trying to carry water with asieve.

A negative real interest rate policy is usually called ”financial repression,” because it represses financial savings in banks. 227 Governments Can KillGrowth 3.0% 2.0% 0) 2 D I p" 2 1.0% .e b U 2 .e 0 P 3 E til S 0.0% B .M 8 a -1.0% -2.0% <-20 <-l0 <-5 Budget balances as percentage of Figure 11.1 Budget deficits and per capita growth, 1960-1994 <O GDP >O 228 Chapter 11 Table 11.2 Examples of severely negative real interest rates Years Real interest (%) Country Argentina Bolivia Chile Ghana Peru Poland Sierra Leone Turkey Venezuela Zaire Zambia -2.2 1975-1976 1982-1984 -3.6 1972-1974 -2.9 1976-1983 -1.4 1976-1984 -8.6 1981-1982 -1.9 1984-1987 -3.1 1979-1980 -2.7 1987-1989 -6.0 1976-1979 1985-1988 Per capita growth (Yo) -69 -5.2 75 -1.8 24 -61 -35 -19 -33 -44 -35 -24 -34 Banks trying to keep savings with a negative real interest rate are in effect trying to carry water with asieve. The evidence supports the view that sharply negative real interest rates areassociated with growth disasters. Real interest rates that are -20 percent or even morenegative go together with sharplynegative growth: -3 percent per capita per year. Interestingly, milder financial repression is not so disastrous. Real interest rates between -20 and 0 go together with modest but positive per capita growtha little below 2 percent per capita. Positive real interest rates are most favorable for growth, with a growth rate of 2.7 percent per capita.1° Table 11.2 shows some examples of severely negative real interest rates and the accompanying growth performance. Strongly negative real interest rates are bad for growth because they tax those who put their financial savings in banks.

Ross Levine and I examined the income difference betweenEast Asia and Africa as explained by policies and other factors. For each policy, we calculated the difference in that policy between Africa and East Asia and then multiply it by that policy’s effect on growth. I apply the growth difference to initial income togetthe income differences. Africa’s higher government budget deficits, higher financial repression, and higher black market premium explain about half of the growth difference between East Asia and Africa over three decades. If policies truly docause growth, then Africa would havebeen $2,000 richer per person if African economic policies had been at East Asian levels (figure ll.2).39 On the brighter side, Latin American governments changed incentives for growth in the early1990s by correcting all of the above, and they gained an additional 2.2 percentage points of growth in response.40 They lowered inflation, lowered the black market premium, moved towardfree trade, and lifted repression of banks.

When the Money Runs Out: The End of Western Affluence by Stephen D. King

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Albert Einstein, Asian financial crisis, asset-backed security, banking crisis, Basel III, Berlin Wall, Bernie Madoff, British Empire, capital controls, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, congestion charging, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, cross-subsidies, debt deflation, Deng Xiaoping, Diane Coyle, endowment effect, eurozone crisis, Fall of the Berlin Wall, financial innovation, financial repression, fixed income, floating exchange rates, full employment, George Akerlof, German hyperinflation, Hyman Minsky, income inequality, income per capita, inflation targeting, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, London Interbank Offered Rate, loss aversion, market clearing, mass immigration, moral hazard, mortgage debt, new economy, New Urbanism, Nick Leeson, Northern Rock, Occupy movement, oil shale / tar sands, oil shock, old age dependency ratio, price mechanism, price stability, quantitative easing, railway mania, rent-seeking, reserve currency, rising living standards, South Sea Bubble, sovereign wealth fund, technology bubble, The Market for Lemons, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas Malthus, Tobin tax, too big to fail, trade route, trickle-down economics, Washington Consensus, women in the workforce, working-age population

Zimbabwe provides the best twenty-­first century example: in July 2008, the inflation rate stood at a modest 231,150,888.87 per cent.9 Western nations surely will not plan to go down that route. Populations are ageing, grey power is on the rise and no vote-­seeking political party would advocate an excessive dose of inflation that might, in turn, destroy the real spending power of pensioners. There is, however, another alternative. Governments can jump to the front of the credit queue, pushing to the side other would-­be borrowers. They can engage in ‘financial repression’, siphoning funds to themselves that might otherwise have gone to, for example, small and medium-­sized companies.10 Quantitative easing provides one mechanism to allow them to do so. To be fair, this was not the intention. As I’ve already argued, the idea was to kick-­start economic growth via quantitative easing, creating a virtuous circle of rising activity, higher tax revenues, falling social expenditures, reduced budget deficits and, hence, stable – or, even better, falling – levels of government debt.

Investors know that the value of government bonds is guaranteed by central banks, at least in nominal terms. That guarantee makes government bonds even more attractive to risk-­averse investors. They end up following the central bank’s lead. But, by implication, if government bonds are now more attractive, other assets are less so. The government ends up awash with credit, but, at the same time, the rest of the economy is starved of it. This is a form of financial repression, a way of ensuring that the government is able to rig credit markets to suit its own aims even if the economy as a whole may perform less well as a consequence. Quantitative easing may originally have been designed to improve economic performance but it has also allowed governments to raise debt on the cheap. With economic stagnation, quantitative easing has merely allowed governments to postpone the fiscal ‘day of 80 4099.indd 80 29/03/13 2:23 PM Stimulus Junkies reckoning’.

We know from Asia’s experience in 1997–8 and from the eurozone crisis that creditors are, ultimately, a fickle bunch, prepared to give regimes the benefit of the doubt during the good times but more than happy to remove their support during the bad times, inevitably making the bad times even worse. No government wants to be faced with the prospect of not being able to pay the bills. To avoid default, governments will manoeuvre themselves to the front of the credit queue, pushing other possibly more worthwhile projects to one side in a bid to remain solvent. Acts of financial repression will become increasingly frequent. Our savings will increasingly be diverted to government interests, whether or not those interests really deliver a good rate of return for society. Admittedly, if companies themselves are hoarding cash – as the largest were in the years following the onset of the financial crisis – it might make good sense for governments to borrow more. In a world of deficient demand, extra government borrowing can offset extra 217 4099.indd 217 29/03/13 2:23 PM When the Money Runs Out private sector saving.


