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Hey guys,

I was heavily involved in discussions in Oslo that concerned fairness
should be the argument. The Dems often are articulating a concern for
the poor but have not effectively engage the debate of the moving
spread between the rich - those making more than $750,000 a year and
the middle class 75,000 and 500,000.II think Democrats would gain by
talking about fairness of load of costs.

Michael
Policymakers learn a new and alarming catchphrase

By Gillian Tett
Published: May 9 2011 19:43 | Last updated: May 9 2011 19:43
Another week, another wave of dismal fiscal gridlock in Washington.
But as US politicians squabble about how to cut the debt, another
concept with a catchy name is quietly starting to creep into the
policy debate: “financial repression”.

A few weeks ago, Carmen Reinhart, a US economist who shot to fame two
years ago by co-authoring an influential book on sovereign debt, This
Time Is Different, produced a joint paper for the International
Monetary Fund on the topic of “financial repression” in the west. And
while this phrase is not yet mainstream news, it is starting to
generate a buzz among the policy elite in Washington and in some
European capitals.

EDITOR’S CHOICE
Money supply: Better news on US credit - May-09

Clive Crook: Now Obama must lead on the deficit - May-08

Editorial: Raising the roof on America’s debt - May-08

The issue at stake revolves around the question of where investors
“choose” to put their money. During the past three decades, western
savers have generally assumed they could put their money wherever they
wanted, since financial markets were organised according to the mantra
of globalisation and free market capitalism – and thus the price of
money (or interest rates) was set largely by demand. But as Ms
Reinhart and Belen Sbrancia, her colleague, point out, this freedom
was unusual. In the 1920s, global capital markets were also pretty
free. But, from the 1940s to the 1980s, western governments operated
capital controls and interest rate caps that restricted financial
flows, limiting investor choice.

It is often assumed that these controls were driven by a wave of
financial reforms after the 1929 stock market crash (just as
governments are implementing financial reforms now). And that is
partly true. However, Ms Reinhart and Ms Sbrancia argue that these
controls also had a crucial fiscal impact. After the second world war,
the debt of the advanced economies spiralled to about 90 per cent of
gross domestic product, roughly comparable to today, which meant
western governments desperately needed to find investors to buy the
bonds.

One consequence of the controls was they created a captive domestic
audience for those bonds. Better still, because these bonds paid a
yield lower than inflation, whenever those captive investors bought
bonds, they effectively paid a hidden subsidy to the government,
enabling them to reduce the debt.

Ms Reinhart and Ms Sbrancia argue the world has forgotten that the
widespread system of financial repression “played an instrumental role
in reducing or ‘liquidating’ the massive stocks of debt accumulated
during World War II”. Between 1945 and the 1980s, they say the US and
UK’s “annual liquidation of debt via negative real interest rates” on
average amounted to 3-4 per cent of GDP per year, or 30-40 per cent of
GDP debt reduction over a decade.

These days nobody is talking about introducing overt capital controls
or interest rate caps in the west. And central banks appear determined
to curb inflation. But some influential investors fear eventually the
temptation to let inflation jump above bond yields will reappear.
“While the ancient Romans used to shave metal coins in an attempt to
monetise debts, our evolving financial system has used more
sophisticated techniques [to cut its debt],” says Bill Gross, head of
Pimco investment fund. “Bond prices don’t necessarily have to go down
for investors to get skunked.”

Central banks such as the Federal Reserve have already been buying
bonds. And there are now some intriguing hints that private sector
institutions are being urged to hold more bonds. In the UK, the
introduction of financial reforms has forced banks to purchase more
gilts. Similar steps are afoot in other parts of Europe and in
Washington some policymakers are quietly mulling whether US banks and
pension funds could – or should – follow suit, especially if foreign
buyers (who own half the US debt) stop buying US bonds.

Such moves horrify some free-market economists, who argue “repression”
crimps private sector investments, thus undermining growth. But
postwar politicians clearly decided this was a price worth paying to
cut debt and avoid outright default or draconian spending cuts. And
the longer the gridlock over fiscal reform rumbles on, the greater the
chance that “repression” comes to be seen as the least of all evils;
at least compared with others that may emerge from spiralling western
debt.