Scourge of financial repression

World suffers as governments put squeeze on their private sectors

The world is in the throes of "financial repression" and investors should be aware of its effects on their investments, Chris Hart, Investment Solutions's chief strategist, warned this week.

Financial repression refers to monetary measures taken with a view to channel resources towards the government rather than the private sector.

"In the 1960s and 1970s this term was coined as governments were squeezing their private sectors. We've also seen it at other times during the post-World War 2 period. At its most extreme, financial repression represents the fascist and socialist claim on assets and it results in property rights being compromised."

According to Hart, governments use many guises to channel money from economic players to themselves.

These include exchange controls and mandatory pension contributions.

This results in the economy turning into what Hart calls a systemic Ponzi scheme.

"Our financial system needs ever-rising levels of credit to function. However, the more debt the system takes on, the slower it grows. In other words, as the debt burden rises, the economy needs ever more debt to achieve the same outcome."

Cash and bonds now sit at the epicentre of risk instead of being refuges from risk.

The telltale signs of financial repression include market manipulation, irrational policy intervention and increased government economic participation. This invariably leads to the government increasing tax, especially on the wealthy. There is also an increase in red tape and associated corruption.

The net result of financial repression is that the borrower becomes politically more powerful than the saver (effectively shifting resources from the prudent to the less prudent).

Glenn Silverman, chief investment officer at Investment Solutions, said the economy essentially has three pillars and it goes out of kilter if any of these pillars grows disproportionately.

"The key elements of an economic system are the corporate sector, labour (which is Joe Public) and the government. When one pillar gets too powerful, it crowds out other players. Inflation has a dramatic influence on investment and asset classes and we have to protect against it."

According to Silverman, the investment outlook for the world has changed due to financial repression.

Volatility will increase, returns will be lower, fewer safe havens will be on offer and returns from different asset classes will become increasingly correlated. For investors, a focus on asset allocation is critical.