India's Long Road by Vijay Joshi

Affordable Care Act / Obamacare, barriers to entry, Basel III, basic income, blue-collar work, Bretton Woods, business climate, capital controls, central bank independence, clean water, collapse of Lehman Brothers, collective bargaining, colonial rule, congestion charging, corporate governance, creative destruction, crony capitalism, decarbonisation, deindustrialization, demographic dividend, demographic transition, Doha Development Round, eurozone crisis, facts on the ground, failed state, financial intermediation, financial repression, first-past-the-post, floating exchange rates, full employment, germ theory of disease, Gini coefficient, global supply chain, global value chain, hiring and firing, income inequality, Indoor air pollution, Induced demand, inflation targeting, invisible hand, land reform, Mahatma Gandhi, manufacturing employment, Martin Wolf, means of production, microcredit, moral hazard, obamacare, Pareto efficiency, price mechanism, price stability, principal–agent problem, profit maximization, profit motive, purchasing power parity, quantitative easing, race to the bottom, randomized controlled trial, rent-seeking, reserve currency, rising living standards, school choice, school vouchers, secular stagnation, Silicon Valley, smart cities, South China Sea, special drawing rights, The Future of Employment, The Market for Lemons, too big to fail, total factor productivity, trade liberalization, transaction costs, universal basic income, urban sprawl, working-age population

The government-​administered rates on small savings are only changed annually, and set a floor to bank deposit rates, which in turn set a floor to bank lending rates.33 Smooth transmission of monetary policy requires that small savings rates should move in tandem with the policy rate. Other factors that impede transmission include a) interest rate subsidies that are given for various selected activities and b) the high level of the statutory liquidity ratio (SLR), which stipulates the minimum share (currently 21.5 per cent) of bank deposits that has to be placed in government securities.34 These are all features of ‘financial repression’ that clearly need to be phased out. But this would require coordination between the government and the RBI. For example, the SLR could not be reduced without reducing government borrowing, i.e. the fiscal deficit. The point to note here is that the smooth operation of inflation targeting depends on improving the transmission mechanism for monetary policy. [ 152 ] Stability and Inclusion 153 Overall, the performance on the inflation front has been commendable.

From 2008 onwards, fiscal consolidation was meagre but this did not stop the debt ratio falling from 80 per cent of GDP in 2008/​9 to 68 per cent in 2014/​15. This is because high inflation eroded the value of the debt. Now, India has a formal inflation target. If inflation were maintained in the next five years at the targeted 4 per cent, the burden of reducing debt would fall very much on fiscal adjustment proper. The RBI’s commendable efforts to maintain a positive real deposit rate, and to unwind financial repression, will tend to keep the government’s real borrowing rate positive as well, say at around 3 per cent, unlike the six inflationary years from 2008, when it was zero or negative. Reduction of the debt ratio will thus be more challenging than hitherto.57 Even so, it is surely high time that India stopped its past practice of repeatedly postponing genuine fiscal consolidation. (For example, the Fiscal Responsibility Act of 2003 has been paused or amended several times.

Direct monetary financing of deficits does not exist in India. It is the case, however, that fiscal deficits are excessive; and it is also true that, in the present dispensation, there can be indirect monetary financing of deficits since the RBI may be required to conduct open market operations to prevent a rise in the government’s borrowing costs.67 Other manifestations of indirect fiscal dominance in an extended sense (or equivalently of ‘financial repression’) are a) government capture of bank deposits via the statutory liquidity requirement, b) administered interest rates on small savings, and c) interest rate subsidies for selected activities. All these factors constrain monetary policy and/​or impede its smooth transmission. However, none of them are significant enough to make monetary policy powerless, and they should and could be reformed while the inflation targeting regime is in operation.


pages: 318 words: 77,223

The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse by Mohamed A. El-Erian

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activist fund / activist shareholder / activist investor, Airbnb, balance sheet recession, bank run, barriers to entry, break the buck, Bretton Woods, British Empire, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, carried interest, collapse of Lehman Brothers, corporate governance, currency peg, Erik Brynjolfsson, eurozone crisis, financial innovation, Financial Instability Hypothesis, financial intermediation, financial repression, fixed income, Flash crash, forward guidance, friendly fire, full employment, future of work, Hyman Minsky, If something cannot go on forever, it will stop - Herbert Stein's Law, income inequality, inflation targeting, Jeff Bezos, Kenneth Rogoff, Khan Academy, liquidity trap, Martin Wolf, megacity, Mexican peso crisis / tequila crisis, moral hazard, mortgage debt, Norman Mailer, oil shale / tar sands, price stability, principal–agent problem, quantitative easing, risk tolerance, risk-adjusted returns, risk/return, Second Machine Age, secular stagnation, sharing economy, sovereign wealth fund, The Great Moderation, The Wisdom of Crowds, too big to fail, University of East Anglia, yield curve, zero-sum game

It also has not helped that, like other members of this specially formed crisis management grouping for the Eurozone, the central bank has had to operate under a rather clumsy, complex, and at times troubled “troika” arrangement—one that brings together three institutions (the ECB, the European Commission, and the IMF) that are subject to varying degrees of economic influence, have different mandates, and tend to differ in their operational modalities and even their mindsets. The list of institutional worries does not stop here. Having been subjected to a prolonged period of financial repression, savers have started to realize that, due to partial policy responses on both sides of the Atlantic, they are being sacrificed in attempts to rehabilitate banks and the economy. It is not just about nonexistent and in some cases negative interest rates on the main low-risk saving instruments, be they government bonds, savings accounts, or certificates of deposit. It is also about how the growing number of institutions that provide long-term protection, such as life insurers, are having to reduce their offerings as they are gradually pushed toward losses by the ultra-low-yield environment.

Instead, as illustrated by the (albeit extreme) case of Greece, situations of excessive indebtedness can slowly slip into a vicious cycle in which inadequate growth aggravates debt overhangs, while at the same time the expanding overhangs themselves undermine growth further. To make things worse, the liquidity and solvency challenges become deeply intertwined and even harder to solve. By taxing creditors and subsidizing debtors through artificially low and repressed interest rates, the financial repression regime that central banks have been imposing can help alleviate debt overhangs. But it takes a long time—a very long time—for such a strategy to make a decisive breakthrough. In the meantime, it risks significant collateral damage and unintended consequences that, among other things, distort growth engines, as we have discussed earlier. A third way to deal with debt overhangs is through unilateral default.

It slows the reengagement of fresh capital and induces lenders to charge a much higher risk premium, at least initially. It can also encourage the sort of moral hazard that undermines responsible economic management over time. All of this leads to the fourth way—that involving orderly debt and debt service reduction (DDSR). DDSR is needed to overcome debt overhangs in situations where sufficient growth is not forthcoming, default would be too disruptive, and financial repression is not enough. Fortunately, history provides a guide on fruitful approaches. An example is the Brady Plan at the end of the 1980s/early 1990s, an issue that I worked on as an economist at the International Monetary Fund. Having spent many years arranging both public and private financing to highly indebted Latin American countries so that they could pay their creditors, including banks that would have faced severe difficulties otherwise, the international community came to the realization that bolder steps were needed if the continent were to resume growing properly.


