The Short End of the Long View

‘Financial Repression’ and 1099’s…Financial Repression is a concept that was articulated in the 1970’s but has come back into academic vogue lately. Carmen Reinhart has written a lot about it recently in the financial press. The simplified version is that it is a form of taxation forced upon savers as governments target negative real interest rates. As such, it is effectively a transfer of wealth from individual savers to the government sector as the government artificially lowers the absolute rate of interest to shore up a growing fiscal deficit.

As noted in my last post, since President Obama’s election the federal deficit is up 40% with what amounts to a zero interest rate policy. One can only imagine what that is going to look like should rates rise.

The notion of Financial Repression really hit home with me this week as I scurried around to provide information to my tax accountant. In one account with an average annual balance in the six figures, I had no 1099 form. I went to the local bank and asked if I could get a duplicate as I had misplaced the original. The banker told me that since less than $10 of interest had been paid on the account they did not have to issue a 1099!!

No wonder investors are piling into risk assets! This is one of the desired outcomes of Financial Repression as conservative investors are forced out the risk curve in search of some form of absolute return. Oh for the days of the 5% passbook account!

Japan a Year Later…  We are just crossing the one year anniversary of the tragic earthquake and tsunami that rocked Japan. The devastation was monumental as measured in human, emotional and financial terms. Japan has been caught up in a decade-plus tenure of grinding deflation. The yen has been too strong for its export business and the BOJ has been too tight in its monetary policy. The debt in Japan has made it one of the largest indebted countries on the planet. Its financial markets have been dismal.

Year to date however, Japan is tied for the best performing equity market with Brazil. The BOJ has gotten looser in its monetary positioning. Could this be the big turn in the Japanese equity markets that people have been looking for in a decade plus? Small fortunes have been lost trying to predict this turn but it may finally be different in Japan.

Japanese equities account for 10% of the world indices and active managers have been woefully underweight Japan for some time now. It could be time to dabble in Japanese equities. If the turn is here there will be a land rush by world equity managers to participate….

4 Responses to “”

  1. May 23rd, 2012 at 2:54 am   

    Deepak Bidwai says:

    Very well explained how government first decreases the return earned on liquid assets, then force to take risk and then try to tax more on the same income.

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