While financial repression worked well in the 1940s - 60s, the circumstances facing the U.S. then were far different from today.
The U.S. was the last manufacturing base standing during much of that period. Whatever the U.S. did, they got away with it — they were the only fully functioning financial system in the world.
Roger you are right on this and the numbers make it even more stark than the geopolitical argument alone suggests.
Financial repression after WWII worked because three conditions existed simultaneously. First, the debt was largely fixed. The war ended, spending dropped to roughly 15% of GDP, and inflation could quietly erode a static principal over decades. Second, the deficit as a percentage of total spending was tiny, averaging roughly 3 to 5% of outlays in most years during that period. Third, entitlement obligations were minimal. Social Security, Medicare, and Medicaid combined accounted for only 3% of GDP in 1950.
Today all three conditions are reversed. Federal spending runs at 23 to 25% of GDP, entitlements alone consume 18% of GDP and are structurally guaranteed to keep growing, and roughly 27 cents of every dollar the federal government spends is currently funded by debt rather than revenue.
Financial repression requires a fixed debt load you can inflate away. What we have instead is a debt that grows faster than inflation can erode it. Every dollar of inflation that reduces the existing burden is accompanied by new deficit spending that adds more to the total.
The tap was closed after WWII. That is the part of the strategy that made it work. That part does not exist today.
Thank you for the article. Regarding item 2, central banks may well keep interest rates low, as Trump wants to do, which will fuel inflation so eroding debt, but unlike decades ago (longer term) bond holders will sell their bonds to get better yields (the central bank doesn’t control all bonds issues). So the financial repression strategy will be much diluted ?
Excellently written article. On this one, I agree very much so. Indeed, the best place to have assets in this type of environment is in real, fixed assets, like real estate, art, cars, etc. - financed as much as possible with low-rate long-term debt. "Low rate" is, of course, relative, as I think rates will be heading to 10% or so in the near future, due to the fact that our treasury auctions will have a record amount of tbills on sale soon.
However, I can't help but think that your article here conflicts with your recent, "I'm selling all my real estate" article. As I said in the comment to that article, I think you might be having a knee-jerk reaction to the nonsense of Los Angeles. Long-term commercial real estate seems poised to be one of the best investments in an inflationary environment. Particularly with a reasonable amount of debt / leverage attached?
Warsh is still only one vote out of twelve. He’ll need to earn the confidence of his colleagues long before he can marshal votes toward an agenda as bold as financial repression, if he can at all.
Waller for instance was awfully hawkish in his speech in Germany. The story is a good one, but it’s unlikely it will be so cut and dry.
To reduce the debt, it’s likely that we’ll need all the “tools” in the toolbox: austerity (cuts to entitlements to start), deregulation/pro-growth, and lower yields.
At the same time, there is no willingness to stop spending or pay higher taxes. Both parties want to be Santa with their respective giveaways of tax cuts and spending sprees.
Great article. That makes a lot of sense that we need to keep inflation above what we have financed our dept interest payments to in order to shrink the debt.
Seems to punish those who keep their savings in cash the most.
Second - Those who don't have wage growth at the same pace with the higher inflation
Grew GDP while keeping interest rates below inflation. Not a possible combination today if the Fed is going to maintain its dual mandate. The Treasury needs to sell $2 trillion in bonds each year, no one will buy them if they have a negative return.
While the US has hegemony through the dollar, its alliances and its military it will be ok. The only thing is that each of those are being eroded by this current administration.
Intentionally keeping inflation higher than long term rates would be in direct violation of the Fed's mandate to provide price stability, right? What would the argument be from an independent Fed Board's perspective as to why this would help them achieve their dual mandate? Or would this just be an admission from the Fed that they aren't as independent as we believe and have a 3rd unstated mandate, which is to protect the Federal government from defaulting on it's debt?
A lot of interesting educational information, but I suspect the 'game plan' as laid out here has a zero % chance in being put into action. The levels of interest below inflation, tax increases on the wealthy (in the near term), a reduction in spending.... These may have been historical tools but we are not what we were in 75 years ago.... We are not what we were 30 years ago. I have my own beliefs on where this is going, and it's too horrifying to put it down on a Substack post. I don't wish to get political or discuss the socio-economic or militaristic predictions here, but I'm sure somewhere in your many of you also know what happens when things are unsustainable.
Balance of payments now runs faster than inflation, even at higher levels. Once a reactor passes Critical Threshold, there is NO stopping the meltdown. The fed and treasury know this and are simply managing the destruction-in-progress.
The AI editing is so obvious and makes your work unreadable.
While financial repression worked well in the 1940s - 60s, the circumstances facing the U.S. then were far different from today.
The U.S. was the last manufacturing base standing during much of that period. Whatever the U.S. did, they got away with it — they were the only fully functioning financial system in the world.
