Wednesday, March 14, 2012

A tax that's not a tax but is a tax.......

Ah...............The world of high finance.  Newmark's Door opens to an essay by Carmen Reinhart suggesting that debt will be weighing heavily on decision-making processes for a long time to come.  Can't say that is much of a surprise,   Full essay here.  Excerpts here:
Faced with a private and public domestic debt overhang of historic proportions, policy makers will be preoccupied with debt reduction, debt management, and, in general, efforts to keep debt-servicing costs manageable. 

As they have before in the aftermath of financial crises or wars, governments and central banks are increasingly resorting to a form of “taxation” that helps liquidate the huge overhang of public and private debt and eases the burden of servicing that debt.

Such policies, known as financial repression, usually involve a strong connection between the government, the central bank and the financial sector. In the U.S., as in Europe, at present, this means consistent negative real interest rates (yielding less than the rate of inflation) that are equivalent to a tax on bondholders and, more generally, savers.

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