pages: 353 words: 81,436

Buying Time: The Delayed Crisis of Democratic Capitalism by Wolfgang Streeck

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activist fund / activist shareholder / activist investor, banking crisis, basic income, Bretton Woods, capital controls, Carmen Reinhart, central bank independence, collective bargaining, corporate governance, creative destruction, David Graeber, deindustrialization, Deng Xiaoping, Eugene Fama: efficient market hypothesis, financial deregulation, financial repression, fixed income, full employment, Gini coefficient, Growth in a Time of Debt, income inequality, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, labour market flexibility, labour mobility, late capitalism, liberal capitalism, means of production, moral hazard, Myron Scholes, Occupy movement, open borders, open economy, Plutonomy: Buying Luxury, Explaining Global Imbalances, profit maximization, risk tolerance, shareholder value, too big to fail, union organizing, winner-take-all economy, Wolfgang Streeck

Rogoff, Growth in a Time of Debt, NBER Working Paper No. 15639, Cambridge, MA: National Bureau of Economic Research, 2009). If this is true – like all econometric ‘laws’, it should be treated with utmost caution – many developed economies are already incapable of growth. 73 See a few thoughts on the subject in chapter 4 below. 74 In combination with low interest rates, capital controls and high inflation, this may add up to a public debt reduction strategy. The technical name for it is ‘financial repression’ (C. Reinhart and M. Sbrancia, The Liquidation of Government Debt, NBER Working Paper No. 16893, Cambridge, MA: National Bureau of Economic Research, 2011). 75 Systems to regulate state bankruptcies have often been proposed. For creditors, they would limit the freedom of debtor states in the event of a payment default, although they could never be sure that governments would agree to play by the rules.

An example of successful camouflage of major intergovernmental transfers, or potential transfers, is the handling of the so-called TARGET2 balances of national central banks with the ECB.83 4) Insofar as the financial and fiscal crisis can be dealt with only through a general devaluation of public debt – mainly, though not only, in the absence of growth – this should be done gently and over as long a period as possible, so that large investors with a capacity to retaliate are able to adjust their portfolios in time to protect themselves against losses. Here too the technical expertise in the central banks and international organizations is in demand. It would be incumbent on the experts to devise ways for governments to liquidate debt they cannot clear through economic growth alone: that is, measures of ‘financial repression’ at the expense of savers (preferably small asset holders outside the financial sector), involving a combination of high inflation with low interest rates and pressure on banks and insurance companies to invest in government bonds.84 There are signs that preparations are nearly complete to launch this sort of policy as soon as the present crises are under control and the interests of the financial sector have been taken care of.

See European Monetary Union executive pay, 2.1, 2.2n66 exports, 1.1n13, 3.1, 3.2, 3.3, 4.1 passim ‘false needs’ (‘false consciousness’) Fama, Eugene family, 1.1, 1.2 fear, 1.1, 2.1, 3.1, 4.1; in bank customers and investors, 1.2n12, 1.3, 1.4n76, 2.2. See also panic Federal Reserve, 1.1, 2.1, 2.2, 4.1 federation of states (proposed). See interstate federation (proposed) Feldstein, Martin female employment. See women’s employment ‘fiat money’, 1.1, 4.1 financial marketeers. See Marktvolk ‘financial repression’, 2.1n74, 3.1 financing, pay-as-you-go. See pay-as-you-go financing financing of debts. See debt-financing Finland, 2.1, 3.1, 4.1 ‘flexibilization’, 1.1, 2.1, 3.1, 4.1 Fordism foreign direct investment France, 1.1n59, 2.1; election of 2012, 3.1, 3.2, 4.1n6; under Bretton Woods; employment/unemployment; EU relations, 3.3, 3.4, 3.5, 3.6, 3.7; government bonds; income inequality, 1.3, 2.2n10; inflation; internal diversity; monetary policy; public debt, 1.5, 2.3; strikes; taxation, 2.4, 2.5, 3.10n42; unionization rates; US relations, 4.4n26 Frankfurt School, itr.1 passim, 1.1, 1.2 passim, 1.3 Fritz, Wolfgang Germany, itr.1 (n), 1.1, 2.1n71, 2.2 passim, 3.1n18, 3.2n25, 3.3 passim; Bremen, 3.4; Council of Expert Advisors; debt ceilings; employment/unemployment, 1.2, 3.7n69; EU relations, 3.8n25, 3.9 passim, 3.10, 3.11, 3.12 passim, 4.1, 4.2, 4.3n18, 4.4; as exceptional (relatively immune to crisis), 1.3, 1.4; export industry, 1.5n13, 3.13, 3.14; government bonds; Greek relations, 2.3n83, 3.16n27; homogeneity/nationalism, 4.5, 4.6; income inequality, 1.6, 2.4, 3.17, 3.18; industrial democracy; inflation, 1.7, 1.8, 1.9; Italian relations, 2.5, 3.19n81, 3.20, 3.21; Merkel administration, 2.6n37, 2.7n81, 3.22n27, 3.23n59, 3.24n72, 3.25n76, 3.26, 3.27, 4.8; Neue Lander, 3.28 passim; private debt, 1.10, 1.11, 4.9; public debt, 1.12, 1.13n59, 1.14 passim, 2.8, 2.9, 3.29, 3.30, 4.10; public spending, 3.31, 3.32, 3.33; reunification, 1.15n6, 1.16, 3.34, 3.35, 3.36, 3.37, 4.11; Schröder administration, 2.10, 2.11n37, 3.38; ‘sociology of finance’ (World War I), 2.12; state of emergency legislation; strikes; taxation, 1.18n66, 2.13, 2.14n53, 2.15, 2.16, 2.17n37, 3.40; unionization rates; voter turnout decline, 2.18, 2.19, 2.20; Weizsäcker views, 2.21.


pages: 475 words: 155,554

The Default Line: The Inside Story of People, Banks and Entire Nations on the Edge by Faisal Islam

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Asian financial crisis, asset-backed security, balance sheet recession, bank run, banking crisis, Basel III, Ben Bernanke: helicopter money, Berlin Wall, Big bang: deregulation of the City of London, British Empire, capital controls, carbon footprint, Celtic Tiger, central bank independence, centre right, collapse of Lehman Brothers, credit crunch, Credit Default Swap, crony capitalism, dark matter, deindustrialization, Deng Xiaoping, disintermediation, energy security, Eugene Fama: efficient market hypothesis, eurozone crisis, financial deregulation, financial innovation, financial repression, floating exchange rates, forensic accounting, forward guidance, full employment, G4S, ghettoisation, global rebalancing, global reserve currency, hiring and firing, inflation targeting, Irish property bubble, Just-in-time delivery, labour market flexibility, light touch regulation, London Whale, Long Term Capital Management, margin call, market clearing, megacity, Mikhail Gorbachev, mini-job, mittelstand, moral hazard, mortgage debt, mortgage tax deduction, mutually assured destruction, Myron Scholes, negative equity, North Sea oil, Northern Rock, offshore financial centre, open economy, paradox of thrift, Pearl River Delta, pension reform, price mechanism, price stability, profit motive, quantitative easing, quantitative trading / quantitative finance, race to the bottom, regulatory arbitrage, reserve currency, reshoring, Right to Buy, rising living standards, Ronald Reagan, savings glut, shareholder value, sovereign wealth fund, The Chicago School, the payments system, too big to fail, trade route, transaction costs, two tier labour market, unorthodox policies, uranium enrichment, urban planning, value at risk, working-age population, zero-sum game

