economic profits

A mechanism by which governments buy foreign bonds in an effort to sterilize currency is referred to as Financial Repression. There is a direct proportionality between the degree to which this process occurs and the liberality of said political economy.

To hold down interest rates as an offset to the value of currency are the effects of financial repression. This, in turn, due to the relative value of [cheap] money leads to a more competitive trade regime in said country.

Hume’s Price specie flow mechanism would otherwise cause the money to appreciate as trade balances of said countries became increasingly positive. However, the financial repression maneuver works to artificially stop the rising tide of natural price fluctuations in the international money market in such a way that a disequilibrium takes place between a government’s cost of capital and it’s returns on foreign exchange reserves.

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Tagged as: 2007 subprime mortgage financial crisis, competitive trade regime, cost of capital, economic profits, effects of financial repression, Financial repression, financially repressive economy, foreign bonds, foreign exchange reserves, governments, marginal returns, perfectly competitive markets, political economy, Price specie flow mechanism, return on investment, risk taking

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