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Mortgage Rates and Financial Repression

financial repression and mortgage ratesFinancial repression is a newly-emerging buzzword, the idea that by forcing down interest rates the government is scooping up funds that would have gone to the private sector. Why would the government do this? To paper over the size of the federal deficit and avoid a financial collapse.

If this sounds like a strange idea consider several thoughts.

First, one-year CDs now have an interest rate of roughly .98 percent.

Second, the current rate of inflation is 1.7 percent.

If you have faithfully followed the strategy of every sane financial adviser, rich person and grandmother; if you saved money to invest and protect yourself in case of a financial emergency, you are losing buying power and “buying power” is the real definition of wealth. In this example, if you save $100,000 you earn $980 per year but your buying power falls by $1,700. You’re losing $720 in buying power, you have less wealth.

Seen another way, a loaf of bread has just as many slices as it did last year but now costs more. The cash value of money has declined so it takes more dollars to buy the bread.

Pity The Poor Millionaire

Imagine that you have a retirement account which holds $1,000,000. That’s a big number and if you earned .98 percent you would receive $9,800 for the year or $817 per month. Unfortunately, most people don’t have $1 million or anywhere close. According to the EBRI Center for Research on Retirement Income, the typical IRA held $81,660 in 2012.


So what about financial repression?

The total outstanding federal deficit as this is written is about $17.9 trillion. The rate for one-year Treasury bills was 0.057 percent in September.

The cost to carry the US debt is less than the rate of inflation because the government is able use its huge leverage to borrow at a discount. That government discount is not free, however. People with savings pay a huge price because their ability to get interest on their savings has been pushed below the rate of inflation. While the government wins in one way many taxpayers lose in another.

If the government paid anywhere near a reasonable rate to service the debt — say the rate of inflation plus a little more, perhaps a total of 2.0 percent — its finances would be turned entirely up-side down. Instead of shelling out interest payments worth $430.8 billion in fiscal 2014 the government would have instead paid out a lot more interest and shown a far-larger deficit.

Financial Repression and Mortgage Rates

Those who believe in financial repression will no doubt argue that the missing interest proves their point, that government is manipulating the financial markets in its favor. If that view is correct then something else is also true: Without financial repression mortgage rates would be higher.

Those who believe in financial repression will no doubt argue that the missing interest proves their point, that government is manipulating the financial markets in its favor. If that view is correct then something else is also true: Without financial repression mortgage rates would be higher.

Investors seek the best combination of risk and reward for their funds. If government debt offered a better return then some money now in the mortgage marketplace would drift over to government investments. The volume of dollars available to those who want to finance and refinance real estate would decline and — all things being equal — mortgage rates would increase.

Financial repression has surely hurt savers and it seems like a Machiavellian way to run government finances, but then how else are government finances ever run?

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