That is very much not true today.
Hopefully Kevin Warsh understands this.
Roger you are right on this and the numbers make it even more stark than the geopolitical argument alone suggests.
Financial repression after WWII worked because three conditions existed simultaneously. First, the debt was largely fixed. The war ended, spending dropped to roughly 15% of GDP, and inflation could quietly erode a static principal over decades. Second, the deficit as a percentage of total spending was tiny, averaging roughly 3 to 5% of outlays in most years during that period. Third, entitlement obligations were minimal. Social Security, Medicare, and Medicaid combined accounted for only 3% of GDP in 1950.
Today all three conditions are reversed. Federal spending runs at 23 to 25% of GDP, entitlements alone consume 18% of GDP and are structurally guaranteed to keep growing, and roughly 27 cents of every dollar the federal government spends is currently funded by debt rather than revenue.
Financial repression requires a fixed debt load you can inflate away. What we have instead is a debt that grows faster than inflation can erode it. Every dollar of inflation that reduces the existing burden is accompanied by new deficit spending that adds more to the total.
The tap was closed after WWII. That is the part of the strategy that made it work. That part does not exist today.
Agreed. If real rates were positive post war the dollar would have been absurdly high vs trading partners who were trying recover.
Thank you for the article. Regarding item 2, central banks may well keep interest rates low, as Trump wants to do, which will fuel inflation so eroding debt, but unlike decades ago (longer term) bond holders will sell their bonds to get better yields (the central bank doesn’t control all bonds issues). So the financial repression strategy will be much diluted ?
Excellently written article. On this one, I agree very much so. Indeed, the best place to have assets in this type of environment is in real, fixed assets, like real estate, art, cars, etc. - financed as much as possible with low-rate long-term debt. "Low rate" is, of course, relative, as I think rates will be heading to 10% or so in the near future, due to the fact that our treasury auctions will have a record amount of tbills on sale soon.
However, I can't help but think that your article here conflicts with your recent, "I'm selling all my real estate" article. As I said in the comment to that article, I think you might be having a knee-jerk reaction to the nonsense of Los Angeles. Long-term commercial real estate seems poised to be one of the best investments in an inflationary environment. Particularly with a reasonable amount of debt / leverage attached?
Warsh is still only one vote out of twelve. He’ll need to earn the confidence of his colleagues long before he can marshal votes toward an agenda as bold as financial repression, if he can at all.
Waller for instance was awfully hawkish in his speech in Germany. The story is a good one, but it’s unlikely it will be so cut and dry.
To reduce the debt, it’s likely that we’ll need all the “tools” in the toolbox: austerity (cuts to entitlements to start), deregulation/pro-growth, and lower yields.
At the same time, there is no willingness to stop spending or pay higher taxes. Both parties want to be Santa with their respective giveaways of tax cuts and spending sprees.
Great article. That makes a lot of sense that we need to keep inflation above what we have financed our dept interest payments to in order to shrink the debt.
Seems to punish those who keep their savings in cash the most.
Second - Those who don't have wage growth at the same pace with the higher inflation
#3 is the same as #1 wearing different makeup.
Read this same article on another Substack already. US grew GDP after WW2. Nothing magic
Grew GDP while keeping interest rates below inflation. Not a possible combination today if the Fed is going to maintain its dual mandate. The Treasury needs to sell $2 trillion in bonds each year, no one will buy them if they have a negative return.
Inflate the debt away is a tactic as old as time.
While the US has hegemony through the dollar, its alliances and its military it will be ok. The only thing is that each of those are being eroded by this current administration.
Intentionally keeping inflation higher than long term rates would be in direct violation of the Fed's mandate to provide price stability, right? What would the argument be from an independent Fed Board's perspective as to why this would help them achieve their dual mandate? Or would this just be an admission from the Fed that they aren't as independent as we believe and have a 3rd unstated mandate, which is to protect the Federal government from defaulting on it's debt?
This is a major problem indeed. Thanks for focusing on it.
Why the fuck is there an ad in this?
This could simply be said by saying the government is corrupt
A lot of interesting educational information, but I suspect the 'game plan' as laid out here has a zero % chance in being put into action. The levels of interest below inflation, tax increases on the wealthy (in the near term), a reduction in spending.... These may have been historical tools but we are not what we were in 75 years ago.... We are not what we were 30 years ago. I have my own beliefs on where this is going, and it's too horrifying to put it down on a Substack post. I don't wish to get political or discuss the socio-economic or militaristic predictions here, but I'm sure somewhere in your many of you also know what happens when things are unsustainable.
Balance of payments now runs faster than inflation, even at higher levels. Once a reactor passes Critical Threshold, there is NO stopping the meltdown. The fed and treasury know this and are simply managing the destruction-in-progress.
There is one simple rule in finance spend less than you earn