FUTURE FINANCIAL REPRESSION IS GREEN!

Gordon T Long

Global Macro Research | Macro-Technical Analysis

THESIS 2012

FINANCIAL REPRESSION

FUTURE FINANCIAL REPRESSION IS GREEN!

In 2015 I co-founded the Financial Repression authority (FRA).

I had come to the realization by then that Financial Repression was not going to be just a temporary Macroprudential Monetary Policy, but rather a policy basis that would be with us for a very long time. Additionally I felt this already accepted policy approach, adopted after WWII to handle the massive war debt burden, would likely need to be greatly expanded into approaches never previously envisaged. Though initially even QE was somewhat a shock, it appears to have only the beginning. Unfortunately my concerns have proven well founded as this note will endeavor to illustrate!

The accepted central tenet of Financial Repression is to use Negative Real Yields to effectively confiscate wealth through reduced purchasing power by central bank Monetary Policy to manage the government debt burden.

This approach is presently in the process of being greatly enhanced through what might be better labeled ‘Regulatory Repression’.

Going forward, instead of solely relying on Monetary Policy to manipulate interest rates, it will now include the use of Regulatory Compliance in concert with incentivized capital markets & the media sanctioned social pressures of ESG adoption to greatly broaden its effectiveness. As explosive a financial surge and relief to the Securities Market was with the adoption of Asset Backed (ABS) and Mortgaged Backed (MBS) securities in the 1990’s, it is expected to pale in comparison to new Carbon Backed securities. All of this being driven by, and rooted in, the fear of Global Climate Change. Let me briefly explain, as it is important to your financial investment planning..

FINANCIAL REPRESSION

This concept of Financial Repression was introduced in 1973 by Stanford economists Edward S. Shaw and Ronald I. McKinnon. We argued at the FRA that Financial Repression is not a conspiracy theory but rather a collective set of Macroprudential (well intentioned) policies and regulations focused on controlling and reducing excessive government debt through 4 fundamental pillars:

1. Negative Real Interest Rates,
2. Forced attempts at inflation in an era dominated by Deflation due to Global Labor arbitrage & Demographics,
3. Ring-fencing regulations and financial investment options,
4. The use of Key Data “Obfuscation” where required.

All of which effectively transfers purchasing power from private savings.

We developed the chart below to show how the ‘good-intention’ objectives by government & central banks translate into policies, financial reform and regulations which collectively cause unintended consequences ultimately resulting into the adverse risks to investors and retirees (see the red core).

GREEN FINANCIAL REPRESSION

As successful as Financial Repression has proven to be, through new untested major variant polices such as Quantitative Easing (QE), it has already been found to be insufficient in effectively reducing the government’s debt burden. Additionally, as an Unintended Consequence it has become a major contributor to growing wealth inequality and Moral Hazard. Debt growth in the developed economies continues to expand at an ever accelerating rate which now requires even further aggressive policy accommodations.

Policy setters have only recently accepted that sustained expansion of the money supply has delivered what it normally and eventually always does – Inflation! Sustained low rates are now contributing to not only malinvestment, but exploding inflation which threatens to become a political problem for elected policy setters.

The dilemma suggests the following is on the horizon:

Suspected Targets

~4.7%: Expecting Higher Inflation Rates,
~2.2%: Will Require Higher UST Bond Rates,
~-1.5%: To still achieve High Real Negative Rates.

THE PLAN

What Is This Really All About?

WHY IS THIS REQUIRED: The Global Economy and Central Banks are trapped in a Credit & Liquidity Crisis that requires the growth of Debt that is significantly larger than global economic growth of credit is capable of generating.

CONSEQUENCES: The current financial system is so massively over leveraged through 100s of Trillions of dollars of derivatives, futures contracts, options and balance sheet gearing that if credit and debt are not increased, the system will implode under its own unfundable weight.

SOLUTION: A Global campaign for Climate Change through an accelerated movement towards Green Energy provides the optimum vehicle for the creation of a stream of taxpayer and debt-funded “investments” which in turn will need a just as constant degree of debt monetization by central banks.

