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The trade war that was released by Donald Trump is perhaps just the precursor for much greater unrest in the global economy. What rates look when the dust settles, shortages, surpluses and trading patterns are still formed by financial flows. It is only a matter of time before another economic policy war flares up – it has already started. Welcome to the new era of financial repression.
Financial repression refers to policy that is designed to steer capital to finance government priorities, rather than where it would flow into non -regulated markets. In the post -war decades, Western countries used regulations, tax design and forbidden to limit both capital flows across boundaries and direct domestic flows in favorite applications, such as government bonds or housing.
The US then led the decades of financial deregulation and globalization that led to (and led to) the global financial crisis. The US has now made it clear that it rejects its traditional role in dismantling financial walls between countries and anchoring the global financial order.
Rumors about a “Mar-A-Lago Accord”, which would manage the value of the dollar, while the global investors are forced to make a discount and to lock the lending to Washington, has yielded shocked disbelief by other countries. But it is not only Mar-A-Lago: various policy proposals have recently surfaced that can be reasonably grouped as measures of financial nationalism.
These include a tax on transferments, taxes on foreign investment interests by countries with policy that Washington rejects, and the promotion of dollar-continued stablecoins and looser bank lever instructions. The last two would both stimulate flows into the fault of the US government debt.
While the US represents the biggest swing of the pendulum, other large economies have the same orientation of letting the financing flows freely.
China has never stopped practicing financial repression on a scale. It has retained a non-convertible currency and manages its exchange rate. It uses a network of banks, companies and subnational governments that are influenced by the State or by the State to send the credit flow to points of sale indicated by various economic developmental doctrines that are preferred by Beijing over the years. The latter has had both successes (the industry of the electric vehicles) and failures (the housing bubble). China is also working on an alternative to the dollar-based international payment system.
Europeans have long been puristic about free capital mobility – originally in the EU internal market, but also with the rest of the world. Yet the attitude changes there too.
The influential reports from former Italian Prime Minister Enrico Letta and Mario Draghi have emphasized that the block sends several hundred billion euros abroad every year when there are huge gaps in domestic financing. This invites policymakers to take measures to destroy financial flows. This also applies to the agenda to unite national financial markets.
The aim of turning the euro into a more attractive reserve and investment currency has also been strengthened by Trump’s apparent contempt of the role of the dollar. A large EU level loan program suddenly looks, and an official digital euro is on the road. At the same time, the UK tries to persuade pension funds to give more savings in the hands of British companies.
Europe may not end with full financial repression, but it is now an open season for policy to send financial flows where governments, not just markets, think they are most needed. In reality, obligations to climate and digital transitions and defense-related infrastructure do not make any other choice.
What should we make of this return of financial state activism?
First note that it is already in the decline of financial globalization. Rapid growth of cross -border financial claims by banks stopped in 2008. Almost 50 percent of the world economy at the beginning of 2008, such claims were shrunk to 30 percent. This can be partially compensated by non-banking activity, but in any case it happened without deliberate policy to keep money at home.
Secondly, complaints about surpluses of other countries can change quickly if we end up in a fight for the world’s available capital, making the Trade Wars at the play of children.
Thirdly, a lot can go wrong. It is not that liberalized financing has covered itself in glory (it is not). But the state -oriented financing is a risky activity, susceptible to boyfriend politics and wrong allocation without guarantees. Yet it may be necessary. If everyone is going to try to keep more capital at home, it is even more important to put it at the best.
