During the 1970s, interest rates in Europe and the United States trailed the annual increase in the price level. The foreign exchange markets rewarded countries with the soundest monetary policies. The best-performing currencies in that era – the Swiss franc and Deutschmark – were issued by countries with relatively stable prices. Inflation-ravaged Britain, by comparison, saw the pound slide.
Monetary authorities won’t allow this process to continue indefinitely. In 1985, the United States arranged the international currency agreement, known as the Plaza Accord, to bring down the value of the dollar. During the last decade, the Swiss National Bank devoted a lot of effort to preventing the country’s currency from appreciating against the euro. Besides, the United States is not an obvious safe haven from financial repression.
The term financial repression was originally coined in the 1970s to describe the habit of authorities across much of the developing world of keeping interest rates well below inflation. Stanford economist Ronald McKinnon associated financial repression with the state control of credit, the discouragement of personal savings and lacklustre economic growth. Now the developed and developing world are trading places.
For instance, Brazil’s policy rate has risen from 2% early last year to 12.75% today – a figure slightly above the latest inflation print. As interest rates have climbed more steeply in emerging markets than elsewhere, the real yield on a basket of bonds issued by the major debt issuers - Brazil, Mexico, South Africa and Indonesia - has reached a 15-year high relative to the post-inflation yield on U.S. Treasury bonds.
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