Dan Amerman: Financial Repression & The New Interest Rate Hike

Financial repression authority Daniel Amerman returns this week to discuss the ramifications of the Federal Reserve's first interest rate hike in nearly a decade:

The key to understand the situation here is that this is not normalizing, and we don’t have a precedent. We really don’t. We’re kind of all being soothed and reassured by the Wall Street Journal and Bloomberg and the financial authorities that we’ve been down this path before, we’ve been down it many times, more often than not we’ve had rising markets as a result and, really, there’s nothing to worry about. The issue with that is there are many things this time that are entirely different, and what is presented as 'normalizing', for instance, is going back to say a projected interest rate cycle like we saw in the 2000’s or the 1990’s. What’s completely different, among many other things, is that we’ve never had rates forced so low before, and they’ve never been so low for so long. So, if you look, say at a long-term graph since 1954, what’s been going on with the Fed funds rates, we’ve had plenty of reversals in interest rate direction, but they’ve been these brief little dips that look nothing whatsoever like this.

The other big issue, and this goes back to our prior conversation on financial repression, is that I don’t think you can take any interest rate increases from the 2000’s, 1990’s, 1980’s, 1970’s as being comparable. Because, we have the greatest degree of national debt outstanding that we’ve had since the 1940’s and the 1950’s. So, you have to go much further back in time to see how a rate increase works when you have a country that’s just absolutely massively in debt. And, it’s a very different process than these recent historicals they’re talking about.

I just read the statement from the Federal Reserve and what they clearly showed was this was not normal. And, one of the clear ways that they showed it is that they made crystal clear that they would be keeping their current holdings of U.S. government and agency debt in roughly the 2.4 to 2.5 trillion dollar range, until this is fully confirmed and they’re sure they’re going forward with the interest cycle and so forth. Now, that by itself tells you this isn’t normal. Typically, if you’re talking about driving interest rates down, you want liquidity in the system, and you provide liquidity through asset purchases. If you want to drive interest rates up, you want to tighten the system and you might remove money from the system let’s say by selling many of those assets. And, they’ve made clear on the front end that they’re not doing that.

And, I think this, again, ties very closely into what we’ve talked about before, with the size of the national debt, with financial repression and so forth. For financial repression to work, for the government to keep a lid on and control of interest rates, they need a large captive audience. One of the largest components of captive audience is the federal funds currently holding such a large portion of the U.S. national debt. So, if they were to follow a true normalizing cycle, they should be selling those and they’re not.

Our national debt is a fantastic sum that most of can’t really understand. How could we possibly be that badly in debt? How can we make the payments on that debt in terms of principle and interest and so forth? And, people are right that if we were in a normal market situation, we would be in a huge degree of difficulty with the national debt. But, again, this is something that’s happened many times over the centuries. And, what governments typically do, their most popular choice when they get deeply into debt is they increase their control over the markets so they knock out the interest rate risk for themselves, they push rates way down as they’ve done to historical lows. There’s more to it than that (we'd need another full hour more to talk about financial repression), but basically, they transfer wealth from savers to the government in the process of paying down the debt, in a process that most people don’t understand. 

Click the play button below to listen to Chris' interview with Daniel Amerman (60m:03s)

This is a companion discussion topic for the original entry at https://peakprosperity.com/dan-amerman-financial-repression-the-new-interest-rate-hike/

The ultimate risk from interest rates rising is to any financial asset that is valued as NPV of future cash flows. This correlates all values to the discount rate. The way to avoid that risk is to invest in assets that do not generate cash flow but are valued based on supply and demand. Precious metals spring to mind.
But it feels like we're all screwed however hard we try. Damage limitation is the game




Excellent discussion. What the Fed can't control is the distortions in the private sector ZIRP and excessive liquidity generate. For example, asset bubbles and the ability of financiers with access to 'free money" to outbid the bottom 99.5% for income-generating assets. In effect, financial repression is the engine of rising wealth and income inequality, which leads to social disorder/revolution.

You are a master at boiling things down in a very clear, understandable way.  This was never clear to me before you just wrote it down;

  In effect, financial repression is the engine of rising wealth and income inequality

I always viewed financial repression to be the banks counterfeiting freshly printed money, no different than a common criminal would with a printer in his basement, and then using that printed money to buy real things, ie to steal from everyone else who has to work for their dollars. This extra money dilutes the money supply which caused prices to rise. There are two logical market responses to such rising prices: demand higher interest rates, and everyone pile into precious metals. The banks put lids on those two escape routes to suppress the population and prevent them from escaping from that theft of wealth. We all know how they suppress precious metals and interest rates. 
There is another escape route however, and I wish I had pursued it previously: gemstones. Banks cannot control prices of gemstones. Additionally, they do not stand out like red flags in x ray machines and metal detectors like pm's do so it is easier to move them between countries. Also they don't weigh a ton.  Their only caveat is that their value isn't standardized like pm's, it is more subjective and you have to know what you are doing or you'll get ripped off. 