This will require a major policy transition as well as new methods of delivering massive increases in debt creation while managing currency stability.

COP26 was a major globally coordinated step towards that goal!

WHAT ARE WE TALKING HERE?

We are talking about a plan targeted to spend $150 trillion over 30 years globally. This will average $5 trillion in annual investments – amounting to twice current global GDP!

$130 TRILLION ALREADY COMMITTED

Mark Carney, the UN Special Envoy on Climate Action and Finance and former Bank of England Governor through theGLASGOW FINANCIAL ALLIANCE for NET ZERO has secured agreements to devote $130 trillion in private capital funding – around 40% of the world’s financial assets – to hit net zero emission targets by 2050. Its members represent over 450 financial institutions from 45 countries. From the US, banks that participated included Bank of America, Citi, JPMorgan Chase, Morgan Stanley, Goldman Sachs and Wells Fargo.

“We must build a financial system entirely focused on net zero”

Mark Carney – UN Special Envoy on Climate Action and Finance and former Bank of England Governor.

“REWIRING OF THE ENTIRE FINANCIAL SYSTEM”

The big message from the Glasgow climate conference was the role of finance in decarbonizing the global economy. It’s a dangerous development and financial pivot.

In his speech to the 26th Conference of the Parties (COP26), Britain’s chancellor of the Exchequer, Rishi Sunak, pledged action to “rewire the entire financial system for Net Zero.”

Until now, central banks and financial regulators – particularly the Fed and the SEC in the U.S. — have been maintaining the pretense that their involvement in climate policy is motivated by concern about climate financial risk. Climate financial risk is a smoke screen for what can only be seen to be an aggressive Green Financial Repression power grab.

“If there’s a revenue stream, then the funding is infinite”

Bank of America chief executive Brian Moynihan told the Wall Street Journal’s Greg Ip.

ACHIEVING A REVENUE STREAM

A CARBON CREDIT is a tradable permit or certificate that provides the holder of the credit the right to emit one ton of carbon dioxide or an equivalent of another greenhouse gas – it’s essentially an offset for producers of such gases.

CARBON OFFSETS are tradable “rights” or certificates linked to activities that lower the amount of carbon dioxide (CO 2) in the atmosphere.By buying these certificates, a person or group can fund projects that fight climate change, instead of taking actions to lower their own carbon emissions.In this way, the certificates “offset” the buyer’s CO 2 emissions with an equal amount of CO

FORCED ESCALATING CARBON PRICING THROUGH REGULATORY PRICE SETTING

The Intergovernmental Panel on Climate Change estimates a minimum of $135 a ton, rising up to $14,300 a ton in order to hit net zero in 2050.

Rupert Darwall is the author of “Climate-Risk Disclosure: A Flimsy Pretext for a Green Power Grab,” and a senior fellow at RealClearFoundation observed:

It should set alarm bells ringing when bankers stop talking about risk and prudence and start talking like Buzz Lightyear. These revenue streams don’t currently exist, but one way or another, they will be created — juiced up and supported by governments and multilateral aid agencies such as the World Bank.

On the other side of the ledger, returns on investment in the production of hydrocarbon energy needed to keep the lights on and economies moving are to be suppressed, pushing up their cost. Ultimately, the revenue streams Moynihan and other bankers lend against come from taxpayers and consumers. Higher energy costs and supply disruptions would make it harder to service purportedly low-risk net zero financing.

When bankers talk of the social value of bank lending, it has all the makings of a systemic financial crisis. In 1987, shortly after the Reagan administration’s botched Savings & Loan (S&L) deregulation, University of Chicago economist Sam Peltzman warned of the dangers to bank capital when banks are induced by governments to channel credit to socially “worthy” sectors like housing. There followed the S&L meltdown, which cost American taxpayers up to $124 billion. Two decades later came an order-of-magnitude larger financial crisis, also with its origins in housing finance. Using the global banking system to cross-subsidize net zero risks a financial crisis that would make 2008 look comparatively minor — much the way the S&L meltdown looks to us today.

