|At the darkest hour of the crisis, I can see the state confiscating all IRA, 401(k) and private/corporate pension assets and transferring them into Social Security.|
By: George Noga – November 11, 2018
If the term financial repression is new to you, get used to it! You already are experiencing it and it will get much worse as the spending crisis ratchets up. Financial repression is government action that insidiously transfers wealth from the private to the public sector and, in particular, facilitates government financing of its massive debt.
Repression is already here; thus far, we have seen only less virulent forms: (1) artificially low (zero) interest rates that savaged savings and deferred the consequences of the government’s debt binge; (2) multiple bouts of quantitative easing, driving up prices of government bonds and suppressing interest rates; (3) regulations for banks to hold more government bonds to meet capital requirements; (4) increases in bank reserve requirements; and (5) early salvos in the war on cash. Following are the top five forms of repression you can expect as the spending crisis goes thermonuclear.
1. Negative Interest Rates and the War on Cash These go hand-in-hand; negative rates won’t work if citizens can hold cash as they are much better off with cash than negative rates. In Japan, the sale of safes soared when rates went negative. Europe wants to ban the 500 Euro note and the US the $100 bill. Canada, Singapore and many other countries have phased out large denomination notes. Cash can protect citizens from an overpowering state and that is precisely why the state has declared war on cash.
2. Currency and Capital Controls As the spending crisis heats up, citizens are better off moving all or some of their funds to other countries. There is no doubt the government will put a stop to this with currency controls – as have all other nations in similar straits. Government also will regulate the flow of capital and capital markets by various means including taxation, regulation, prohibitions and mandates.
3. Bail-Ins During the spending crisis, banks will fail. Governments have established bail-in provisions requiring depositors of such banks to make the banks solvent by confiscating a portion of their deposits. Recently, Cyprus proposed taking 9.9% from every depositor. The state may palliate this by proffering worthless equity or bonds in the failed bank as compensation. Again, this ties into the war on cash; bail-ins won’t work unless citizens are forced to keep their money in banks or other institutions.
4. Seizure of IRA, 401(k) and Pension Assets Throughout history, pension funds have proven the quickest and easiest for politicians to steal. In recent years, Poland, Hungary, Bulgaria, Ireland and France have, through one artifice or another, seized money from personal, company and/or public pension accounts. Currently, there is $30 trillion of pension assets in the US; if you believe these are safe, you also believe in the Tooth Fairy. The Obama Administration once prepared a working paper outlining how government could seize 25% of Americans’ assets in IRA and 401(k) accounts.
5. Debt Restructure The state can forcibly restructure its debt, which can take many (or multiple) forms: (1) lengthen maturities; (2) impose a haircut, i.e. writedown of principal; (3) lower the interest rate – even to a negative rate; (4) require rollover; (5) delay or prevent redemption; (6) conversion to other securities; and (7) repudiation.
Opportunities for financial repression are limited only by the imagination. More than likely, government will use all five of the forms of repression listed supra. I can see the state requiring IRA, 401(k) and private/corporate pension plans to own a mandated amount of government debt. At the darkest hour of the crisis, I can see the state taking over all (by then $50 trillion) private pension assets and converting them into highly politicized government pensions that revert to the state upon death.
Government created this problem. Its ham-handed attempts to fix it will destroy America as we know it and create a lost generation of unfathomable desperation. That is why we passionately believe America needs more liberty and less government!
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