In the USA, the defence secretary and others have played down any potential leverage that China might possess with its still massive stock of US government debt. The situation is broadly described as ‘mutually assured destruction’. China would sustain massive collateral damage if, for example, it attempted to dump its bond holdings. In this situation, the USA does appear to have obliged China to become a forced lender, a type of bonded banker for its ever-growing debts. It is a form of international financial repression. China’s currency policy, in effect, holds down the living standards of its people, obliging them, and the nation generally, to lend its hard-earned dollars back to the USA. This arises because the dollar is the world reserve currency, and US Treasury bonds are a trusted form of liquid international mega-cash to be swapped with other nations, banks and pensions funds. For the past decade China has had nowhere else to go to park its massive reserves.

One caja appointed a ballet dancer to its board. Political dominance of the banking system was nothing new. In the Franco era, the dictatorship practised a form of credit intervention that directed savings to investments declared as ‘qualifying’ by the Junta de Inversiones. This essentially forced Spanish caja savers to lend money to Franco’s government and preferred companies at below market rates. It was a type of tax, a form of financial repression that helped Franco’s treasury to avoid having to fund its deficits on the markets. The system only ended in 1977, two years after Franco’s death. At this point, Spain’s cajas began funding small business and housing loans. Although founded back in the 1830s, in proper credit-market terms Spain’s cajas were born at the same time as those young Spaniards whom they would plunge the deepest into debt.

‘This is undoubtedly the biggest financial crisis the world economy has ever faced, and it’s continued now for four years. I do not know when it will come to an end.’ As the crisis raged through the American, British and European financial systems, the Bank of England was pushing the boundaries of monetary policy further than any other central bank. Behind the imposing façade that glowers over Threadneedle Street, the Bank was preparing an experiment in ‘financial repression’, an experiment that was to test the balance between credibility and calamity. It was called quantitative easing. Every schoolchild is familiar with ‘The Magic Penny’, the morning assembly song: It’s just like a magic penny, Hold it tight and you won’t have any. Lend it, spend it, and you’ll have so many, They’ll all roll over the floor. Only in Britain could there be a ubiquitous children’s song that invokes the concept of the velocity of circulation of money.


pages: 376 words: 109,092

Paper Promises by Philip Coggan

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accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, balance sheet recession, bank run, banking crisis, barriers to entry, Berlin Wall, Bernie Madoff, Black Swan, Bretton Woods, British Empire, call centre, capital controls, Carmen Reinhart, carried interest, Celtic Tiger, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, debt deflation, delayed gratification, diversified portfolio, eurozone crisis, Fall of the Berlin Wall, falling living standards, fear of failure, financial innovation, financial repression, fixed income, floating exchange rates, full employment, German hyperinflation, global reserve currency, hiring and firing, Hyman Minsky, income inequality, inflation targeting, Isaac Newton, John Meriwether, joint-stock company, Kenneth Rogoff, labour market flexibility, light touch regulation, Long Term Capital Management, manufacturing employment, market bubble, market clearing, Martin Wolf, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, Myron Scholes, negative equity, Nick Leeson, Northern Rock, oil shale / tar sands, paradox of thrift, peak oil, pension reform, Plutocrats, plutocrats, Ponzi scheme, price stability, principal–agent problem, purchasing power parity, quantitative easing, QWERTY keyboard, railway mania, regulatory arbitrage, reserve currency, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, short selling, South Sea Bubble, sovereign wealth fund, special drawing rights, The Chicago School, The Great Moderation, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Wealth of Nations by Adam Smith, time value of money, too big to fail, trade route, tulip mania, value at risk, Washington Consensus, women in the workforce, zero-sum game

In a March 2011 paper, Carmen Reinhart and Belen Sbrancia argue that the success of this debt-reduction programme was down to ‘financial repression’.12 Domestic investors such as pension funds were forced to lend to governments through regulations that restricted their investment freedom; the interest rate on this debt was then held at artificially low levels. The result was that real (after inflation) interest rates were negative for roughly half the time between 1945 and 1980; investors were coerced into losing money. Reinhart and Sbrancia reckon this policy may have reduced debt-to-GDP ratios by between three and four percentage points a year. It is not too much of a stretch to see the Basle III rules, agreed after the 2007 – 08 crisis, as a step down the road to financial repression. Banks are being forced to hold more capital, a policy that will lead them to own more government bonds.

Banks are being forced to hold more capital, a policy that will lead them to own more government bonds. Pension funds also own more government bonds these days under the guise of ‘liability matching’. As Reinhart and Sbrancia remark, financial repression may re-emerge in ‘the guise of prudential regulation’. Russell Napier, a financial historian, takes a similar line, writing: It is time to bring back capital controls. Only with such controls can government debt burdens be inflated away. With capital controls, private savings can be more easily forced into public sector debt. It was capital controls that ensured the UK’s gilt yields could be below its inflation rate in the 1970s.13 The post-1945 rules were difficult to evade thanks to the imposition of capital controls. In those days, payments took time to process, and rules were easier to enforce; British tourists were even limited in the amount of sterling they could take abroad.


pages: 182 words: 53,802

The Production of Money: How to Break the Power of Banks by Ann Pettifor

Ben Bernanke: helicopter money, Bernie Madoff, Bernie Sanders, bitcoin, blockchain, borderless world, Bretton Woods, capital controls, Carmen Reinhart, central bank independence, clean water, credit crunch, Credit Default Swap, cryptocurrency, David Graeber, David Ricardo: comparative advantage, debt deflation, decarbonisation, distributed ledger, Donald Trump, eurozone crisis, fiat currency, financial deregulation, financial innovation, financial intermediation, financial repression, fixed income, Fractional reserve banking, full employment, Hyman Minsky, inflation targeting, interest rate derivative, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, Kenneth Rogoff, light touch regulation, London Interbank Offered Rate, market fundamentalism, Martin Wolf, mobile money, Naomi Klein, neoliberal agenda, offshore financial centre, Paul Samuelson, Ponzi scheme, pushing on a string, quantitative easing, rent-seeking, Satyajit Das, savings glut, secular stagnation, The Chicago School, the market place, Thomas Malthus, Tobin tax, too big to fail

