Financial Repression, Global Macro, India’s Options…

Contributed by: Rajni Dhameja, CFA and Shreenivas Kunte, CFA

IAIP and Reliance Mutual Fund organized a session on “Financial Repression, Global Macro, India’s Options and much more” by Russell Napier in Mumbai on October 24^th 2016. The event was well attended by the participants.

Following are the key takeaways from presentation:

• Financial repression is a term used to describe measures sometimes used by governments to boost their coffers and/or reduce debt. These measures include the deliberate attempt to hold down interest rates to below inflation, representing a tax on savers and a transfer of benefits from lenders to borrowers. It is generally characterised by government resorting to ownership or control through financial regulation (forcing banks to hold govt. debt), credit controls, politicisation of credit, government mandated interest rates, capital controls, restricted investment list, transaction tax, capital levy, dividend controls etc..

• Debt levels in developed economies has gone up significantly comparing to emerging economies leaving limited options for developed nations
• Return of financial repression is evident due to following:
  • Total debt to GDP ratios in the developed economies is at all time high up to 268%
  • Public debt to GDP ratio in US 101%, Eurozone 104% and in Japan is 221%
  • Historically, real GDP growth rates fall above a particular level of Debt to GDP ratio.
• Solutions to reduce the high debt level
  • Austerity, default of public debt, increase in real growth, hyperinflation and financial repression are few possible solutions to reduce debt
  • History of austerity is history of politicians – politicians may not want choose it. Default would not be a sought after solution for its obvious reasons.
  • Hyperinflation has helped France and financial repression has helped UK to bring down the debt to GDP ratio during certain economic conditions
  • Real growth can be the answer but this may not happen except for Germany
• All the above measures are directly or indirectly aimed at keeping the yield curve lower than the inflation
• Financial repression leads to slowly stealing money from savers and is bad for investors in bonds and equities
• For 40 years financial industry has geared up and levered. No correlation has been observed between GDP and return on equity because of supply of capital.
• Balance sheet of central banks have ballooned with debt, contractions of which may not be an easy option.
• Considering this, investments should be targeted in jurisdictions where repression is not necessary. For instance, key emerging economies as they have relatively lower level of debt. Emerging economies with too much foreign currency debt should be avoided.

• RD & SK