The two great global economies, USA and Chinahave supplied so much stimulus To his economies in the world that emerged after the emergence of the COVID that the threat of financial repression to burn the enormous debt and the inflationary explosion for it is real. This is pronounced in one of his latest reports the veteran Straight Stock of Société Générale (SG) Albert Edwards, breasted in the Bank of England decades ago and fortune teller of the Asian crisis of the late 90s and the great financial crisis. Looking for alerts to the investors of this scenario, Edwards cites the economist who surely has in recent times against financial repression: “This is the world of Russell Napier.”
Concerned about yields of the bonds that continue to increase, “crushed under the weight of oversized tax deficits,” Edwards has the conviction that something, at some point, will break, as happened in 1987, when Wall Street succumbed. Without hot cloths, the SG analyst is clear that, if the growth of the US gross domestic product (GDP) has surprised in the latter exercises by force, it is because many underestimated the scope of the “Fiscal debauchery that the Biden administration He was willing to tolerate. ” deficits of more than 7% In the last three years, “says the economist.
That scenario does not paint better with a Trump that has landed with countless tax gifts (tax drops) under the arm. Pretensions that threaten to widen the deficits and gain weight public debt. A fear that autums of 2023 have already been seen and is observed again in the increase in the Treasury bond cousin of the US (the plus that is paid for uncertainty when lending money to a longer term).
Using the edwards metaphor in other previous reports, if The transatlantic ‘SS America’ is directed towards the rocksthe “Fiscal Dyscentía” of China (Another metaphor of the SG economist) directs it to them at a “supersonic speed.” “Not only has the US thrown fiscal caution into the wind, so China has done. It is amazing to go back to the 2008 world financial crisis, when the US deficit shot up to two digits (in% of GDP), while the China’s deficits were tiny.
Returning to the US, but the precept for other countries being valid, Edwards denounces that Politicians have no interest in fiscal adjustment And the bond guards seem to be waking up gradually from their lethargy (I sell your bonds if you have no fiscal discipline). In the case of the most powerful economy on the planet, the suffering of small businesses compared to the good numbers of Wall Street and an expense centered on the richest households in front of more low income than beaten complicate that fiscal adjustment. “It is not necessary to be a genius to see that this is like the fuel for a populist revolt, making it impossible to cut fiscal spending,” Edwards synthesizes.
The American exceptionalism and the hegemonic bastion of the dollar does not pal a The US is in an advantageous financing situation, but that will not prevent the yields of the bonds from going up. “
Pulling a graphic demolition, usual travel companion of Edwards, of the International Monetary Fund (IMF) with some projections of public debt of 150% of GDP for the US and almost 250% for China Within about 30 years, the analyst does not see other solution for governments than financial repression: “I see no alternative for governments other than governments kidnap monetary policy to finance these deficits. As the interest payments of the public debt are triggered, the central banks will be forced (literally if necessary) to suppress the yields through quantitative expansion (QE), “he says, speaking of a control of the yield curve Like the one that had been giving in Japan. This is the world of Russell Napier’s financial repression, “says the SG strategist.
Napier, the oracle
But who is this Napier? An authentic guru, not only for Edwards. Russell Napier He is an outstanding economist, investment strategist and author, recognized for his analysis of financial markets and his historical approach to interpret economic trends. Is especially known for his book Anatomy of the Bear: Lessons from Wall Street’s Four Great Bottomswhich examines the main market crises in modern history and extracts valuable lessons for investors. In recent years, Napier has become a kind of economic prophet for its opinions on ‘macro’ issues such as the impact of monetary and fiscal policies on markets, the Resurgence of inflation and the changing role of central banks in the global financial system. If you have any specific consultation about him or his ideas, I will be happy to help you.
In 2020, while much of the world still fought against deflation and central banks applied ultralaxas monetary policies (negative types and public spending on historical maximums), Napier predicted a dramatic change: the return of inflation as governments tool to handle an unsustainable debt. According to Napier, the developed world has entered into a new economic era marked by financial repression, where governments play a dominant role in creating money and in the allocation of resources, a change that will have deep implications for economies, markets and the savers.
In Napier’s words, “the power to control money creation has passed From central banks to governments“. This transition became evident during the Covid-19 pandemic, when many governments began to massively guarantee bank credit, moving the money levers towards their own hands. But far from being a temporary measure, this trend has strengthened with Subsequent crises, such as war in Ukraine and derived energy crises. Historical debt
The scourge of financial repression
The impact of this new stage, which Napier defines as “Structural financial repression”it is deep and prolonged. Real negative interest rates (that is, types below inflation) will allow governments “liquefy” your debts slowlymoving the cost to the savers. According to Napier, this mechanism creates a wealth transfer of savers and retirees towards governments and, to a lesser extent, towards young people. Although this strategy relieves public finances (a good example can be seen in Spain, where public debt has been reduced by almost 20 points despite presenting deficit after public deficit), it is a huge challenge for traditional investors, which will have to sail The storm to protect the value of your heritage. Napier warned that “investors in bonds and shares will lose money in real terms” and underlines the need to rethink investment strategies in sectors linked to large capital spending projects, such as energy, climate change and defense.
The consequences of financial repression are significant and affect both savers and the economy in general by causing unfair redistribution of wealth. On the one hand, it harms those who have conservative assets, such as bank deposits or bonds, since their yields fail to compensate for the loss of purchasing power caused by inflation. This causes one wealth transfer from savers to debtorsmainly governments. On the other hand, financial repression can discourage private investment, since capitals are directed towards public financing instead of productive activities (this is known in economic jargon as Crowding Out Effect). Although this strategy relieves public finances and reduces debt ratios on GDP, it can also generate distortions in financial markets and perpetuate economic inequalities, in addition to increasing dependence on governments regarding the control of the financial system.
In this context, Napier is becoming a kind of reference to understand the paradigm shift that the world economy is experiencing: A transition from the predominance of free markets towards a more directed economy, where governments control in a subtle, effectively, financial dynamics. With its deep and history -based analysis, Napier invites us to reflect on how these changes will impact in the long term in our societies and the balance between debt, inflation and well -being.
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