TRANSITION PLANS POLICED BY AN INDEPENDENT AUDITORS

The Glasgow COP’s host, Britain’s chancellor of the Exchequer, Rishi Sunak, singled out British business for special treatment and announced that the U.K. will become the first ever “Net Zero aligned financial center.” That vision will see businesses being forced to file net zero transition plans policed by an independent task force. This was intended to set the model for all UN countries to adopt in some form.

NOW REQUIRES THE IMPLEMENTATION OF:

GOVERNMENT REVENUES: A CARBON TAX
- A carbon tax places a fee on the carbon emissions content of fossil fuels, and the market then determines the resulting quantity of emissions reductions
INCREASED LIQUIDITY: GREEN BONDS
- A green bond is a type of fixed-income instrument that is specifically earmarked to raise money for climate and environmental projects. These bonds are typically asset-linked and backed by the issuing entity’s balance sheet. So they usually carry the same credit rating as their issuers’ other debt obligations.
- Green Bond purchasers are typically institutional investors, often with either an ESG (environment, social and governance) mandate or an environmental focus. Other buyers include investment managers, governments and corporate investors.
- In addition, there are often tax benefits for investing in green bonds.
- According to the Climate Bonds Initiative, the issuance of green bonds reached $269.5 billion in 2020. The United States was the largest player, with $50 billion in new issuance. The same analysis found that the cumulative issuance of green bonds had reached over $1 trillion.
- REVENUE STREAMS: CARBONS CREDITS, CARBON OFFSETS & CARBON STREAMING
- These tradable financial instruments foster the expansion of the securities markets and the broadening use of financial leverage, derivative adoption and ETF products.
LOAN GUARANTEES: CONTINGENT LIABILITIES
- We can expect many governments to guarantee Climate Change investments. The US Fiscal Gap which includes Contingent Liabilities is currently already in excess of $212T and no doubt will grow to assist in accelerating Climate Change and the rapid adoption of Green Technologies.

Indirect climate policies are not a substitute for direct government action to suppress consumer demand for greenhouse gas-emitting activities. Using the financial system as the principal policy instrument of decarbonization will have unintended consequences and create immense distortions that threaten global financial stability and the functioning of a commercial society. The climate crisis enters a new, dangerous phase as finance ministers, central bankers, and financial leaders all look to save the planet — with other people’s money.

CONCLUSION

The goal of Financial Repression is to effectively reduce the financial burden of debt expanding faster than economic growth. Green Financial Repression takes a fundamentally different approach. Instead of trying to solve the problem through Monetary Policy and restrictive Fiscal Policy (including Taxation with their individual consequences) it uses the governments regulatory powers.

WHAT IS GOING ON HERE

Governments regulatory powers have always included broad ranges of Fees, Licenses, Toils and Assessments. The new approach uses Time & Level Assessments.

By setting Carbon Emission Levels and Time frames it forces compliance which can only be achieved through forced investment or in some cases de-investment. Additionally, it is using the policies of ESG in gaining investor approval to incentivize Voluntary Compliance and participation.

WHAT THIS GREEN EXPANDED FINANCIAL REPRESSION DELIVERS

Investment is expected to not only come in the form of Capital Investment but also to foster growth in the capital markets for tradable permits, rights and certificates for carbon emissions. Carbon Credits and Carbon Offsets therefore create taxable profits, but most importantly the massive Investments required is projected to materially expand Global GDP.

The Global GDP is presently ~ $84T/year. $150T over 30 Years is $5T. That is an annual increase of 6% which is dramatic when the global economic growth approximates 3% or less.

However, it is expected to be much larger than that because the $5T/year is only the planned amount of investment capital being raised. Additionally, it is expected to result in dramatically increasing competitive & regulatory driven Carbon pricing which will outstrip overall Inflation.

Remember, it is centrally Inflation and economic growth that Financial Repression is targeted at. What we have here is more appropriately termed “Regulatory Repression”. Instead of penalizing Savers with reduced purchasing power it penalizes Carbon Emitters & Users achieving the same end.

… at least that appears to be their plan?

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