What Is “Financial Repression” and Why Should You Be Concerned?

CHISWICK, WEST LONDON – Last week, the Federal Reserve hinted it is becoming concerned with inflation.

This surprised many traders, who had been thinking the Fed wasn’t concerned at all about inflation. There were some dramatic moves in the currency, gold, and interest rate markets as a result. 

What do I think?

More below. But first…

Think Like a Tourist

Greetings from London, my childhood home…

We were only supposed to be here for a couple of months. (Our car is still parked at the airport in Idaho Falls.)

My mother named me as executor of her will, so I came here to oversee the administration of her estate and sell her property.

But it turns out, we love it here, and we don’t want to leave… 

The only way to have fun in London is to think like a tourist and marvel at the place. If you think like a local, it’s the hardest place to live in the world. So we continue to behave like tourists…

Here we are outside Abbey Road Studios in St. John’s Wood, retracing the footsteps of The Beatles this weekend…

There are few tourists in London at the moment due to COVID-19, so we’re trying to get out and learn as much as we can about the city while it’s quiet.

We’ve been to museums, galleries, palaces, and gardens.

On Saturday, we met Balraj Khanna at his studios. He’s a world-famous artist, best-selling author, and long-time London resident.

Here we are, surrounded by thousands of paintings and his other creations…

Also on Saturday, reader Ash and her family invited us to have brunch in their neighborhood of Little Venice.

We love meeting the locals and making new friends. Here are our families eating together next to the Grand Union Canal…

Next week, we’re touring the Tate Modern… the Museum of the Home… and the Royal Courts of Justice, London’s high court and the birthplace of Common Law.

Now, back to the Fed hinting it may be concerned with inflation…

Revolt in the Sovereign Debt Market

As regular Postcards readers know, the U.S. government is broke. It plans to soft-default on its debt by pushing inflation up while keeping interest rates down.

The technical term for this is “negative real interest rates.” Here’s what that means for the debt…

A negative 3% real interest rate reduces the real value of the government debt by 46% over 20 years. At negative 5%, the real value of the government debt gets reduced by 64% over 20 years. (This is thanks to the power of compounding, but I won’t bore you here with the details.)

The slang term for this condition is “financial repression.” It means the government is sneakily stealing from bond investors, on an inflation-adjusted basis, by about 3% to 5% a year. 

Here’s the thing…

The Fed and the Treasury cannot admit they’re doing this. The announcement would trigger a revolt in the sovereign debt market. So they must pretend to be tough on inflation once in a while, to placate bond investors.

Nothing Has Changed

This is what we saw last week… The Fed pretending to be concerned about inflation to placate its investors and buy some more time.

But long term, nothing has changed. The government has $28.5 trillion in debt and plans to keep spending money it doesn’t have – to the tune of more than a trillion per year.

That’s why it must soft-default through inflation.

That means it will pay down its debt… but with massively watered-down dollars. It’s the only way the government can default on its debt without admitting it’s defaulting.

The bond market will eventually figure out what we already know and revolt anyway.

We’ll see yield curve control (capping interest rates) and a massive expansion of the Fed’s balance sheet… And the paper currency system will be the release valve.

We call this a “synchronized global currency devaluation.” (I’ve explained yield curve control and the synchronized global currency devaluation in more detail here and here, respectively.)

In the meantime, markets will move in waves of sentiment as traders position themselves – and over-position themselves – in one direction or the other.

Higher Gold Prices Ahead

My sense is, after a year of positioning themselves for “more inflation,” traders had become overinvested in inflation hedges.

Even though the Fed is only pretending to be concerned about inflation, it was enough to trigger a bigger-than-normal reaction in the markets.

Nothing to worry about, though. With $28.5 trillion in debt and more debt coming, the long-term trend of higher inflation, lower real interest rates, and much higher gold prices is assured…

That’s why, in my Tom’s Portfolio advisory, I’ve recommended a portfolio of gold and other hard currencies. If you haven’t inflation-proofed your portfolio yet, now is the time to do it.

I put together a special report to help you build the ideal portfolio of gold and other inflation-fighting assets – including a detailed allocation strategy and the best ways to buy physical gold and silver. To learn more, watch this.

– Tom Dyson

P.S. The “hero trade” I mentioned in my last column is short-selling the stock market. That means actively betting on the stock market falling, instead of simply holding gold and other hard currencies, which has been our position for the last three years.

I find myself more and more drawn to this idea… because the stock market seems so expensive and the outlook for profits seems so poor. I’m just not sure I have the will to take it on, though. I like my sleep too much. More to come…

Like what you’re reading? Send your thoughts to [email protected].

Readers respond to Tom’s recent takeaways from homeschooling his kids…

Reader comment: Your idea of assessments after educational activities is exactly the right idea and what you are doing is correct, as well. Keep varying them but require creativity in both your choices and theirs as well. I’m retired from technology, financial management, and education.

Reader comment: Homeschooling versus weird kids… I think one must consider there’s a dynamic in a classroom which changes every year. Teacher… students… material level. It’s an ever-changing thing for kids in a formal classroom. The personalities and interaction depend on personalities of the instructor and the different students. That has to have weight on the adaptability of individual kids to all of it. With homeschooling, teachers are mostly the same. Students are definitely the same and personalities are known. It can’t be the same… formal school versus homeschool.

Of course, both have merits, but I think homeschooling reinforces individuals. Formal schooling reinforces teamwork, adapting to a different skill set each year. If your children are going from homeschool to a family business, they may not need the adaptability for working with outside members so much. We all know homeschoolers do end up very knowing and bright, and if they want to depend on their own skill set, it’s great.

Reader comment: I think you shouldn’t even question whether you are screwing up your kids. They have already had so many great experiences and gotten more of an education from those than most people would in five lifetimes. Especially with the sorry state of the educational system in the U.S. Good luck.

Reader comment: I love your Postcards and I love your commitment to homeschool your children. I’m a music teacher. During COVID-19 restrictions, I’ve been teaching out of my home, music classes for very young children and piano lessons. I estimate 15 children come in and out of my home every week for classes and piano lessons. Over 99% of them are homeschooled.

In today’s world, children are much farther along in their educational progress if they’re homeschooled, and they love being with their friends. But, mostly, they love learning worthwhile facts and attitudes that homeschooling brings. Formal education is not what it used to be. I admire parents who can see that.

We’re living in unusual times; I admire parents who can recognize teachers are under tremendous pressure and who “fight” throwing all children into the same barrel with watered-down curricula that does not prepare children to think for themselves. Congratulations to you!! Keep it up. I’m an admirer of you and your wife.

Tom’s note: Thank you for sharing your thoughts with us. We always appreciate your support and encouragement! Please keep writing us at [email protected], and I’ll do my best to answer your questions in future Friday mailbag editions.