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Financial repression is any government policy that hampers the investment opportunities of its citizens while improving the overall fortunes of the government itself. Proponents of this theory feel that this occurs whenever governments fall into significant debt and need funding to extricate themselves. The theory states that governments use tactics like interest rates, government bonds, and the banking system to effectively act as a system of indirect taxation on the citizens of these countries. Those people who feel that the theory of financial repression is, at best, cynical, and at worst, treasonous, argue that it is simply a backlash against necessary government interaction with economic machinery.
There are very few cultures throughout history that have existed without some sort of intervention on behalf of governing bodies on their monetary systems. Most of these governing bodies have argued that such intervention is necessary for the betterment of society at large, but the opportunity for corruption in such cases is obvious. In the modern world, such outright governmental corruption would be difficult to effect. Still, some experts believe that a subtler form of government misbehavior exists in the form of financial repression.
While it is hard to define, financial repression essentially occurs any time that a government places its own financial concerns ahead of the concerns of its citizenry. This can be done in ways that are hard to detect. In some cases, the methods for achieving such an effect might even be perfectly legal, even as the spirit of the action by the government in question could be perceived as deceitful.
One specific way that financial repression can be achieved is through manipulation of interest rates. If interest rates are held at a low level while inflation soars, it means that the real value of the interest rate is negative. By keeping saving options limited only to banks that offer these interest rates, the government can limit the prospects of the citizens. In addition, a government can persuade banks to funnel their money to government securities, thereby reducing the debt of the government in the process.
It is difficult to draw the line between where simple economic stimulation ends and financial repression begins. Many who believer in this theory point to periods when it was practiced by governments in developed countries coming out of expensive wars that placed them heavily in debt. On the other hand, those governments often were forced to take drastic actions to build back the economies of their respective countries.