THE GOVERNMENT was accused of “hijacking” the credit system to fund its own “profligacy” by HSBC’s chief economist yesterday.
In a research note, Stephen King slams Western governments, including the US and the UK, for rigging the credit system so that they can “jump to the front of the credit queue” and impose low borrowing rates for states, while private sector borrowers are “crowded out” and forced to pay more.
He uses the term “financial repression” to describe the policy, whereby governments force savers and companies to lend to them for low returns or at a real-terms loss.
By borrowing heavily while having the Bank of England act as “gilt purchaser of last resort”, King argues that the government has managed to keep its borrowing costs down but that it will only serve to “live with” a high debt burden and will not reduce it.
The note is a stinging critique of George Osborne’s claim to be pursuing a policy of “fiscal austerity and monetary activism” – whereby the government proceeds gradually with budget cuts and relies on the Bank of England to buy its debt.
“By jumping to the head of the credit queue, government is not subject to the market forces that might, in other circumstances, impose discipline on its behaviour,” King writes.
In addition, King highlights that new Basel III capital rules force banks and other financial firms to stock up on public debt because it is the only way to meet liquidity requirements, despite the fact that a lot of public debt is not highly liquid in a crisis.
“Lending to government ends up artificially high and, by implication, lending to everybody else ends up too low,” he writes, adding: “That’s unfortunate because, without economic growth, it’s very difficult to bring debt back down again even under conditions of financial repression.”
He also warns that financial repression is likely to result in “persistently lower growth” in Western countries and that it will be hard for central banks to turn off the tap.
“The central bank will find it increasingly difficult to tighten monetary policy,” he says, because politicians and central banks will continue to prioritise putting off short-term pain “at the possible expense of long-term gain”.