Financial repression shrinks debt through negative real interest rates on captive bondholders

Evidence

The first path is usually known by the pejorative sobriquet of financial repression. Carmen Reinhart and M. Belen Sbrancia recently discussed this possible path. They concluded, by examining episodes of past high indebtedness, that states restructure their financial systems in periods of crisis in such a way as to allow them to create “captive audiences.” Banks, pension funds, and other long-term debt holders are “encouraged” through capital controls, interest-rate ceilings, and other devices to hold a large amount of government bonds. The government then pays a low nominal interest rate on the bond while running a near-balanced budget with a positive but small rate of inflation. This creates an effective negative real interest rate on the bond such that the value of the debt shrinks over time. — Mark Blyth, Austerity, 651

Categorization

• DEFINE: Defines the financial repression mechanism precisely: capital controls, interest-rate ceilings, and negative real rates.
• XREF: Connects directly to Mattei’s work on austerity and its alternatives; also connects to Reinhart’s This Time Is Different. — connects to: Large debts shrink in real terms when growth outpaces the debt — Mark Blyth, Austerity: The History of a Dangerous…, 52; Inflation erodes the real cost of fixed-interest debt; Over 18 trillion dollars in loans paid negative real interest rates to lenders — Yanis Varoufakis, Technofeudalism: What Killed Capitalism, 927

Broader Connections

• Inflation erodes the real cost of fixed-interest debt #expands (0.90)
• Large debts shrink in real terms when growth outpaces the debt #expands (0.85) — Mark Blyth, Austerity, 52