Following his re-election, US President Barack Obama almost immediatelyturned his attention to reining in America’srising national debt. In fact, almost all Western countries are implementingpolicies aimed at reducing – or at least arrestingthe growth of – the volume of public debt.

In their widely cited paper “Growth in a Time of Debt,” Kenneth Rogoff and Carmen Reinhart argue that, when government debt exceeds 90% of GDP,countries suffer slower economic growth. Many Western countries’ national debtis now dangerously near, and in some cases above, this critical threshold.

Indeed, according to the OECD, by the end of this year, America’s national debt/GDP ratio will climb to108.6%. Public debt in the eurozone stands at 99.1% of GDP, led by France, wherethe ratio is expected to reach 105.5%, and the United Kingdom, where it willreach 104.2%. Even well disciplined Germany is expected to close in on the 90%threshold, at 88.5%.

Countries can reduce their national debt by narrowing the budget deficitor achieving a primary surplus (the fiscal balance minus interest payments on outstanding debt). This can be accomplished throughtax increases, government-spending cuts, faster economic growth, or somecombination of these components.

When the economy is growing, automatic stabilizerswork their magic. As more people work and earn more money, tax liabilities riseand eligibility for government benefits like unemployment insurance falls. Withhigher revenues and lower payouts, the budget deficit diminishes.

But in times of slow economic growth, policymakers’ options are grim. Increasing taxes is not only unpopular; it canbe counter-productive, given already-high taxation in many countries. Publicsupport for spending cuts is also difficult to win. As a result, many Westernpolicymakers are seeking alternative solutions – many of which can beclassified as financial repression.

Financial repression occurs when governments take measures to channel tothemselves funds that, in a deregulated market,would go elsewhere. For example, many governments have implemented regulationsfor banks and insurance companies that increase the amount of government debtthat they own.

Consider the Basel III international banking standards. Among other things, Basel III stipulatesthat banks do not have to set aside cash againsttheir investments in government bonds with ratings of AA- or higher. Moreover,investments in bonds issued by their home governments require no buffer, regardless of the rating.

Meanwhile, Western central banks are using another kind of financialrepression by maintaining negative real interest rates (yielding less than therate of inflation), which enables them to service their debt for free. TheEuropean Central Bank’s policy rate stands at 0.75%, while the eurozone’sannual inflation rate is 2.5%. Likewise, the Bank of England keeps its policyrate at only 0.5%, despite an inflation rate that hoversabove 2%. And, in the United States, where inflation exceeds 2%, the FederalReserve’s benchmark federal funds rate remains at an historic low of 0-0.25%.

Moreover, given that the ECB, the Bank of England, and the Fed areventuring into capital markets – via quantitative easing (QE) in the US and theUK, and the ECB’s “outright monetarytransactions” (OMT) program in the eurozone – long-term real interest rates arealso negative (the real 30-year interest rate in the US is positive, butbarely).

Such tactics, in which banks are nudged,not coerced, into investing in government debt,constitute “soft” financial repression. But governments can go beyond suchmethods, demanding that financial institutions maintain or increase theirholdings of government debt, as the UK’s Financial Service Authority did in 2009.

Similarly, in 2011, Spanish banks increased their lending to thegovernment by almost 15%, even though private-sector lending contracted and theSpanish government became less creditworthy. Asenior Italian banker once said that Italian banks would be hanged by the Ministry of Finance if they sold any oftheir government-debt holdings. And a Portuguesebanker declared that, while banks should reduce their exposure to riskygovernment bonds, government pressure to buy more was overwhelming.

In addition, in many countries, including France, Ireland, and Portugal,governments have raided pension funds in orderto finance their budget deficits. The UK is poised to take similar action,“allowing” local government pension funds to invest in infrastructure projects.

Direct or indirect monetary financing of budget deficits used to rankamong the gravest sins that a central bank couldcommit. QE and OMT are simply new incarnationsof this old transgression. Such central-bankpolicies, together with Basel III, mean that financial repressionwill likely define the economic landscape for at least another decade.