Wednesday, December 19, 2012

Western countries to follow Latin America’s 1990 – 2003 depression

Financial repression targets the producers of society, i.e., the middle class, and therefore harms the economy. By destroying savings with a zero percent interest rate policy, which reduces government borrowing costs, but deprives savers and pensioners of interest income, and prevents capital formation.

The greatest concern is the link between capital formation and new business creation, which is primarily a middle class phenomenon. The vast majority of corporations are small businesses and they account for the majority of jobs. By preventing capital formation, financial repression kills new business creation, increases unemployment and bring down the middle class.

Surges in Central Government Public Debts and their Resolution: Advanced
Economies and Emerging Markets, 1900-2011

Click on the above image to get a larger picture.   Source: Carmen M. Reinhart and M. Belen Sbrancia (NBER 16893, 2011) (Source: link)

The worlds advanced economies will go through the same financial repression as the emerging economies like Argentina, Uruguay and Brazil did in the 1990's to early 2000's. The above graph tell the story. The repression should reach its intensity around 2022-2023.

Geir Solem
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