Given that the rentier was hardly likely to engineer his or her own demise, then the assertion of public authority over the financial system was essential. Until Keynes, finance had been jealously guarded by private authority. Today such public authority of the kind advocated by Keynes is rejected by mainstream economists, and even by many progressive economists who use the imprecise and pejorative notion of ‘financial repression’ to attack democratic management of the finance sector. Financial ‘repression’ is akin to regarding the emancipation of slaves as the repression of the rights of slave owners! On a more mundane theoretical and practical level, the theory of liquidity preference led to the devising of appropriate monetary and debt management arrangements to enable any such authority to set the rate of interest across the spectrum of lending. The ability of the public authorities to achieve low rates of interest across the spectrum is fact.


pages: 524 words: 143,993

The Shifts and the Shocks: What We've Learned--And Have Still to Learn--From the Financial Crisis by Martin Wolf

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air freight, anti-communist, Asian financial crisis, asset allocation, asset-backed security, balance sheet recession, bank run, banking crisis, banks create money, Basel III, Ben Bernanke: helicopter money, Berlin Wall, Black Swan, bonus culture, break the buck, Bretton Woods, call centre, capital asset pricing model, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collateralized debt obligation, corporate governance, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, debt deflation, deglobalization, Deng Xiaoping, diversification, double entry bookkeeping, en.wikipedia.org, Erik Brynjolfsson, Eugene Fama: efficient market hypothesis, eurozone crisis, Fall of the Berlin Wall, fiat currency, financial deregulation, financial innovation, financial repression, floating exchange rates, forward guidance, Fractional reserve banking, full employment, global rebalancing, global reserve currency, Growth in a Time of Debt, Hyman Minsky, income inequality, inflation targeting, information asymmetry, invisible hand, Joseph Schumpeter, Kenneth Rogoff, labour market flexibility, labour mobility, light touch regulation, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, Long Term Capital Management, mandatory minimum, margin call, market bubble, market clearing, market fragmentation, Martin Wolf, Mexican peso crisis / tequila crisis, money market fund, moral hazard, mortgage debt, negative equity, new economy, North Sea oil, Northern Rock, open economy, paradox of thrift, Paul Samuelson, price stability, private sector deleveraging, purchasing power parity, pushing on a string, quantitative easing, Real Time Gross Settlement, regulatory arbitrage, reserve currency, Richard Feynman, Richard Feynman, risk-adjusted returns, risk/return, road to serfdom, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, Second Machine Age, secular stagnation, shareholder value, short selling, sovereign wealth fund, special drawing rights, The Chicago School, The Great Moderation, The Market for Lemons, the market place, The Myth of the Rational Market, the payments system, The Wealth of Nations by Adam Smith, too big to fail, Tyler Cowen: Great Stagnation, very high income, winner-take-all economy, zero-sum game

The second was pursuit of export-led economic growth – the most successful of all development strategies.23 The outcome of the Asian financial crisis was to increase the incentive to pursue this strategy, particularly by the Asians themselves. The third was supporting a high-investment, high-profit, high-savings development strategy. According to Pettis, this strategy, pioneered by Japan, is characterized by: systematically undervalued currencies; relatively low wage growth and so low wage shares in national income; and financial repression ‘in which the state allocates credit and the central bank forces interest rates to below their natural or equilibrium rate’.24 Asian countries needed export surpluses to export the surplus output and surplus savings that were the direct consequence of these strategies. This was particularly true of China, in the 2000s. The last reason was increasing insurance against financial crises, partly by accumulating foreign-currency reserves and partly by reducing dependence on net inflows of fickle foreign finance.

De-leveraging can be achieved by growing out of debt, via a combination of real growth and inflation, or by paying down and restructuring debt. De-leveraging involves one, or often all, of these processes. How well the strategy of ‘growing out of debt’ works depends on the relationship between rates of interest and growth. The lower the former and the higher the latter, the better. That is why ‘financial repression’ – a deliberate reduction in the costs of debt by lowering returns to creditors – is common in a de-leveraging episode. Aggressive monetary policy lowers interest rates and supports nominal incomes. This is why the decision of central banks to move the short-term interest rate to near zero was right. It is also one of the reasons why higher inflation would help. An aggressive fiscal policy can also help de-leveraging.

Research at the International Monetary Fund has suggested, for example, that the more expansionary the immediate macroeconomic policies, the smaller are the long-term losses in output.11 Yet another legacy is the mountains of private debt, mostly generated before the crisis, and public debt, generated after it. The lower the prospective economic growth, the more policymakers will rely on those four horsemen of post-crisis apocalypse: austerity, inflation, (financial) repression and (debt) restructuring. Since the crisis itself has damaged animal spirits, the likelihood is that trend growth will have been lowered for this reason alone. Moreover, while policymakers may want to drive the economy via another credit boom, they may find it hard to do so, even in the short term. As important as the legacy of debt are the monetary consequences. Central banks have become unprecedentedly active players in the economies of all high-income countries, not excluding the Eurozone, where the ECB has been the decisive actor.


pages: 113 words: 37,885

Why Wall Street Matters by William D. Cohan

Apple II, asset-backed security, bank run, Bernie Sanders, bonus culture, break the buck, buttonwood tree, corporate governance, corporate raider, creative destruction, Credit Default Swap, Donald Trump, Exxon Valdez, financial innovation, financial repression, Fractional reserve banking, Gordon Gekko, greed is good, income inequality, Joseph Schumpeter, London Interbank Offered Rate, margin call, money market fund, moral hazard, Potemkin village, quantitative easing, secular stagnation, Snapchat, South Sea Bubble, Steve Jobs, Steve Wozniak, too big to fail, WikiLeaks

But when banks are being encouraged not to extend credit, or the price they have to pay for extending credit—on both the financial and the regulatory fronts—encourages them not to do so, then the economies of the world are condemned to zero growth, and that is basically what is happening in the United States, western Europe, and Japan, three of the world’s four largest economies. The whole world is struggling to get economic growth. “The reason that that’s happened isn’t because we had a financial crisis,” one senior Wall Street executive told me. “It’s because the way we decided to reform from this financial crisis created the shortage of capital and led to financial repression. It’s made it impossible for financial intermediaries to perform their normal role because we have regulators who are acting on behalf of legislatures and presidents and prime ministers of countries to get the financial institutions into such a position of liquidity and lack of ability to lend that it just made it difficult to start new businesses and to expand in a normal way.” He said the Obama administration’s philosophy about banking regulations and the proper way banks should behave—essentially more like utilities—has been “the straw that’s breaking the camel’s back” and is condemning the nation’s economy to years of slow growth.


