Concentration of Power and Destructive Monetary Policies

We live in an era where the global monetary economy dictates the pace of the real, productive economy. Central bankers are elevated to the status of magicians, or gods of Olympus, infallible, clairvoyant, and benevolent. Unfortunately, no one whispers in their ears that they are nothing more than men.

To be fair, central banks have acted correctly on several occasions to stabilize the financial system. The problem is that it seems that once they have tasted power, they no longer want to give it up. Thus, we now find ourselves in a very different reality in which the major central banks are conducting a very dangerous monetary experiment: putting themselves in a dead-end situation from which, by definition, they do not even know if they will be able to escape.

The philosophy that drives them is the same one that has always driven the concept of interventionism in the economy: a small group of financiers decides that it can control the economy without understanding that it is not a machine, but an ecosystem made up of human beings endowed with intelligence and freedom of action who, instead of doing what this group orders them to do, do what suits them best. What works is that wonderful spontaneous order called the market economy, which respects human freedom, dignity, and responsibility, encourages people to develop their talents, and has also proven effective in lifting much of humanity out of poverty.

Since biblical times, every economy has had cycles in which prosperity alternates with hardship, the origin of which lies in the inevitable and immutable fallibility of man. In the vain search for an economy without cycles, financial and economic interventionism creates perverse incentive systems that ignore the therapeutic nature of recession, which is painful but healthy and essential for cleaning up and correcting the mistakes and excesses of the past. Of course, what fundamentally drives politicians to try to avoid downturns is not the well-being of their citizens, but the concern that lean times will coincide with their reelection.

Economic interventionists, whether they be independent central banks or certain governments, forget that they can lead a horse to water, but they cannot make it drink. In fact, economic interventionists can set financial or interest rates at will, but they cannot force people or companies to take out loans. The interventionist government can freeze the price of a certain product or increase the minimum wage for workers, but it cannot force a company to produce if it loses money and goes bankrupt, nor can it force it to hire if the fixed wage exceeds the worker's productivity. The interventionist can impose taxes or establish regulations that border on sadism, but it cannot force employers to accept to carry out their activities under such conditions, nor can it prevent them from leaving for somewhere else, where they will not be subjected to constant torture for the crime of wanting to create jobs and wealth for themselves and the community.

Similarly, the central bank can set zero interest rates, or very high interest rates, and create oceans of liquidity out of thin air, but it cannot force banks to lend to those they do not deem appropriate, or to lend more than prudent risk management recommends. Nor can it force citizens or companies to borrow if they do not need to.

The Western world has a huge problem with excessive debt. In Brazil's case, public debt in 2010 was just under 60% of GDP and now exceeds 70% of GDP, and continues to grow. Thus, when very high interest rates are set, the debt on public and private securities automatically increases. This makes me wonder: what is the point of encouraging an increase in financial debt when we already have excessive debt? In addition, there are numerous studies showing that high levels of debt hinder economic growth. Do we want less growth? If we have serious problems today, what problems will we have with higher debt and lower growth?

Central banks argue that they want to reduce inflation, although there are no solid precedents in the history of central banks for controlled inflation creation. To this end, Europe reached the absurd point of creating negative interest rates, a concept unprecedented in the documented history of humanity. The FED (equivalent to the Brazilian central bank) also raised the US fund rate range from around 0.25-0.50% in March 2022 to 4.75-5.0% in March 2023, i.e., an increase of approximately 500% in a few months, without this having any effect on the US inflation rate.

The interest rate originates from the axiom that a good, or a dollar in the present moment, which is certain, secure, and tangible, has more value than a good, or an uncertain dollar tomorrow. As the popular saying goes, a bird in the hand is worth two in the bush. That is why those who lend or invest are rewarded with reasonable rates. Therefore, the concept of negative interest rates makes no sense, because those who deposit their salary in the bank pay the bank for the privilege of lending it to them. Imagine a mortgage where the bank not only lends us the money to buy the house, but also pays us every month for that loan. Perhaps because I am not a banker or a central bank employee, I consider this an aberration or, if I may say so, stupidity.

Of course, these zero or negative rates have created the biggest bubble in stock market history. Financial history shows that all bubbles, without exception, eventually burst, as happened with the real estate and stock market bubble 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 ripple in comparison. Very high interest rates also create aberrations in the economy, especially when they are out of step with current economic realities and are attributed to the uncertain future of government measures. By definition, all future measures are subject to uncertainty, whether they are market-related or political decisions. The fact is that rapid changes in interest rates over a short period of time mismatch assets and liabilities and have dramatic consequences, as seen in the collapse of Silicon Valley Bank. Today, the system is much faster and has instant amplification mechanisms that make it difficult, if not impossible, to control even the smallest damage. Events unfold very quickly, as evidenced by the collapse of Credit Suisse, which, in just over a week, saw a bank with more than a trillion in assets go bankrupt.

Of course, central banks must look to the future, as interest rates are a price (of money) that also serves to convey information about inflation and growth expectations, or the credibility of the debtor. This information mechanism is important for the proper functioning of the economy. But central banks tend to undermine this informative function by politicizing interest rates. When the set rate is out of step 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 truly artificial price.

Nowadays, monetary policies are dominating global 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 reckless risks. Let us not forget that reckless risks = bankruptcies. Interest rates should reflect inflation control, but they cannot be limited to this. They must take into account job creation and the development of real economic activity.

Monetary policy has become so important worldwide that there is even talk of a common currency for commercial transactions between countries, the basic purpose of which is to avoid being tied to a third currency, in this case the dollar, as commercial transactions end up being subject to US monetary policy, even though this operation has nothing to do with the United States.

It is not a good idea to have institutions with such immense power, free from any legal constraints, accountable to no one and subject to no oversight, whose unelected leaders are exempt from all responsibility. Abuse of power is guaranteed. Monetary policy cannot override productive economic policy, which generates goods, jobs, income, and taxes.

I lived in a period when the central bank printed money and bought public debt with that money. Brazil was called a banana republic because we only destroyed the currency. Nowadays, both abroad and here, monetary policies have taken center stage with their decisions to raise interest rates detached from the real economy, strongly impacting the global economy. In this way, central banks have already turned most developed countries into banana republics, and we will all have to deal with the consequences, which nothing suggests will be positive.