The world’s most prominent central banks operating in the largest and most liquid financial markets have successfully implemented financial repression policies over the past three years which have significantly reduced debt burdens.
The prize for the most agressive financial repression goes to the Bank of England. Negative interest rates over the past three years averaging -3% have reduced the U.K.’s total debt to GDP ratio by a whopping 71%, from 315% to 243%; and government debt to GDP was reduced by 47% , from 141% to 94%. As the chart below shows (data from the Bank for International Settlements, BIS) this pattern of financial repression has been the norm, and led by the world’s leading financial powers, the Euro Group and the United States in particular. The United States has has negative interest rates in 14 of the past twenty years, and since 2020, these policies teamed with “fiscal dominance” have caused a sharp fall in debt ratios.
In the case of emerging markets, Turkey, Poland, Malaysia, Argentina, Chile and Saudi Arabia stand out for their reductions in debt loads. Korea, China and Thailand are among the few countries that saw their debt burdens increase over this period. China, which faces strong deflationary forces caused by excess capacity, malinvestment, a real estate bust and a sharp decline in consumer confidence, has seen its debt ratios continue to rise from already extremely high levels. China’s total debt to GDP ratio rose over the past three years from 294% to 306%. Moreover, if China’s GDP is overstated by as much as 25% as many economists argue, China’s ratio may be approaching Japan’s stratospheric 407% ratio.
The case of Brazil is somewhat unique and points to the future for other countries. Brazil’s central bank has pursued ultra-orthodox policies, meaning that it has managed only a brief honeymoon with negative interest rates and now faces a long period with high real rates. Central bankers in Brazil don’t have room for financial repression, being as they are reined in by unstable “hot money” capital flows from both domestic and foreign investors.
The U.S. Fed, though in a much better shape than Brazil’s central bankers, is also facing challenges from new inflationary forces and fiscal deficits that are expected to rise consistently to fund the retirement of Baby Boomers.
The losers of financial repression (e.g., holders of government bonds and mortgage securitizations) have surely learned their lessons and, at any sign of a new crisis addressed with more quantitative easing, will flee to real assets that have a better chance of preserving value.