Financial Repression, Pt. 1 | Professor Hanno Lustig on Hidden Taxes, Fiscal Sustainability, and Japan’s Debt Puzzle
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Today's episode is brought to you by the Unlimited HFGM Global Macro ETF, ticker HFGM. Later in the show, you'll hear more about HFGM, currently the number one Morningstar rated fund since its inception in The US macro trading category. Let's get into it. Today, we're gonna be talking about financial repression and fiscal sustainability. I am so glad to be joined by Hanno Lustig, Mizuho Financial Group professor of finance at Stanford University. Professor, welcome to Monetary Matters. Thank you.
I'm very excited to be here.
The topic financial repression is something that stirs in motion deep within a lot of people. What is this tool? What is financial repression? Then we will go on to Japan, where you argue it has been used quite extensively. Financial repression
is a term that is sort of used to describe any time the government tries to fund itself by making sure that its funding costs are sort of below what the market rate would be. And so it covers a wide array of different types of interventions, and I'm sure we're going to dive into specifics later. But it's sort of been very widely used, financial repression, not just in developing economies, but also in advanced economies. In fact, there's plenty of examples from US history, specifically during wartime, when the federal government and the Fed decided to join forces and lower the federal governme
So financial repression is the government enacting policies to fund itself at cheaper rates and perhaps more available rates so it can borrow more than might otherwise be available. So one example might be passing laws that strongly encourage banks to hold government debt. Normally, banks might wanna make a higher return, perhaps lending to individuals or corporations, but because of some regulation that the government passes, banks hold a lot of government debt. You could argue that we have that right now in The United States and several countries and continents around the world. That's one e
I suspect that if you go back in time, you'll see plenty of examples of what we would now call financial repression, particularly when you look at wartime. So one thing that I've done in some work with a couple of my co authors is we looked at all US and UK wars. And the reason we focused on The US and The UK is because there's great data on bond issuance, bond prices for both of these countries. For The US really going back to its creation actually. And for The UK, you can go back to the eighteenth century at the very least. And so what we found is that pretty much every time The UK or The US
So you're saying that wars are extremely expensive and if the government went to the taxpayers, they went to the citizens and they said, This is how much it costs and here is how much we're going to raise your taxes by. That would be ridiculously unpopular. So instead of doing that, maybe they raise taxes a little bit, but they take it from people who invest in the government debt instead of people who tax. That's what they do.
That's exactly right. That's a better way of saying what I was trying to say. The government, whenever they go to war, they think, boy, it's going to be way too expensive for us to finance all of this right away by increasing tax revenue, especially during wartime. We don't want to do that. We're only going to raise taxes a little bit. And instead, what we're going to do is we're going to shift a big part of the burden of the war, whatever the case may be. In The UK, one of the biggest ones was the Napoleonic War in the early nineteenth century and the First World War. We're going to shift
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