By JOSÉ RICARDO FIGUEIREDO*
The Central Bank intends to increase the Selic rate, citing expectations of future inflation
Since the beginning of the current government, we have been patiently following the slow fall in the Selic interest rate from 13,75% to the current 10,5% per year, while inflation remained at around 4% per year. We recently had the frustrating interruption of the fall, despite the fact that we still live with one of the highest real interest rates on the planet. Now, we hear that the Central Bank intends to increase the Selic rate, claiming expectations of future inflation. And perhaps it will do so, depending on the government's guidance. Focus Bulletin, which reports research carried out periodically with around one hundred and sixty representatives of the financial system.
The news is a slap in the face for the Central Bank, which has expectations of significant economic growth. These are workers in the public and private sectors, whether salaried, informal or self-employed. These are small, medium and large business owners, whose main source of income is production or trade. These are government officials who are concerned with meeting fundamental demands in health, education, security, infrastructure, etc.
Therefore, a measure on an essential parameter of economic policy, which affects the entire nation, is in the hands of a handful of representatives of the financial market, who are paid, in large part, by the Selic rate. How can a democracy live with this? Or, better yet: can we talk about democracy while living with this?
The absurd has a history. First, a traumatic experience of hyperinflation and supposed remedies against inflation, which made people value monetary stability greatly since the Real Plan. Second, the systematic neoliberal preaching against the State also dogmatized a mechanistic relationship between low inflation and high interest rates. These points are discussed below.
The traumas of hyperinflation in the Brazilian Republic
From the 1930s to 1980, Brazil had one of the highest economic growth rates in the world, averaging 6 to 7%, while almost always experiencing moderately high inflation rates, above single digits per year. A sharp acceleration in inflation occurred in the early 1960s, reaching a rate of 80% in 1964, which was one of the justifications for the military coup that year.
The military regime was successful in reducing inflation by prohibiting strikes, continuously reducing the minimum wage, and, ultimately, by squeezing wages. This anti-social and recessive approach had consequences in the protests of 1967 and 68 and in the emergence of armed struggle, which were responded to by the coup-within-a-coup by the Military Junta.
But it was clear that the recessive policy was dangerous for the regime itself, and that a developmentalist policy would be necessary. Furthermore, the wage reduction that had already occurred would stimulate foreign investment. The early 1970s were characterized as the period of the “Brazilian economic miracle”, reaching growth rates of 10% per year, with inflation falling to a minimum of 14% per year.
But this situation began to change, largely due to the double shock of oil prices, of which we imported four-fifths of what we consumed. We reached the end of the 1970s with moderate growth, but inflation approaching 100% per year, and seeing major workers' strikes defying police repression.
The main responses to this crisis, under the government of General Geisel, were correct: Petrobras invested in sub-salt oil under the sea, and the automotive ethanol program was created. But these measures would have medium and long-term effects and, in the face of high inflation, General Figueiredo, who formally took over the government in 1980, took the worst possible measure: he effectively handed the government over to the IMF, to the applause of the press.
The IMF's anti-inflationary policy was that of the strict monetarist orthodoxy of the Chicago school, imposing spending cuts, the end of subsidies, interest rate hikes, privatization, and thus causing recession, unemployment, and hunger. At the time, industrialist Severo Gomes, a minister in the Geisel government and opposition senator in the Figueiredo government, said: “Of the Chicago school, the one who killed the least was Al Capone.”
But the recessionary remedy did not work this time. João Figueiredo, who had taken office with inflation close to 100% per year, left the government with inflation in the region of 250% per year. If the high inflation of 1964 had helped put the military in power, even higher inflation would see the end of the military regime in 1985. But we were still at the beginning of the longest and most intense inflationary process in our history, in which inflation exceeded 20% per month for several periods.
Early in the New Republic, we had an unorthodox innovation in the technique of combating inflation, designed to eliminate, in a socially neutral way, the inertial aspect of inflation. The term inertial inflation designates the process of successive transfer of increases in the prices of inputs and labor to the prices of products, from these to the prices of derived products, affecting consumers who, as workers, will demand new transfers, and so on.
In periods when inflation reaches reasonably constant monthly levels, even if high, this inflation can be eliminated by means of a monetary reform that incorporates and neutralizes this inertial aspect. This idea inspired the Cruzado Plan of 1986 and the Bresser Plan of 1987, with Sarney, and the Real Plan of 1994, with Itamar Franco.
All these plans also required an “anchor” to ensure stable prices at the beginning of the new currency, at least. The monetary reform of the Cruzado plan was followed by a price freeze, artificially stretched for electoral reasons, and the plan collapsed shortly after the 1986 elections. The Bresser plan was less dependent on a freeze, but it also did not last long.
