Amsterdam 2013

Negative real interest rates a clear sign of financial repression

Sylvester Eijffinger, a Tilburg University professor and renowned international monetary policy expert said “financial repression is everywhere in the OECD” in a keynote address to the Fiduciary Investors Symposium in Amsterdam.

Eijffinger says “the globalisation of monetary policy makes it very hard for emerging economies to shield themselves from these influences”.

Eijffinger points to negative real interest rates in northern European states and elsewhere as a clear sign of a global era of financial repression. Eijffinger highlighted Japan’s expansionary ‘Abenomics’ monetary policy as being the “most extreme form of the phenomenon”, but mentioned the recent nomination of “dovish” Janet Yellen as the next head of the US Federal Reserve as another clear sign of the times.

Eijffinger reckons fiscal interest gained dominance over monetary policy in the midst of the financial crisis in 2008 to create financial repression via negative real rates. “It’s a wealth tax in a very opaque way, which is likely to continue for another five years if not 10 years,” he argues.

The professor identified clear motives for governments to continue a policy of financial repression. Firstly, he explains “it is very difficult to cut government expenditure – even in Germany, which is the most stability-oriented country you could imagine.” Populism is forcing governments into a corner when it comes to deficit cutting in many countries such as the Netherlands, he argues.

The possibility of governments reducing deficits via strong growth also appears slim in the years ahead, says Eijffinger, making inflating away deficits via downward pressure on interest rates an attractive option. “Negative real interest rates allow governments to deleverage at the expense of investors and private savers,” adds Eijffinger.

Independent spirit

Financial repression seriously irks Eijffinger, who states “I’m a believer in the independence of central banks, I am convinced it is the best thing for a country in terms of social welfare”. He is dismissive of continued claims to independence by the worlds’ central banks, saying “an independent central bank is one that can say no to politicians.” He reckons the US Federal Reserve’s official position of being “independent within government” is false.

Eijffinger sees a power grab by governments over monetary policy occurring in the aftermath of the financial crisis in 2008: “Politicians stepped in to save banks and they thought ‘Gosh, we really are important!’ The balance of power between politics, banking and central banks was completely reversed as 20 years of monetary dominance and fiscal accommodation was replaced by fiscal dominance and monetary accommodation.”

Eijffinger argues that a consequence in 2013 is that “politics is making a mess” of the economic upswing in the Netherlands, in words in defence of recently criticised remarks from the president of the Dutch central bank.

History of repression

Eijffinger’s prognosis of another five years of financial repression is based upon his detailed take on monetary policy history. “If you look at periods of financial repression, going back to even before the Second World War, you’ll see they last 15 years on average,” he says.

Eijffinger gleefully cites the lessons from history as he argues “people forget that financial repression is nothing new”. He outlines a 30-year period from the end of the Second World War, with interest rates “effectively zero” in the US from 1948 to 1952, “direct monetary financing” introduced in a 1952 accord and negative real interest rates seen during the stagflation of the 1970s.

Eijffinger says that the lessons learnt in the 1980s and 1990s of the virtues of central bank independence are now being forgotten.


Eijffinger believes the tapering of quantitative easing is the US will now start in spring 2014 in the earliest but will be “very grave” for investors. Eijffinger recalled former Federal Reserve chairman William McChesney Martin’s well known maxim of taking the punch bowl out of the party to describe what federal banks should be doing. In reality, Eijffinger believes there is now a lag of 18 months to two years developing in monetary transmission.

Eijffinger urges investors “to think about what financial repression means for investment policy decisions on bonds and stocks”. Clearly it is something they could be thinking about for quite some time.


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