Financial Repression: How Governments Punish Savers

In that regard, the authors show that the negative real rate savers get in the U.K., U.S., Germany and Canada has climbed so far up the yield curve as to now encompass 10-year bonds. In the U.S., for example, the real (i.e., after-inflation) return on 2-year bonds is -2.5%; on 5-year bonds it is -1.8%; and on 10-year bonds it is -0.6%. Two-year bondholders in the U.K. are getting a -3.1% real interest rate.

While low rates serve to transfer capital from savers to borrowers, both government and private, the authors argue that stealth repression and inflation are politically safer and less visible than unpopular spending cuts or tax hikes conducted in the political arena.

In the current crisis, the authors say real rates in advanced economies have been negative about one-half of the time, and below 1% in 82% of all observations, and this despite the fact that "several sovereigns have been teetering on the verge of default or restructuring (with the attendant higher risk premiums)."

These governments awash in debt are managing to find buyers for their bonds. One method to accomplish this is the government itself buying the bonds; a more direct approach, and possible portent of future trends, is the requirement the U.K. imposed on its banks at the height of the crisis to maintain a large share of domestic bonds in their portfolios. "Thus, the process where debts are being 'placed' at below-market interest rates in pension funds and other more captive domestic financial institutions is already under way in several countries in Europe," Kirkegaard and Reinhart write.

The authors conclude that efforts both to keep rates low and to create or maintain "captive" audiences for government debt "are likely to be only the tip of a very large iceberg."