Financial Repression

In favorable economic and political conditions, state economies usually function according to free-market laws. However, in some circumstances, a necessity to involve the state in regulating economic and financial processes might emerge. In these cases, the state institutions use the determined policies to impact the economic-financial sector and implement certain measures to regulate the state’s economic functions. Thus, the rigid actions of state regulators in the economic and financial system of a country have been termed as financial repression. This concept has a significant impact on the economy of the state and on individuals. Financial capital control measures, as a component of financial repression, aim to keep the financial flows within the country as a positive impact on the state economy, but they can have also a negative effect on some groups of market participants in the form of the reduction in real return from investments.

Financial repression is a complex of measures, used by state institutions to reduce the national debt as well as to boost the state budget. The creating of the environment with a combination of low-interest rates and higher rates of inflation allows the state to achieve its goals to fill the budget and reduce the debt. Financial repression manifests itself in such matters as interest rates’ capping on government debts and deposits, the regulation of banks and financial institutions, and the direct lending by the government. The impact here lies in the fact that there is a finance flow directly to the state regulator.

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Edward S. Shaw and Ronald I. McKinnon developed this concept first as early as in 1973. Thus, the term financial repression was utilized in handling the question of financial markets back in the 1960s, 1970s, and 1980s. In fact, such state intervention was implemented in the countries with underdeveloped economies or after the economic recession, or a crisis. Nevertheless, over the last few years, there has been an opinion that financial repression may have a positive effect on the economies of not only developing countries but also well-developed ones. Some mechanisms, used by state regulators and financial institutions during financial repression in the country, particularly affect citizens’ interests. One of them is state capital control that influences financial capital by regulating financial flows into or out of a country. Among these controls are taxes and tariffs as well as the effect of capital control can be seen in regards to equities, bonds, and foreign exchange trades. It is considered that the capital movement out of a country is an undesirable process that has its causes in political or economic instability. Capital outflow is the kind of pressure on the macroeconomic that violates the balance between foreign and domestic investments. Some politicians and financial economists argue that the USA must take control of capital movements. Such an argument can be rational under certain economical processions. The control of intense capital outflows and the redirection of financial flows to the domestic market could potentially stimulate the economy and generate economic growth. These measures in the aggregate with the income of capital gains taxes can achieve the state’s goal to reduce its national debt and to boost the budget.

At the same time, financial capital state control has its supporters and opponents. Thus, some count it as an additional measure of safety to the economy, while others argue that capital control limits economic progress and efficiency. For example, McBride (2017) states that businesses will see restrictions on their capital transactions, and the structure of their businesses might be disrupted considerably. Further, McBride (2017) assumes that had such controls become real, a dangerous precedent would emerge. In such a case, the state will be in the power of making arbitrary rulings on some transfers that might seem as dangerous to the economy, which will only politicize it. If agreed that financial repression has a positive impact on the economy in total, then it might have some non-positive effect on certain market participants. One of its measures will be aimed at regulating the income of savers from deposits and investments. The level of inflation and interest rate are the main factors that affect the size of real incomes on deposits and investments. Thus, state regulator’s actions should keep the balance between high inflation levels and low-interest rates. The state with high national debt must be forced to lower its debts’ value by destroying the value of the national currency. Thus, a high inflation rate becomes a background for effective financial repression since it leads to the reduction of a nation’s debt. Different players in the economy, including savers, pension planners, and insurance companies that peg their decisions on long-term investments to meet future obligations, might also struggle. At the same time, in regards to the national debt, low-interest rates bring the advantage of saving billions of dollars in interest. As McBride (2017) mentions, the USA is the country with an optimistic response to structural reforms and fiscal stimulus, while it enjoys an uptick in inflation.

The state interventions in the economic processes, which use certain measures and policies, have a significant, both positive and negative, impact on the economy and state’s development, and they even might have global consequences for an extended period. A well-planned financial repression implementation is capable of making necessary changes in the financial sphere of the state’s economy, bring a necessary balance between economic and financial functions, and influence the development of the state’s economy positively. The important measures with a significant impact on the economy include controlling inflation rate and financial flows as well as managing interest rate. Financial capital control measures, as a component of financial repression, aim to save the financial flows within the country as a positive impact on the state’s economy, but they can have also a negative effect on some groups of market participants in the form of the reduction in real return from savings and investment. With these measures, the state has an opportunity to achieve its main economic goals, which are reducing the national debt and filling the budget.

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