Pozsar: "Keep an open mind or get financially repressed."

YCC is Here

Keep an open mind, or get financially repressed

- Z. Pozsar

Connecting a couple dots here: The coming Yield Curve Control Zoltan Pozsar alerted us to recently is a tool of financial repression. The BTFP bank bailout is a a form of YCC. Active financial repression has just started in the form of the current bank bailout

1. Given: YCC = Financial Repression

2. And: BTFP = YCC

3. Then: BTFP is Repression

Financial Repression

Financial Repression is what the name implies. One of the main goals of financial repression is to keep nominal interest rates lower than they would be in self-clearing markets. Other things equal, this reduces the government’s interest expenses for debt and contributes to deficit reduction.

However, financial repression produces negative real interest rates (nominal rates below the inflation rate), and reduces or liquidates existing debts and becomes the equivalent of a tax—a transfer from savers to borrowers, including the government (Reinhart and Sbrancia, 2011).

It turns out, Yield Curve Control represses quite nicely...

YCC is a Tool of Financial Repression

Yield Curve Control (YCC), a form of QE which targets rates as opposed to notional bond values, seeks to keep long term bond rates artificially low by preventing them from getting to a level properly reflecting inflationary pressures on its currency. Real rates go negative. How negative depends on how repressed things get.

We had been banging on recently about the coming YCC version of QE that both Zoltan and Hartnett now propose is in the works. Examples:

• Pozsar: YCC needs to "keep the wheels on the cart" or the dollar is dead.

• Hartnett on YCC, Inflation, and Precious Metals

But how is the Bank bailout financial repression? How is it inflationary? We’ve been told BTFP is not QE. We’ve also been correctly told they are just loans. Specifically, if YCC is financial repression, how does the Bank Bailout fit in?