Financial Repression Rears its Ugly Little Head

Public investors are stressed. With guns to their domes, board members at U.S. public pension plans have lowered their target annual return expectations. Governments in Western Europe and the United States are structuring a confined investor pool for their sovereign debt. This domestic pool includes pension funds, banks, and insurance companies.

Institutional investors have considered the negative effects of financial repression.

Governments continue to interfere in capital markets to channel cheap funds towards them. Governments heart low interest rates; it allows them to finance outlays cheaper. Sovereign wealth funds and other long-term savers are the victims here. Financial repression is corroding sovereign wealth forcing them to invest in riskier assets.

On December 19, 1980, the prime rate in the United States peaked at 21.5%. Ever since then interest rates continue to fall which boosted public equity markets. Analyzing historical asset allocation from sovereign funds in the 1980s, many held their money in savings accounts and fixed income instruments. The Libyan Investment Authority had a major portion of assets sitting in bank accounts.

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