On
13th of March FED announced that it will hold its interest rate
policy id est keeping fund rates between 0 and 0.25 percent. Before it, many
economists stated that FED’s current monetary policy resembles financial
repression. The main concerns are about negative real interest rates.
Being
a lender to governments or to central banks is deemed as the most riskless lending
in conventional literature. But not in
crises times. During boom periods even governments or central banks of
advanced economies are running beyond threshold of secure debt burdening and
when a crises, in its all forms, knock the door it turns out that there is a substantial
debt overhung. In that case supreme
authorities tend to manipulate their debts with the form of hidden taxation
which enables them to liquidate debt overhang and to ease the burden of
servicing the debt.
Such
manipulations or policies known as financial repression can be observed when
there are consistent negative real interest rates (yielding less than the rate
of inflation) and this is equivalent to a tax on bondholders or generally
savers. Negative interest rates help
governments to reduce deficit and liquidate the debt they have in their own
favor. Negative interest rates are
usually accompanied by expansive monetary policy and high central bank
intervention into economy.
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