FRA Co-Founder Gordon T. Long sits with BCA Research Chief Economist, Martin Barnes, a highly decorated and well renowned economist of 40+ years to talk Financial Repression and Barnes most recent work, Low Growth and High Debt: Financial Repression is Here to Stay.
Barnes defines Financial Repression as,
"An environment where interest rates are kept below levels which most people would consider being normal."
In a recent publication, Low Growth and High Debt: Financial Repression is Here to Stay, Barnes focused on the problems of continued high debt levels and argues Financial Repression as a legitimate solution to the global debt crisis.
"If you can't easily get your debt burdens down, then at a minimum you have to make the debt easier to live with, and the only way you can make your debt easier to live with is through Financial Repression. In other words, financial repression is the inevitable result of a world with low growth and stubbornly high debt."
Consequences of Low Interest Rates
"If money is free, very clever people at some point are going to do stupid things with it. There is no question that low interest rates will encourage some misbehavior, and speculation. However it is hard to make the claim that today's interest rates are low enough to be causing economic problems."
Despite already low interest rates, economic growth around the world has been relatively low. Barnes states, "Economies should be booming with current interest rates but they're not, we are living in a world that I would argue needs lower interest rates."
"The by-product is financial distortion which has powerful implications for certain groups of people such as people trying to live off of fixed incomes. But you can't push interest rates up to protect the interest of those people if the global economy is screaming for even lower rates. We cannot have a level of interest rates that will have everyone happy."
The Pension Fund Dilemma
A major mistake with the development of pension funds is that governments did not increase the pension age with the increase life expectancy.
"In a world of low returns, and people living much longer, the promises that were made a long time ago can no longer be kept. Everyone needs to understand that at some point those promises have to change, either by raising retirement age or increasing contribution rates. The logic behind these pensions is unsustainable and therefore it must change."
Situation in Canada
In the midst of falling commodity prices, devalued currency and the housing market bubble, Barnes states the Canadian economic situation
"...is not disastrous; just like so many other economies, we are stuck in low growth. Exports are battling against moderate global growth and world trade. The big drop in the Canadian dollar has not lead to a big pick up in exports as we would have hoped. We are very tightly linked with the US economy and they are slowly growing so that is a positive."
"Housing by every standard is incredibly overdone, especially in Toronto and Vancouver, it's hard to get away from the fact that house prices are extraordinarily high here and it will likely erode."
"China is moving away from its commodity oriented growth to a more service oriented model. The world is moving away from its commodity dependence which is not great for Canada, but we'll adjust to that."
Check out his interview with Gordon T Long which covers this and much more.