pages: 700 words: 201,953

The Social Life of Money by Nigel Dodd

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accounting loophole / creative accounting, bank run, banking crisis, banks create money, Bernie Madoff, bitcoin, blockchain, borderless world, Bretton Woods, BRICs, capital controls, cashless society, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, commoditize, computer age, conceptual framework, credit crunch, cross-subsidies, David Graeber, debt deflation, dematerialisation, disintermediation, eurozone crisis, fiat currency, financial exclusion, financial innovation, Financial Instability Hypothesis, financial repression, floating exchange rates, Fractional reserve banking, German hyperinflation, Goldman Sachs: Vampire Squid, Hyman Minsky, illegal immigration, informal economy, interest rate swap, Isaac Newton, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, Joseph Schumpeter, Kula ring, laissez-faire capitalism, land reform, late capitalism, liberal capitalism, liquidity trap, litecoin, London Interbank Offered Rate, M-Pesa, Marshall McLuhan, means of production, mental accounting, microcredit, mobile money, money market fund, money: store of value / unit of account / medium of exchange, mortgage debt, negative equity, new economy, Nixon shock, Occupy movement, offshore financial centre, paradox of thrift, payday loans, Peace of Westphalia, peer-to-peer, peer-to-peer lending, Ponzi scheme, post scarcity, postnationalism / post nation state, predatory finance, price mechanism, price stability, quantitative easing, quantitative trading / quantitative finance, remote working, rent-seeking, reserve currency, Richard Thaler, Robert Shiller, Robert Shiller, Satoshi Nakamoto, Scientific racism, seigniorage, Skype, Slavoj Žižek, South Sea Bubble, sovereign wealth fund, special drawing rights, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, transaction costs, Veblen good, Wave and Pay, Westphalian system, WikiLeaks, Wolfgang Streeck, yield curve, zero-coupon bond

Harvey redefines core money as state fiat money backed by a hierarchy of international and national public and private institutions: “as the banks do for the individual capitalists, as the central bank does for the private banks, as a de facto ‘world banker’ does for national central banks” (Harvey 2006: 249). At the top of the hierarchy, the question of the value of world money is posed, but never satisfactorily answered: the fundamental contradiction that Marx identified within money is never resolved (Harvey 2006: 251). Institutions at the top of the hierarchy are able to exercise only a particular, negative form of power. This is the power of financial repression, whereby forms of discipline (such as austerity) are imposed upon those lower down. What these institutions cannot automatically do, however, is restore money’s underlying value. In order for this to happen, capital must find some way to “re-establish its footing in the world of socially necessary labour” (Harvey 2006: 293). In Marx’s account, capital can do this either by reattaching itself to gold, or by renewing its connections with commodity production.

See also crypto-anarchy Anaximander, 145 Andersen, Gavin, 369–70 animal spirits, 45 anthropology, 7, 39, 164, 269, 390; cultural, 297; of money, 279, 285, 294, 295 Apollo, 136, 154, 155 Aquinas, Thomas, 314, 325, 327, 337 Aqoba, 365 Arab Spring, 2–3 arbitrage, 301, 303 Arendt, Hannah, 151 Argentina, alternative monies, 316; insolvency crisis, 69, 148, 392 Aristotle, 17, 27n17, 39n35, 223, 337; The Nicomachean Ethics, 93 Arrighi, Giovanni, 61n22 Arrow-Debreu general equilibrium model, 111n art, 17, 202 art auction, 202 art market, 201 assemblage, 238 asset relief program, 116 association, in Karatani, 84; in Simmel, 84n42 Atkins, Ralph, 206n39 Auster, Paul, 35 austerity, 90, 126–32, 133, 134; and debt, 388; and the destruction of capital, 88; and economic recovery, 21; economic and monetary policies in support of, 3, 5, 22, 88; effects of, 382; and financial repression, 69; forced, 75–76, 77; government programs in pursuit of, 2, 70, 78, 90, 388; and guilt, 256; and neurosis, 153, 159; the politics of, 92, 153; and restricted economy, 208 ‘Austrian’ theory of money, 5, 17, 362, 368 authority, market, 220 Autonomia Operaia, 72–73, 240–41, 246 Autonomism. See Autonomia Operaia Ayer, Alfred Jules, 36n Babb, Sarah, 211–12 Babylonia, 23–24 Bailey, Samuel, 84 bailout, banking, 100, 116, 127, 128, 130, 131, 254, 256; of Continental Illinois, 119; and debt jubilee, 202 Baja Beach Club, 377 Bakunin, Mikhail, 357 Balibar, Étienne, on Europe, 261–62, 262–63; Reading Capital, 229; on sovereignty, 262; We, The People of Europe?

See state fiat money fiction, and economic expectations, 16; and language, 36; and the free market, 338; and money, 6, 235, 317; and monetary policy, 110; in Simmel, 317; and truth, 36 fictitious capital, 55, 56, 58, 62, 65, 68–69, 70, 83, 194, 243; Marx’s definition of, 57n16; in Ricardo, 59n finance, etymology, 201; versus money, 61–62, 66, 125; social study of, 295 finance capital, 60, 64, 68, 74, 232, 249 financial engineering, 124 financial expropriation, 79 financial innovation, 121 financial instability hypothesis, 117, 124 financial repression, 69 financial system, 3; and crisis formation, 69; expansion of, 114; relationship to GDP, 114. See also capitalism; Wall Street system financialization, 10, 36, 61n22, 66–67, 391; and banking, 114; and the Eurozone crisis, 79; of money, 245, 298; as privatized Keynesianism, 76 First World War, 50, 59, 103, 225, 245, 256, 356, 362 fiscal cliff, 90, 386 fiscus, 261–62 Fisher, Irving, 120n41, 314; on the paradox of thrift, 347; on stamp scrip, 314, 349 Fisher, Mark, 193 floating money, 191, 244 flow, 227, 232, 233–34, 244; and financial markets, 233n Fond-des-Nègres marketplace, 302 Foster, William, 347 Foucault, Michel, 25, 238, 239, 391; death of “man,” 389–90; desire, 229; on homo economicus, 390; on Nietzsche, 389–90, 391; The Order of Things, 228 Fourcade, Marion, 91 Fourier, Charles, 324 fractional reserve lending, 95, 111, 113, 116, 199n26 Frank, Thomas, 315 Frankfurt School, 322, 326–27 Franklin, Benjamin, 176 fraud, 113, 117n, 120, 132, 137, 199, 313, 368 Freddie Mac, 123 free credit, 352 free labor, 98 free market money, 360, 362 free money, 348 free trade 281 Freicoin, 348n, 349n, 370–71 French Revolution, 84, 355 Freud, Sigmund, 150, 228, 332, 334; Civilization and Its Discontents, 152; on money and saving, 151, 336 Friedman, Milton, 131, 330–31 Frisby, David, on Nietzsche, 136–37, 141–42; on Simmel, 137 Fromm, Erich, 14, 85n45, 345, 356, 372, 382; on economic democracy, 338–39; Escape from Freedom, 331; on having versus being, 315, 331–38; on hoarding, 336, 340–41, 350–51; on the humanistic utopia, 315, 333–34, 338–39, 374; on language, 332; Man for Himself, 331, 341; on Marx, 339; “Medicine and the Ethical Problem of Modern Man,” 340; on Messianic time, 335, 338; on money, 334, 339–40, 341, 346; on the Shabbat, 334–35, 338; on spiritual poverty, 334; To Have or To Be?


