"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 United States, 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...
Figure 1, which traces the evolution of average gross public debt for the 22 advanced economies from 1900 to 2011 demonstrates the magnitude of the policy challenges now facing many (if not most) of these countries. However, these numbers significantly understate the magnitude of the debt surge in recent years by excluding record private borrowing—particularly by banks—which remains a major possible contingent liability of governments.
Throughout history, debt-to-GDP ratios have been reduced in five ways: economic growth, substantive fiscal adjustment or austerity plans, explicit default or restructuring of private and/or public debt, a surprise burst in inflation, and a steady dose of financial repression that is accompanied by an equally steady dose of inflation. It is critical to note that the last two option— inflation and financial repression—are only viable for domestic-currency debts (the euro area is a special hybrid case)..."
at http://www.piie.com/publications/opeds/oped.cfm?ResearchID=2065
Such policies, known as financial repression, usually involve a strong connection between the government, the central bank, and the financial sector. In the United States, 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...
Public and Private Debt Overhang
Elevated levels of public debt in the United States and elsewhere will probably be the most enduring legacy of the post-2007 financial crises. For the advanced economies, public debts had not approached these levels since the end of World War II. Figure 1, which traces the evolution of average gross public debt for the 22 advanced economies from 1900 to 2011 demonstrates the magnitude of the policy challenges now facing many (if not most) of these countries. However, these numbers significantly understate the magnitude of the debt surge in recent years by excluding record private borrowing—particularly by banks—which remains a major possible contingent liability of governments.
Figure 1 Gross central government debt as a percent of GDP:
22 advanced economies, 1900–2011 (unweighted averages)
22 advanced economies, 1900–2011 (unweighted averages)
at http://www.piie.com/publications/opeds/oped.cfm?ResearchID=2065
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