Concentration of power and destructive monetary policies
We live in the age of the global monetary economy dictating the pace of the real and productive economy. Central bankers elevated to the category of magicians, or Olympian gods, infallible, clairvoyant and beneficent. Unfortunately, no one whispers in their ear that they are nothing more than men.
To be fair, at various times central banks have acted correctly to stabilize the financial system. The problem is that it gives the feeling that, once they have had a taste of power, they don't want to give it up. So today we find a very different reality in which the big central banks are conducting a very dangerous monetary experiment: putting themselves in a blind alley from which, by definition, they don't even know if they will be able to get out.
The philosophy that drives them is the one that has always driven the concept of interventionism in the economy: a small group of financiers define that they can control the economy without understanding that this is not a machine, but an ecosystem formed by human beings endowed with intelligence and freedom of action that, instead of doing what this group orders them to do, they do what suits them best. What works is that wonderful spontaneous order called market economy, which respects man's freedom, his dignity and his responsibility, encourages him to develop his talents, and has also proven effective in lifting a large part of humanity out of poverty.
Since biblical times every economy has cycles in which bonanza alternates with penury, and whose origin lies in the inevitable and immutable fallibility of man. In the vain search for an impossible economy without cycles, financial economic interventionism creates perverse incentive systems that omit the therapeutic nature of recession, which is painful but healthy and essential to clean up and correct the errors and excesses of the past. Of course, what fundamentally moves politicians to try to avoid low cycles is not the welfare of their citizens, but the concern that the lean season coincides with the moment of their reelection.
The economic interventionist, whether it is the independent central bank, or a particular government, forgets that it can lead the ox to the trough, but it cannot force it to drink. In fact, the economic interventionist can set financial, or interest rates at will, but cannot force people or businesses to borrow. The interventionist government can freeze the price of a certain product, or raise the minimum wage for workers, but it cannot force a company to produce if it loses money and goes broke, nor can it force it to hire if the fixed wage exceeds the worker's productivity. The interventionist can impose taxes, or establish regulations bordering on sadism, but he cannot force the employer to accept performing his activity under such conditions, or prevent him from eventually leaving with fresh wind somewhere where he will not be subjected to constant torture for the crime of wanting to create jobs and wealth, for himself and for the community.
In the same way, the central bank can set zero interest, or very high interest, and create oceans of liquidity out of thin air, but it cannot force banks to lend to whom they do not see fit, or to lend more than prudent risk management recommends. Just as it cannot force the citizen, or the company, to borrow if they don't need to.
The Western world has a huge problem of excess debt. In the case of Brazil, public debt in 2010 was just under 60% of GDP and now exceeds 70% of GDP, and it continues to grow. So when you set very high interest rates, you automatically increase the debt of public and private bonds. With this, I ask myself: what is the sense of encouraging an increase in financial debt when we already have an excess of debt? Besides, there are countless studies that show that high levels of debt harm economic growth. Do we want to grow less? If we have serious problems today, what problems will we have with more debt and less growth?
Central banks argue that they want to reduce inflation, although in the history of central banking there are no solid precedents for the controlled creation of inflation. To this end, Europe at one point reached the absurdity of creating a negative interest rate, a concept unheard of in the documented history of mankind. Also the FED (equivalent to the Brazilian central bank) raised the American fund rate interval from around 0.25-0.50% in March 2022 to 4.75-5.0% in March 2023, that is, an increase of approximately 500% in a few months, without this tickling the American inflation rate
The interest rate has its origin in the axiom that a good, or a dollar in the present, certain, safe and tangible moment, has more value than a good, or an uncertain dollar of tomorrow. As the popular saying goes, better a bird in the hand than two in the bush. This is why lenders and investors are rewarded with reasonable rates. This is why the concept of negative interest rates makes no sense at all, because he who deposits his salary in the bank pays the bank for the privilege of lending it to him. Imagine a mortgage where the bank not only lends us the money to buy the house, but pays us every month for that loan. Perhaps because I am neither a banker nor a central bank employee I consider this to be an aberration or, if I may say so, stupid.
Of course, these zero or negative rates created the biggest stock market bubble in history. Financial history shows that all bubbles, without exception, eventually burst, as happened with the real estate and stock bubbles in 2008. Perhaps when the current bubble of high interest rates, created by the recklessness and arrogance of central banks, bursts, the 2008 bubble will seem like a small sea wave in comparison. The very high interest rates also create aberrations in the economy, especially when they are out of step with the economic realities of the moment, and are attributed to uncertain future government measures. Well, by definition all future measures are subject to uncertainty, whether they are market or political decisions. The fact is that accelerated changes in interest rates in a short period of time unbalance assets and liabilities and have dramatic consequences, as seen in the bankruptcy of the Silicom Valey Bank. Today the system is much faster and has instantaneous amplification mechanisms that make it difficult, if not impossible, to control even the smallest damage. Events run over very quickly, as evidenced by the collapse of Credit Suisse, which, in little more than a week, bankrupted a bank with more than trillion in assets.
Of course, central banks must have an eye to the future, because the interest rate is a price (of money) that also performs an information transmission function about the expectation of inflation and growth, or the credibility of the debtor. This information mechanism is important for the smooth functioning of the economy. But central banks tend to undermine this informational function by politicizing the interest rate. When the rate set does not dialogue with the real economy the credibility effect disappears. For example, a few years ago European sovereign bonds paid less interest than US, or Canadian sovereign bonds, which is not only a distortion, but a real artificial price.
Today monetary policies are dominating the world news and have become more important than the real economy. This endangers companies, banks, insurance companies, pension funds and retirees who depended on a reasonable return on their investments, encouraging them to take imprudent risks. Let's not forget that imprudent risks = bankruptcies. The interest rate should reflect inflation control, but it cannot be just that. It must take into account job creation and the development of real economic activity.
Currently, monetary policy has become so important worldwide that there are even discussions about a common currency for commercial transactions between countries, whose basic purpose is to avoid being tied to a third currency, in this case the dollar, because the commercial transaction ends up being subject to the American monetary policy, without this operation having anything to do with this country.
It is not a good idea to have institutions endowed with such immense power, free from any legal bindings, answerable to no one and subject to no control, and whose unelected leaders are exempt from all responsibility. The abuse of power is guaranteed. Monetary policy cannot override productive economic policy, that which generates goods, jobs, income, taxes.
I lived in a period when the central bank printed money and bought public debt with that money. Brazil was called the banana republics, because we only destroyed the currency. Nowadays, both abroad and here, monetary policies have gained total prominence with their decisions to increase interest rates uncoupled from the real economy, strongly impacting the global economy. In this way, central banks have already transformed most developed countries into banana republics and we will all have to face the consequences, which nothing leads us to believe will be positive.
