The term financial repression refers to a mix of policy options that combines negative real interest rates with a form of inflation that can be difficult to recognize. The term negative real interest rates refers to interest rates that are lower than the rate of inflation. Governments around the world are currently struggling with unprecedented levels of debt. There are a handful of policy options that governments and central banks typically employ when debt-to-GDP ratios are high. These options include: increase economic growth; spending reductions and austerity programs; debt restructuring or default; inflation, and; financial repression. Several of these options present political and practical difficulties. Financial repression may present a preferred policy alternative because it is less explicit or obvious than spending reductions or default. Financial repression is beneficial to government because negative real interest rates combined with inflation helps reduce interest expenses and contributes to deficit reduction. The benefits of financial repression are at the expense of creditors (savers, bondholders and retirees) since they are the recipients of artificially low fixed payments that are eroded even further over time by inflation.
