Where All Your Savings Go…

If Ernest could get it right…

Ernest Hemingway once said “the first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists.”

Papa Hemingway saw more than his share of political fraudsters in his day, and he captured a central truth—profligate fiscal policies have generally led countries to extricate themselves from their difficulties through sleight-of-hand rather than true reform. A more modern form of inflation—financial repression—is being undertaken today.

Here the wayward state seeks to pay negative real interest rates on its debt and thus, it hopes, allow inflation to chip away at its principal over time. Savers pay the price. Today, the Federal Reserve is the instrument of this surreptitious wealth tax—buying roughly 60% of the net new issuance of Treasurys in 2012—and the main reason why an investor in a money-market fund can only get 0.02% on his cash while inflation is close to 2%.


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