FT Analysis: Financial Repression Returns
Analysis of an Emerging Trend in State-Directed Finance
Keep an open mind, or get financially repressed
A Return to Financial Repression: Capital Controls in a New Global Economy
Analysis of an Emerging Trend in State-Directed Finance Authored by VBL for GoldFix
The era of tariff warfare initiated by the Trump administration may have merely set the stage. What follows may be broader, deeper, and more disruptive. While tariff structures are still evolving, the more decisive forces shaping global trade—capital flows, deficits, and surpluses—are now entering a new phase of realignment. The next battleground in global economic policy is no longer theoretical. It has already opened: financial repression is back.
Goldman on The Coming Financial Repression
Housekeeping: written in 3 sections this is must read if one is concerned about how the US will manage its growing and unsustainable debt. Founders can access PDF here
Historically, financial repression describes a range of policies where governments guide or constrain capital to fund domestic priorities. Post-WWII Western economies routinely deployed capital controls, regulatory requirements, and incentives that forced investment toward public goals. These included mandatory holdings of government debt, restrictions on cross-border flows, and targeted lending to strategic sectors such as housing.
That system gave way in the 1980s and 1990s to the U.S.-led global financial liberalization push. For several decades, the United States championed open capital markets and served as the guarantor of cross-border capital mobility. That period is now decisively over. Washington is no longer dismantling barriers; it is rebuilding them.
Recent speculation about a so-called “Mar-a-Lago Accord”—a deliberate weakening of the U.S. dollar combined with policies to trap foreign capital in U.S. Treasury markets—highlights this strategic shift. While this idea remains unofficial, it has shocked many international observers. What matters more is that similar proposals now proliferate across U.S. policymaking circles. These include new taxes on remittances, punitive levies on investments from politically disfavored countries, encouragement of dollar-linked stablecoins, and relaxed capital rules for domestic banks. All are designed to increase demand for U.S. government debt and tighten Washington’s grip on domestic liquidity.
Importing inflation through a weak currency is not the most sustainable form of economic stimulus. In fact, it resembles lighter fluid.
The United States is not alone. Other large economies are also drifting away from capital market openness.
China, for its part, never abandoned financial repression. It continues to operate with a non-convertible currency, a managed exchange rate, and state-directed credit allocation. Under Beijing’s guidance, banks, local governments, and firms direct resources into sectors targeted by national policy. This has yielded mixed outcomes—accelerated development in electric vehicles but massive overbuilding in real estate. In parallel, China is actively developing its own alternatives to the dollar-based global payments infrastructure.
Europe, traditionally a bastion of capital mobility within and beyond the EU single market, is also rethinking its stance. Recent reports by former Italian prime ministers Enrico Letta and Mario Draghi emphasize the irony of large EU savings being exported abroad while domestic investment needs remain unmet. The prospect of redirecting internal capital flows now enjoys growing political legitimacy.
In addition, efforts to enhance the euro’s role as a global reserve currency are gaining traction, especially as the U.S. increasingly politicizes dollar access. A pan-European debt issuance framework is under active discussion. The digital euro project, once abstract, is advancing. The UK, outside the bloc, is pressuring pension funds to allocate more to national investment vehicles. Across the board, there is greater willingness to intervene.
Governments may stop short of comprehensive repression, but the direction is clear. Structural commitments—to climate transition, digital infrastructure, and defense—are not optional. Steering financial flows into these areas is becoming a necessity, not merely an ambition.
This turn toward financial statecraft arises in the context of a broader retreat from globalization. Cross-border bank claims, which peaked in 2008 at nearly half of global GDP, have declined to around 30 percent. This retreat occurred organically, without explicit capital controls, but it now provides cover for more active policy measures to keep capital at home.
There is also a risk dimension to consider. If the shift toward domestic capital retention accelerates, global tensions could erupt into open contests over capital allocation. Future conflicts may be less about goods and more about money—where it moves and who controls it.
At the same time, governments engaging in financial repression must guard against its historical downsides. State-controlled finance has a documented tendency to produce inefficiencies, misallocation, and cronyism. Oversight and accountability will be essential.
Financial Repression is Back
Governments are once again finding ways to manipulate markets to hold down the cost of financing debt
Yet even with these risks, there may be no alternative. If every major economy is moving to ringfence capital, then deploying that capital effectively at home becomes a strategic imperative.
The global economy is not entering a temporary policy experiment. It is undergoing a structural shift. Financial repression, once viewed as a relic of the postwar era, is re-emerging as a necessary tool of 21st-century governance.
Appendix: The Paradox of it All
When debt service eats up an economy as a whole, you are in Paradoxical Effect territory. It starts with diminishing returns on the money spent to fix the economy. It ends with an economy reacting in the opposite direction of the intended effect.
In econimic terms: the inflationary policy’s "marginal utility" decreases and actually flips the other way. The economic body overcompensates from being too out-of-balance.
There comes a point in deficit spending where diminished effects of monetization can actually go negative; Where side-effects become outsized compared to desired effects. Specifically, the debasement (side-effect) created by money printing dwarfs the economic stimulus intended, thereby overwhelming that stimulus and causing even more recessionary behavior.
The side-effect becomes the effect. Your strength gains from srteroid abuse flatline, but your male bra cup-size gets bigger.
The US is a long way from being there, but our Financial Repression will start soon enough.
Sources: Prior GoldFic works, FT analysis by martin.sandbu@ft.com, historical IMF capital control frameworks, ECB policy statements, BIS cross-border claim data.