Simon God, Associate Professor IP Unikamp. Senior Research Fellow at CEBRI and Chairman of the Board of IFFD
Rogerio StudartSenior Fellow at CEBRI and Former Director of the World Bank Group and IsDB
At its last meeting, the Monetary Policy Committee (Copom) of the Central Bank of Brazil (BC) decided to keep the base interest rate at 13.75% per annum. reported that the decision was based on projections that inflation should slow down — from 5.8% in 2022 to 4.8% in 2023 and 2.9% in 2024 — and move closer to the target. However, this signaled that it is monitoring a range of risks that may be associated with the relevant horizon (18 months) and assesses that a permanent increase in public spending, as well as uncertainty about its future trajectory, could dampen expectations, which could demand a further increase in interest rates.
In a recent event in which he commented on the decision, British Columbia’s director of monetary policy, Bruno Serra Fernandez, was asked about the amount of the tax exemption the monetary authority would accept. Fernandez did not answer, preferring to recount an incident that happened in England with the government of Liz Truss, who lasted only 44 days in power. For the director, the Truss government was punished for not adopting an economic policy that he believed would worsen the country’s financial situation. The punishment took the form of financial instability: the devaluation of the pound sterling, the fall in share prices and a sharp devaluation – by 23%, which became the epicenter of the crisis – British government debt securities (gilts) traded on the market. While Brazil’s president-elect is negotiating with Congress on the best way to align the fiscal year 2023 budget with the commitments made during his campaign, what happened in the UK actually calls for a deeper discussion.
More like a disclaimer. We are not here defending the economic policies introduced by the former prime minister, based on the idea that tax cuts, especially for the richest, should boost growth. On the contrary, for reasons which one of the authors has already discussed in another articleIn view of the growing, “self-reinforcing” and immoral inequality of income and wealth that is observed in the world, regressive tax measures are undesirable and cause deterioration of the social fabric. In addition, there is ample evidence of the ineffectiveness of the so-called supply side to accelerate growth.
But back to the version that the Liz Truss government fell because it was punished by the market. Apparently, this is not the only interpretation of events that are already being investigated. AT recent article entitled “It wasn’t the markets that brought down the track. It was the Central Bank of England (BOE).”, economist Narayana Kocherlakota, professor at the University of Rochester and former president of the Minneapolis Fed, who has a deep knowledge of the subject, says that the crisis in England is associated with two huge failures of its central bank.
For Kocherlakota, the Bank of England was an ineffective regulator of the markets, simply watching, without doing anything, the rapid growth of speculative activities of British pension funds, which in the short term became indebted to buy long-term government debt securities. As their price began to fall, a mismatch in fund balances forced a massive sale of securities in the portfolio to meet margin requirements, which made the situation worse. The second and decisive failure of the Central Bank of England was to deal with this instability. Having made the necessary intervention in the market, buying securities and maintaining prices, he announced that his intervention would be for a limited period, fixing the day when it would end. The overlap of these two errors led to a major crisis with a political weakening of the cabinet, making a newly sworn government impossible. Having asked Stumbling into the press about the Bank of England’s role in the downfall of Liz Truss, its chairman, Andrew Bailey, defended himself. But the case is far from closed.
As concerns are often raised in Brazil that fiscal imbalances could worsen inflationary expectations and lead to an unsustainable debt trajectory, and parallels are drawn with what happened in England, its basis needs to be discussed. International debates on macroeconomics have unfolded both in scientific circles and in the specialized press. There is far from being a consensus on the existence of a causal relationship between the growth of debt and the acceleration of inflation. Their uncritical acceptance in the country is due to the fact that they have become set of beliefs– without empirical support – which dominates the national economic debate and prevents substantive issues from being discussed.
The first, perhaps most important, of these beliefs is that the main obstacle to growth is the size of the state. The second is “expansionary economics,” that is, the belief that cutting government spending, in addition to being a guarantee of low and stable inflation, is the way out for renewed investment, growth, and the reduction of unemployment and inequality. It is also believed that in order to finally guarantee austerity measures, it is necessary to imprison “Leviathan”, an argument that served as the basis for the constitutional cap on spending.
Brazil is in a deep social crisis with 33 million people suffering from hunger and 61 million Brazilians facing food insecurity FAO data🇧🇷 And we cannot forget that our democracy is under threat. It is critical to overcome these two crises through an inclusive and sustainable growth recovery. There is an urgent need to structure projects – in infrastructure, logistics, agriculture and green reindustrialization – that could be the seeds for a new wave of public and private investment. Here are the challenges and questions to guide the debate. Possible financial problems can be perfectly resolved by the Central Bank, which is responsible for ensuring the proper functioning of the financial markets in the country.
