After CoViD19 comes a decade of financial repression

The Corona crisis will lead to further excesses of the already extreme global monetary policy. Investors are thus threatened with a decade of intensified financial repression. This is the assessment of the FERI Cognitive Finance Institute based on recent analyses. "We are currently witnessing the transition to a new monetary regime in the course of CoViD19: crisis-induced exploding sovereign debt is being directly financed, i.e. monetized, by the respective central banks," says Dr. Heinz-Werner Rapp, founder and head of the FERI Cognitive Finance Institute. This deliberate abuse of monetary policy for the open monetary financing of government burdens (Overt Monetary Finance/OMF) is only the beginning: "We expect much more aggressive steps in the near future, including targeted control of long-term capital market interest rates," says Rapp.

Massive money creation and bloated central bank balance sheets

Already to overcome the Great Financial Crisis, he said, the majority of major central banks engaged in massive securities purchases (quantitative easing/Q.E.), each financed with newly printed central bank money. "This has led to an enormous inflation of many central bank balance sheets," Rapp explains. These have increased about fivefold since 2008, and in some cases (England, Switzerland) even much more. "This extreme monetary dilution will be massively intensified by the Corona crisis. The US Fed alone will create around 5 trillion US dollars in new money and more than double its balance sheet again in a short period of time," explains Rapp.

Interest rate control policy intensifies financial repression

The unleashed policies of major central banks now pose serious risks to the stability of entire financial systems. A CoViD19-induced explosion of global sovereign debt and its monetisation by central banks could make financial markets nervous and trigger rising interest rates. After all, "the uninhibited use of the money printing machine raises doubts about the solidity of currencies and creates fear of future inflation," Rapp emphasizes. As a countermeasure, central banks could switch to targeted control of the level and structure of interest rates on the capital market. In fact, this would mean a strict freezing of market interest rates at very low levels. Such a policy of yield curve control has long been a reality in Japan and was recently installed in Australia. Other central banks, especially the US Fed, could soon follow suit, especially as the US has taken this route before. "Ultimately, this means a continued tightening of financial repression and an even more restrictive environment for investors in the coming years," concludes the FERI Cognitive Finance Institute.

The FERI Cognitive Finance Institute has already analyzed the problem of massively increasing monetary dilution in a detailed study in 2019. The study "Modern Monetary Theory and OMF - Monetary Dilution and Monetization on the Rise" is available here  in German.