I'm not a fan of gemstones, especially rubies, diamonds and sapphires all of which are very easily and commonly grown in labs.

While the jewelry industry has put up quite a stink trying to convince people that a lab grown diamond is somehow inferior to a 'natural' diamond, I don't see how.  Chemically they are identical.  In fact, given the blood diamond trade I happen to think that lab grown diamonds are superior.

At any rate, the idea that humans can create something in a lab runs against that same thing holding a defined value above the unit cost of production especially if that thing happens to be ornamentation.

Just my $0.02.

Diamonds are just a three dimensional lattice of carbon molecules.

Alas, we would emit far more carbon than we could sequester in making diamonds…

Mining companies' expenses average $40 to $60 per carat for natural colorless diamonds, while synthetic manufacturers' expenses average $2,500 per carat for synthetic, gem-quality colorless diamonds.[100]:79 However, a purchaser is more likely to encounter a synthetic when looking for a fancy-colored diamond because nearly all synthetic diamonds are fancy-colored, while only 0.01% of natural diamonds are.
Else we could have pretty piles of long-term sequestered carbon.


[quote] Their only caveat is that their value [gemstones] isn't standardized like pm's, it is more subjective and you have to know what you are doing or you'll get ripped off. [/quote]

It's problematic for normal folks to think of gemstones or jewelry as an investment. If we buy gemstones we need to expect an instant and major drop in their value. We'll be buying at retail prices but we won't get anywhere near that if we want to sell. Joe the Jeweller would have little reason to offer more for our pretties than what he could get comparable stones for from his normal wholesale sources. That's not a rip-off, it's just a fact of life.
His offer would be further tempered by his judgment about market conditions and prospects for reselling the item(s). That might further depress his offer.

That said, quality gemstones or finished jewelry will always be worth something, even if not what we paid, and sometimes the advantages of easy portability, as Mark points out, will trump any other considerations.

My own approach to jewelry has been to watch the seasonal sales cycles and every so often I splurge on something just because I love it. I don't think of my jewelry as an investment, although if I had to flee the country I'd certainly be packing it!


I did a bit of googling and it seems Australian sapphires are ethically mined. Also dont forget of the horrors of much of the third world gold mining, a huge area of Peruvian rainforest and rivers has been destroyed for this. 
I read that natural stones are distinguishable from synthetic ones and therefore retain value. I can't verify that based on my limited research. I would think that the devaluation from synthetics would be already priced in wouldn't it? You just have to do your research to make sure you are paying a fair price. 

As mentioned, even if you take a substantial hit it may be worth it if pm's get heavily taxed or you can't take them with you. May be a good thing to diversify into as well as pm's. Hey maybe Chris can do an article on this! Always something new to learn about

My most recent work project was polishing a Ti-sapphire gain medium for a laser.  Each optic weights on the order of 1 pound and is free of inclusions.  Lots of fairly sizable un-doped sapphire parts were made available for 'practice' and weren't deemed valuable enough to track.  FWIW, our Pt crucibles are locked in a safe, tracked, and weighed annually.  Even the government has this one figured out.

Image result for ti sapphire



Hats off again to Chris, Adam and crowd. Excellent discussion. There was a lot packed into those 60 minutes and all of it good. I think you two confirmed that "Summerian" secular stagnation is real and we'd better get used to it. I couldn't help feel that the Fed actions were somewhat of a "life support" option for a seriously indebted economy. Daniel's website is where the really scary stuff was, however.
Financial repression is the "cobra-in-the-room" analogy I prefer. The real inflation rate is just another tax on the rest of us. Since the industrial revolution, supply side economics has ruled  the world with fossil fuel driving the expansion of everything from the money supply to population. Demand side economics will be the new reality once energy gets tight.

For now, I'm putting my carbon back into the soil where I can hope, at least, to get my seed back. As Mr. Collum referenced in his review, Gold may be the new "Pet Rock".  Oil still has the inside edge, while I can still breathe!


I'm thinking that this is one of the basic tenets of capitalism:  Those who have capital, or access to cheap capital, typically become the winners.  Those who have to borrow and pay interest are immediately thrust into a competitive disadvantage situation and only extremely dedicated efforts, timing, and good luck can overcome that.  Hard for all those stars to align, for most people.

This guy is smart, I learn a lot .  thank's Chris

In a real capital market, the cost of money would be uncontrolled by a central bank.  The risk/reward ratio of each use of the capital would be the primary determinant of the price of the money.  Control of this cost of money is one of the tenants of communism, not capitalism.  Our present setup rewards power relationships much more than a free market would.  The real risks are backstopped by the bank and the government.  Its all about who you know.