After the failure of the plans under the government of José Sarney, one of the most dramatic moments in the fight against inflation occurred. The plan launched by Collor on the day he took office in 1990 applied a radical heterodoxy: he confiscated all bank accounts with more than a modest amount, both investments and checking accounts, to supposedly be returned after a year and a half. This surprising act against private property came from someone who was elected promising capitalist modernization. The consequences of the Collor plan were profoundly recessionary, with many bankruptcies of small savers who were unable to use their money for what they intended.
The Plano Real avoided the technical and political problems of the first two plans against inertial inflation, and was more successful. The URV, Real Value Unit, denominated in the current currency, was created, whose value in the current currency Cruzeiro Real cumulatively followed the inflation rates, in order to maintain its real value. Some time later, contracts could adopt the URV as a defense against inflation and, some time later, the Real currency, identified with the URV, was adopted for prices and wages.
Prices were converted using the URV value on the date the Real was adopted (1R$=2750Cr$). Salaries were converted according to the average value in URV in the last six months, a period corresponding to the salary adjustment period. In the first years of the Real Plan, the anchor for containing inflation was the high exchange rate, with the real and dollar currencies almost at par, making imports cheaper.
The need for this anchor arises from the fact that, once the inertial aspect of inflation has been eliminated, the main, non-inertial aspect remains: the tendency for inflation to rise, which is a manifestation of the distributive conflict. However, the parity between the real and the dollar caused a balance of payments deficit to the point of exhausting reserves, with renewed submission to the IMF. It had to be abandoned after the 1998 elections, replaced by the institutionalization of the “economic tripod”: floating exchange rate, inflation target and fiscal target.
The floating exchange rate removes the government's control over the exchange rate, making it dependent on the financial market, including speculators. The fiscal target invariably requires a reduction in government spending. The inflation target has been set in such a way that it always leads to an increase in interest rates.
This tripod has indeed contained inflation. If, from the 1980s until the Plano Real there was financial instability and mediocre growth alternating with recessive phases, from the Plano Real until now there has been financial stability, but mediocre growth alternating with recessive phases continues. In both periods, the average growth rate of the economy has been around 2% per year and, in both periods, Brazil has lived with real basic interest rates among the two or three highest on the planet. This is no coincidence.
Interest myths
The mechanistic conception that inflation is fought by increasing interest rates has long been established in the commercial press and in common sense.
Let's see. Interest is a transfer of income from the borrower to the lender. In the case of consumers who buy on credit, an increase in interest rates directly means an increase in prices, and therefore inflation, for all practical purposes. In the case of entrepreneurs who take out loans to invest, an increase in interest rates directly means an increase in total production costs and, almost necessarily, an increase in the prices of products. Therefore, the most direct and immediate result of an increase in interest rates is exactly the opposite of what the mechanistic conception predicts.
But there are indirect effects, whereby interest rate increases tend to be anti-inflationary.
The first is the recessionary effect. Rising interest rates lead some consumers to give up buying, and some entrepreneurs to give up investing. As demand cools, prices tend to fall. The recessionary aspect is not a side effect of the medicine; it is the essence of its relative effectiveness.
Relative effectiveness, not only because it is preceded by the immediate inflationary effect mentioned above, but also by future consequences. A recession is characterized by disinvestment, which means lower future production and therefore lower supply of products in the future. If prices are regulated by supply and demand, disinvestment in one year makes it more difficult to combat inflation in subsequent years.
Because of this, it makes sense to only allow an increase in interest rates if inflation is caused by excess demand, as President Lula defended.
The second anti-inflationary aspect of the interest rate hike has to do with the floating exchange rate. High interest rates attract foreign investment in dollars, which, through the exchange rate fluctuation, strengthen the national currency, making imported products cheaper and making exports more difficult.
When the fixed exchange rate, that is, one set by the Central Bank, was replaced by a floating exchange rate, former minister Delfim Neto commented that the change removed an important variable for adjusting the economy from the government, leaving only interest rates. In fact, the exchange rate became linked to the interest rate, and the latter to the former.
Due to the high interest rate policy of the last forty years, the Brazilian currency has been highly valued throughout this time. This combination explains the speed with which our deindustrialization occurred: the high exchange rate made it difficult to compete with imports, and the high interest rates made productive investment difficult, while at the same time stimulating rentierism.
This disinvestment also meant technological stagnation. In the medium and long term, the loss of technical competitiveness in relation to other nations will close industrial sectors or require a fall in the exchange rate to ensure monetary competitiveness. As Ignácio Rangel taught, inflation is an epiphenomenon that reveals structural deficiencies, which the monetarist anti-inflationary policy only aggravates.
Another major borrower is the State. In this case, an increase in interest rates means a greater transfer of resources from the treasury to the financial system, including foreign capital. Debt servicing will involve around 870 billion Reais this year, around 8% of Brazil's GDP, which will be incorporated into the total debt, since there will be no surplus in the primary deficit.