pages: 261 words: 57,595

China's Future by David Shambaugh

Berlin Wall, capital controls, demographic dividend, demographic transition, Deng Xiaoping, facts on the ground, financial intermediation, financial repression, Gini coefficient, high net worth, knowledge economy, labour mobility, low skilled workers, market bubble, megacity, Mikhail Gorbachev, New Urbanism, offshore financial centre, open economy, Pearl River Delta, rent-seeking, secular stagnation, short selling, South China Sea, special drawing rights, too big to fail, urban planning, Washington Consensus, working-age population, young professional

But banks dominate financial intermediation, providing about 60 percent of loans to the private sector, according to the Asian Development Bank. Moreover, the banking system is concentrated in the four main state banks (which provide 50 percent of loans). These enormous banks all rank among the ten largest in the world by capitalization. Thus the government maintains the dominant position in the financial system. Economists refer to this as “financial repression,” a situation where the government artificially depresses deposit and lending rates and orders the state banks to increase or decrease loans in line with government planning priorities. This variability has given rise to an enormous “shadow banking” industry where individuals or businesses can turn to get quick cash when needed.23 One reason is because the large state banks favor state-owned enterprises and small- and medium-sized enterprises (SMEs) or individuals have had nowhere else to turn for capital.24 These unregulated loans have had several negative effects, including contributing to corruption at the local level and ballooning debt for local businesses and individuals.

Global Governance and Financial Crises by Meghnad Desai, Yahia Said

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Asian financial crisis, bank run, banking crisis, Bretton Woods, capital controls, central bank independence, corporate governance, creative destruction, credit crunch, crony capitalism, currency peg, deglobalization, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, financial repression, floating exchange rates, frictionless, frictionless market, German hyperinflation, information asymmetry, knowledge economy, liberal capitalism, liberal world order, Long Term Capital Management, market bubble, Mexican peso crisis / tequila crisis, moral hazard, Nick Leeson, oil shock, open economy, price mechanism, price stability, Real Time Gross Settlement, rent-seeking, short selling, special drawing rights, structural adjustment programs, Tobin tax, transaction costs, Washington Consensus

Bank of International Settlements (1998) Report on the Maturity and Nationality of International Bank Lending, Bank of International Settlements, Basel, January. Chandler, A. (1990) Scale and Scope: The Dynamics of Industrial Capitalism, The Belknap Press of Harvard University Press, Cambridge, MA. Demirguc-Kunt, A. and Detragiache, E. (1998) ‘The determinants of banking crises in developing and developed countries’, IMF Staff Papers, 45(1): 81–109. Diaz-Alejandro, C. (1985) ‘Goodbye financial repression, hello financial crash’, Journal of Development Economics, 19: 1–24. Furman, J. and Stiglitz, J. E. (1998) ‘Economic crises: evidence and insights from East Asia’, in Brookings Papers on Economic Activity, 2, Brookings Institute, Washington, DC, pp. 1–135. Gomez, E. T. and Jomo, K. S. (1999) Malaysia’s Political Economy: Politics, Patronage and Profits, 2nd edition, Cambridge University Press, Cambridge.


pages: 430 words: 109,064

13 Bankers: The Wall Street Takeover and the Next Financial Meltdown by Simon Johnson, James Kwak

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Andrei Shleifer, Asian financial crisis, asset-backed security, bank run, banking crisis, Bernie Madoff, Bonfire of the Vanities, bonus culture, break the buck, capital controls, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, commoditize, corporate governance, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, Edward Glaeser, Eugene Fama: efficient market hypothesis, financial deregulation, financial innovation, financial intermediation, financial repression, fixed income, George Akerlof, Gordon Gekko, greed is good, Home mortgage interest deduction, Hyman Minsky, income per capita, information asymmetry, interest rate derivative, interest rate swap, Kenneth Rogoff, laissez-faire capitalism, late fees, light touch regulation, Long Term Capital Management, market bubble, market fundamentalism, Martin Wolf, money market fund, moral hazard, mortgage tax deduction, Myron Scholes, Paul Samuelson, Ponzi scheme, price stability, profit maximization, race to the bottom, regulatory arbitrage, rent-seeking, Robert Bork, Robert Shiller, Robert Shiller, Ronald Reagan, Saturday Night Live, Satyajit Das, sovereign wealth fund, The Myth of the Rational Market, too big to fail, transaction costs, value at risk, yield curve

On the appropriation of state property at the fall of the Soviet Union, see Simon Johnson and Heidi Kroll, “Managerial Strategies for Spontaneous Privatization,” Soviet Economy 7 (1991): 281–316. There was a great deal more theft under the smoke screen created by very high inflation. Anders Aslund, Peter Boone, Simon Johnson, Stanley Fischer, and Barry W. Ickes, “How to Stabilize: Lessons from Post-Communist Countries,” Brookings Papers on Economic Activity 1996: 217–313. 38. Carlos Diaz-Alejandro, “Good-Bye Financial Repression, Hello Financial Crash,” Journal of Development Economics 19 (1985): 1–24. 39. The IMF’s voting structure is determined by countries’ quotas (their potential financial commitments to the IMF), which imperfectly reflect their economic and financial power. The G7 and its close allies control a majority of the votes at the IMF and the United States has an effective veto over any major policy decision. 40.


pages: 318 words: 85,824

A Brief History of Neoliberalism by David Harvey

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affirmative action, Asian financial crisis, Berlin Wall, Bretton Woods, business climate, capital controls, centre right, collective bargaining, creative destruction, crony capitalism, debt deflation, declining real wages, deglobalization, deindustrialization, Deng Xiaoping, Fall of the Berlin Wall, financial deregulation, financial intermediation, financial repression, full employment, George Gilder, Gini coefficient, global reserve currency, illegal immigration, income inequality, informal economy, labour market flexibility, land tenure, late capitalism, Long Term Capital Management, low-wage service sector, manufacturing employment, market fundamentalism, mass immigration, means of production, Mexican peso crisis / tequila crisis, Mont Pelerin Society, mortgage tax deduction, neoliberal agenda, new economy, Pearl River Delta, phenotype, Ponzi scheme, price mechanism, race to the bottom, rent-seeking, reserve currency, Ronald Reagan, Silicon Valley, special economic zone, structural adjustment programs, the built environment, The Chicago School, transaction costs, union organizing, urban renewal, urban sprawl, Washington Consensus, Winter of Discontent

For much of the Third World, particularly Africa, embedded liberalism remained a pipe dream. The subsequent drive towards neoliberalization after 1980 entailed little material change in their impoverished condition. In the advanced capitalist countries, redistributive politics (including some degree of political integration of working-class trade union power and support for collective bargaining), controls over the free mobility of capital (some degree of financial repression through capital controls in particular), expanded public expenditures and welfare state-building, active state interventions in the economy, and some degree of planning of development went hand in hand with relatively high rates of growth. The business cycle was successfully controlled through the application of Keynesian fiscal and monetary policies. A social and moral economy (sometimes supported by a strong sense of national identity) was fostered through the activities of an interventionist state.