I'd argue that in a real capital market, you wouldn't need to price money because a real capital market would be asset-based, not debt based! I argue that we don't have an asset based system today because we have all been enslaved into debt serfdom to our banker masters.

We are to understand that financial repression is a transfer of wealth from savers to debtors, via interest rates that are less than inflation. This makes intuitive sense.
We are told that financial repression has historically been a means to allow the government to pay off its debt via stealth inflation, ie by borrowing money at less than inflation rates, so that a trillion dollars in bonds issued today is much easier to pay off in 10 years due to inflation; and conveniently, the government hardly has any interest to pay on the bonds over that 10 year period. Win-win for the government.
But something doesn't add up here because:
We are told that the government is broke.
We are also told that average Joe Schmoe of the 99% persuasion is also broke.
But both the government and average Joe Schmoe are heavy debtors. Joe is indebted to the banks with his mortgage; and the government is indebted to various parties including foreign nations with trade surpluses, and the Federal Reserve itself.
So what gives? If financial repression is the transfer of wealth from savers to debtors, then how can the debtors be broke? Is the government broke, or is it rich? It can't be both.
Well, historically, Joe Schmoe with a mortgage would have benefited from financial repression, as Daniel has explained before, such as in the 1970's with high inflation where home values rose so fast in nominal terms. But nowadays, that's not the case, because as discussed in the interview, the Fed has blown asset bubbles in the hopes that the wealth effect would grow the economy to fill in those inflated assets with real value. For the reasons well explained on this site, that wealth effect and economic growth hasn't happened this time, and Joe Schmoe holding a mortgage is left with a mortgage that is being suspended in the clouds by phony money printing; the underlying economic fundamentals cannot support those inflated house prices and he would otherwise be underwater.
I have a different explanation for what's going on. I have previously explained that if you adjust government spending on a per-person basis using Shadowstats' real inflation figures, you see that government spending actually has been going down since around the US hit Peak Oil 45 years ago. In recent years it's harder to make that statement with confidence because of all the hidden and manipulated government statistics we don't get to see. But up until 2008 it was a clear trend.
Many people say that the government is going broke because it is in too much debt. I don't really agree; I see that as a symptom, not the problem. The government was this indebted after WW2 and thereafter the US experienced great prosperity, as a result of various factors contributing to economic growth. Back then the government's tax base, largely the middle class, was growing. Nowadays, the government is going broke because its tax base (the middle class) is going broke. The middle class is going broke because of two things: 1) the economy can no longer grow, which in itself doesn't necessarily doom the middle class to poverty if the economy was structured to function in a steady state, but 2) in a system where the middle class is constantly parasitized by a 0.01% elite, the only way the middle class can gain wealth, or even just stay afloat for that matter, is if the economy is growing in real inflation adjusted terms so that additional new wealth can be "created". The government is not really stealing from the middle class; the wealthy are stealing from the middle class and the government has no source of real revenue left because the elites control the government and will not allow themselves to be taxed to support it. We no longer have government for and by the people. We have government for and by the elites, against the people.
Money printing by the Fed allocates some revenues to the government to appease the peasants by keeping them from starving with food stamps, because the average 99% can no longer afford to fund the US military industrial complex in addition to the legitimate programs it used to be able to easily afford. And a lot of other printed money goes sloshing around the financial system being used by insiders to play the markets with derivatives to wring the last remaining real wealth out there from the 99%.

For those who haven't visited Dan Amerman's website, go there, read, and learn.  He has an astonishing ability to explain make complex topics very understandable, without dumbing anything down.  That is the hallmark of highly intelligent people:  they can write in a way that makes the complex seem very simple, so that the reader says "oh, of course!". 
In half a hour's reading, his article on applying game theory to social security retirement benefits has completely changed my perspective.  Thanks for bringing Dan Amerman to the PP site. 

When referring to the price of money I am talking about the interest rate to borrow money. In a truly free market the cost of money would not be regulated. In our current risk environment the cost of a loan would be  high and very few of the outstanding loans would even exist. There goes all that 'growth'.

  I would also agree that an asset based money system is the best.  It has been argued that the US system is loosely tied to the asset of oil since it is the reserve currency for world trade, but since the FED stands in the gap the argument is specious. We do not have an asset based currency.  The cronies rule in our economy, it is not free.


IIRC synthetic diamond was invented by GE for cutting tool purposes.   They sold off the Carboloy unit which is now part of Sandvik of Sweden.



Many mahalos to Chris and Adam and their staff and the many contributors who offer an invaluable service to this "World of Wonder" we live in!! Enjoy the ride! MAHALO NUI LOA …