The primary deficit, the difference between government revenue and spending, may have been the cause of public debt in the past, but it has long played a small role in increasing public debt. In discussions about this year's budget, a primary deficit of 0,25% of GDP has caused a stir, with the total deficit expected to increase by 8% of GDP due to debt service. Public debt tends to grow on its own, even when there is a primary surplus, because of the high levels of the Selic rate.
In addition to high interest rates being mechanically associated with falling inflation, other alternatives to combat inflation are discouraged. Paulo Guedes emptied CONAB, which maintained regulatory stocks of essential food products, ensuring satisfactory prices for producers and cushioning speculative price increases.
Why empty an agency like that? Because it is against government intervention in the economy, a liberal would say; after all, speculators should be able to speculate at will.
But there is another factor. Let us recall the fundamental: interest is a transfer of income from the borrower to the lender. In this sense, since inflation has been the preferred argument for high interest rates, it is not advisable for anything to compete with them in the fight against inflation. Not CONAB, not subsidies, not price freezes, nothing. High interest rates are jealous of their absolute role in this area.
So much so that inflation targets of around 4% per year have been established and achieved, much lower than what we were historically accustomed to, forcing an increase in interest rates due to the policy adopted. Wouldn't it be appropriate to relax the monetarist control of inflation a little to allow for greater growth? Anyone who proposes something like this will be massacred by the mainstream media.
Every rational discussion about the Brazilian economy leads to the need to substantially reduce interest rates in general, both the basic Selic rate and the spreads bank employees. For this very reason, rational discussion is prohibited, whether by neoliberal dogmas, anti-inflationary terrorism or neo-fascist diversionism.
Living with dogmas
After the Real Plan and during FHC's first term, inflation was contained by an excessively high exchange rate, supported by Selic interest rates that reached 40% per year with a stabilized currency. FHC's second term began with an exchange rate crisis, forcing the abandonment of the near real-dollar parity. But the tactic did not change, interest rates remained extremely high and other exchange rate crises would occur.
Despite this legacy, the Lula government managed to gradually reduce the interest rate and the size of the public debt in relation to GDP, without confronting the financial system, whose profits increased, and it also managed to implement relevant social policies in terms of minimum income, minimum wage, education, health, and it managed to stimulate important sectors of the economy. It is true that it had a favorable external situation, and it knew how to take advantage of it.
The external situation would change in 2008. At first, the great wave that began in the US reached here as a “small wave”, but during Dilma’s first term, the economy began to stagnate. The president attempted a developmental boost by significantly reducing interest rates in 2012, when the Central Bank began to substantially reduce the Selic rate, and Banco do Brasil and Caixa Econômica Federal began to reduce their interest rates. spreads banking, forcing private banks to follow suit.
Until then, Dilma Rousseff had been highly praised by the mainstream press because, when faced with allegations of corruption in her ministry, she immediately removed the accused ministers. By praising this stance, the mainstream press took a swipe at former president Lula, who, in these cases, avoided offending allies before the investigations were further developed. But the opinion of the press changed with the change in monetary policy. Dilma Rousseff was forced to back down from her policy in 2013, but the mainstream press never forgave her: the leader intolerant of corruption would be transformed into the greatest leader of national corruption.
After the isolation of the left and the coup against Dilma Rousseff in 2016, the governments of Michel Temer and Jair Bolsonaro achieved several of the objectives of financial capital: denationalization of the pre-salt layer, weakening of the CLT and the unions, weakening of public pensions, the SUS, universities and public services in general. The height of the power of the financial system has been the autonomy of the Central Bank: from then on, the democratically elected ruler has lost the power to influence the most important variable in the economy.
And so we come to where we are: arrogantly autonomous, the Central Bank feels free to slap the Nation even more. And what's more: insatiable in the search for the autonomy of the Central Bank, Roberto Campos Neto is articulating in Congress a constitutional amendment to radicalize it even more.
The classic function of the banking system in capitalism is to mediate between money owners and borrowers, allowing idle resources to be used productively or for consumption. In the Brazilian case, since at least the 1980s, the financial system has stopped contributing to production and has become an obstacle to development.
It also became a political delay, symbolized by the presence of Paulo Guedes and Campos Neto, with their respective offshore, under the government of Jair Bolsonaro, Currently, the two largest newspapers in São Paulo, both with shareholdings in banks, have once again allied themselves with Bolsonarism, this time against the STF, providing rhetorical ammunition for those who want amnesty for the coup plotters. It is also heard that “Faria Lima” would have supported Pablo Marçal in the São Paulo elections.
The Brazilian financial system has formed an unproductive, parasitic and reactionary caste. Ready to be thrown into the dustbin of history. The peak is the beginning of the fall.
*Jose Ricardo Figueiredo He is a retired professor at the Faculty of Mechanical Engineering at Unicamp. Author of Ways of seeing production in Brazil (Associated Authors\EDUC). [https://amzn.to/40FsVgH]
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