pages: 831 words: 98,409

SUPERHUBS: How the Financial Elite and Their Networks Rule Our World by Sandra Navidi

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activist fund / activist shareholder / activist investor, assortative mating, bank run, barriers to entry, Bernie Sanders, Black Swan, Bretton Woods, butterfly effect, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, cognitive bias, collapse of Lehman Brothers, collateralized debt obligation, commoditize, conceptual framework, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, diversification, East Village, Elon Musk, eurozone crisis, family office, financial repression, Gini coefficient, glass ceiling, Goldman Sachs: Vampire Squid, Google bus, Gordon Gekko, haute cuisine, high net worth, hindsight bias, income inequality, index fund, intangible asset, Jaron Lanier, John Meriwether, Kenneth Arrow, Kenneth Rogoff, knowledge economy, London Whale, Long Term Capital Management, Mark Zuckerberg, mass immigration, McMansion, mittelstand, money market fund, Myron Scholes, NetJets, Network effects, offshore financial centre, old-boy network, Parag Khanna, Paul Samuelson, peer-to-peer, performance metric, Peter Thiel, Plutocrats, plutocrats, Ponzi scheme, quantitative easing, Renaissance Technologies, rent-seeking, reserve currency, risk tolerance, Robert Gordon, Robert Shiller, Robert Shiller, rolodex, Satyajit Das, shareholder value, Silicon Valley, sovereign wealth fund, Stephen Hawking, Steve Jobs, The Future of Employment, The Predators' Ball, too big to fail, women in the workforce, young professional

While college graduates are 8 times likelier to live in the upper-income tiers—though often with a debt-albatross around their necks—those without a degree have virtually no chance of improving their station in life.11 As a consequence, Americans have come to realize that the American dream has been just that, a dream, and their typically optimistic outlook has given way to gloom, with only 14 percent foreseeing a better life for their children.12 The life expectancy of American whites has been falling as suicide rates are on the rise.13 As evidenced by a recognized measure called the Gini coefficient, the level of inequality in many parts of the world is dismal.14 Globalization Winners versus Globalization Losers To make matters worse, many governments, together with central banks and the financial sector, have resorted to using “accommodative monetary policies”—meaning expanding the overall money supply, or what is commonly referred to as “printing money”—to reduce debts and stimulate demand. In effect, this so-called financial repression acts as a tax on savers, transferring benefits from lenders to borrowers. Meanwhile, the 1 percent have benefited the most from these policies, pocketing 95 percent of income growth in the first three years after the crisis.15 In addition, the 1 percent have the expertise and means to play the global system to their advantage, an example of which is the use of tax havens like the Cayman Islands.


pages: 497 words: 144,283

Connectography: Mapping the Future of Global Civilization by Parag Khanna

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1919 Motor Transport Corps convoy, 2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, 3D printing, 9 dash line, additive manufacturing, Admiral Zheng, affirmative action, agricultural Revolution, Airbnb, Albert Einstein, amateurs talk tactics, professionals talk logistics, Amazon Mechanical Turk, Asian financial crisis, asset allocation, autonomous vehicles, banking crisis, Basel III, Berlin Wall, bitcoin, Black Swan, blockchain, borderless world, Boycotts of Israel, Branko Milanovic, BRICs, British Empire, business intelligence, call centre, capital controls, charter city, clean water, cloud computing, collateralized debt obligation, commoditize, complexity theory, continuation of politics by other means, corporate governance, corporate social responsibility, credit crunch, crony capitalism, crowdsourcing, cryptocurrency, cuban missile crisis, data is the new oil, David Ricardo: comparative advantage, deglobalization, deindustrialization, dematerialisation, Deng Xiaoping, Detroit bankruptcy, digital map, diversification, Doha Development Round, edge city, Edward Snowden, Elon Musk, energy security, ethereum blockchain, European colonialism, eurozone crisis, failed state, Fall of the Berlin Wall, family office, Ferguson, Missouri, financial innovation, financial repression, fixed income, forward guidance, global supply chain, global value chain, global village, Google Earth, Hernando de Soto, high net worth, Hyperloop, ice-free Arctic, if you build it, they will come, illegal immigration, income inequality, income per capita, industrial cluster, industrial robot, informal economy, Infrastructure as a Service, interest rate swap, Intergovernmental Panel on Climate Change (IPCC), Internet of things, Isaac Newton, Jane Jacobs, Jaron Lanier, John von Neumann, Julian Assange, Just-in-time delivery, Kevin Kelly, Khyber Pass, Kibera, Kickstarter, labour market flexibility, labour mobility, LNG terminal, low cost carrier, manufacturing employment, mass affluent, mass immigration, megacity, Mercator projection, Metcalfe’s law, microcredit, mittelstand, Monroe Doctrine, mutually assured destruction, New Economic Geography, new economy, New Urbanism, off grid, offshore financial centre, oil rush, oil shale / tar sands, oil shock, openstreetmap, out of africa, Panamax, Parag Khanna, Peace of Westphalia, peak oil, Pearl River Delta, Peter Thiel, Philip Mirowski, Plutocrats, plutocrats, post-oil, post-Panamax, private military company, purchasing power parity, QWERTY keyboard, race to the bottom, Rana Plaza, rent-seeking, reserve currency, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Coase, Scramble for Africa, Second Machine Age, sharing economy, Shenzhen was a fishing village, Silicon Valley, Silicon Valley startup, six sigma, Skype, smart cities, Smart Cities: Big Data, Civic Hackers, and the Quest for a New Utopia, South China Sea, South Sea Bubble, sovereign wealth fund, special economic zone, spice trade, Stuxnet, supply-chain management, sustainable-tourism, TaskRabbit, telepresence, the built environment, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, Tim Cook: Apple, trade route, transaction costs, UNCLOS, uranium enrichment, urban planning, urban sprawl, WikiLeaks, young professional, zero day

Here are some startling facts about how Americans relate to their own country: Sixty percent believe the American Dream is out of reach for themselves and their children, and 40 percent of Americans aged eighteen to twenty-four believe they will need to migrate abroad in search for work. Many of those surveyed in 2014 belong to a baby boomer generation whose retirement savings were wiped out in the 2008 financial crisis, while the subsequent financial repression (resulting from ultralow interest rates) slashed any hope of what’s left of their pensions recovering value. Record numbers of elderly are moving to Mexico, Panama, and elsewhere seeking more affordable sunset years. Yet more emigrants come from America’s unskilled youth who make up 50 percent of the unemployed. (Some American scholars have even suggested that the United States should export its structurally unemployed so they can reduce demands on the government.)