Financial repression

Posted by: Paul Donovan

12 May 2020

Daily update

  • Financial repression is when politicians use regulation to manage investments in a way that suits them. We are likely to see more of this in the future, as regulating investors into buying bonds is one way of managing debt levels. (It works as a tax on saving, by forcing investors to accept lower yields).
  • Overnight, US President Trump used regulation to stop a Federal pension fund from holding Chinese assets, citing investment risk and national security. Reducing portfolio diversification is an unusual way of managing investment risk. For now, investors are focused on national security, as a possible source of more Sino-US tensions.
  • Saudi Arabia, Kuwait and the UAE have all pledged to further reduce oil production. Oil prices have risen a little on the news. Travel is increasing as lockdowns ease but international travel is likely to be one of the last areas to recover.
  • US consumer price inflation is more likely to be random guesswork than a precise statistic – current spending patterns will not be reflected in the calculation, some prices do not exist in a lockdown and surveying other prices in shops will be difficult. Chinese inflation numbers moderated, demonstrating the disinflation effects of the virus after lockdowns are lifted.

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