In 2015, the IMF published a paper where they discuss the “Liquidation of Government Debt”.
The paper specifically discusses financial repression as one of the ways to liquidate government debt.
What is financial repression? Financial repression refers to government policies that aim to steer money towards government debt while keeping interest rates artificially low (below market-rate or inflation rate)
In their paper, the IMF discussed the following measures of financial repression:
- Imposing caps or ceilings on interest rates
- Regulating the financial sector to require holding of government debt
- Forcing pension funds and insurance companies to invest in government securities
- Printing money to reduce the real value of debt
Interestingly enough, fast-forward to today, and we will notice that many of these policies are already in place.
The paper also points to the use of financial repression during the period of 1945-1980 where real interest rates were negative more 50% of the period:
“For the advanced economies, real interest rates were negative ½ of the time during 1945–1980. Average annual interest expense savings for a 12—country sample range from about 1 to 5 percent of GDP for the full 1945–1980 period. We suggest that, once again, financial repression may be part of the toolkit deployed to cope with the most recent surge in public debt in advanced economies.”
The Liquidation of Government Debt – IMF