The divine hands of the market

Image: Paulo Márcio dos Santos
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By MANFRED BACK & LUIZ GONZAGA BELLUZZO*

Our monetary authority returned to the path of financial faith, saw the light on the road to Damascus…Faria Lima! Amen…

“Freedom consists of knowing the strings that manipulate us”
(Baruch Spinoza).

At the last meeting of the monetary policy committee of the Central Bank of Brazil (Copom), the maintenance of the Selic rate at 10,5% per year and the temporary suspension of cuts in the basic rate were unanimously ratified. At the Temple of Miracles of Finance, located in Faria Lima, pastor JP Morgan, at the end of the service, shouted ecstatically: Amen, Brothers! Credibility is back! Our prayers were heard, we are the people chosen to make money, our truth is our faith! The faithful managers of other people's money sang the chorus: Oh, credibility is back, oh oh...

God Mercado is always right, amen brothers! Who best understands vile metal? Us or the Central Bank? Our monetary authority returned to the path of financial faith, saw the light on the road to Damascus…Faria Lima! Amen…

The deluge of unanchoring inflationary expectations was saved by the divine hands of the market. Against faith and dogma metamorphosed into Science, no one can! Not even Bacen! Amen, twice, brothers!

In the book Power and progress Daron Acemoglu and Simon Johnson remember Edmund Burke, a contemporary of Jeremy Bentham and Adam Smith. Edmund Burke referred to the laws of commerce as “the laws of nature, and consequently the laws of God. How could anyone oppose divine laws?”

So let's excommunicate the infidels at the Federal Reserve, always willing to renege on our beliefs. They say: “From late 2008 through October 2014, the Federal Reserve greatly expanded its holdings of long-term securities through open market purchases with the aim of exerting downward pressure on long-term interest rates and, thus supporting economic activity and job creation, making financial conditions more accommodative”. (website of FED).

“The money we used to buy bonds when we were carrying out quantitative easing did not come from taxes or government loans. Instead, like other central banks, we can create money digitally in the form of “central bank reserves”.

“We use these reserves to buy bonds. Bonds are essentially promissory notes issued by the government and corporations as a way to borrow money.”

“Now that we are reversing quantitative easing, some of these bonds will mature and we will be selling others to investors. When that happens, the money we created to buy the bonds will disappear and the total amount of money in the economy will decrease.” (Bank of England website)

Fortunately, say the Priests of the Faria Lima Sect, the Central Bank of Brazil is prevented from carrying out this type of cursed operation, practiced without shame by our Anglo-Saxon brothers, so admired here. In Brazil, the highest monetary authority cannot determine, intervene or anchor the term structure of the interest rate. Our belief requires that operational autonomy be contained within the limits of faith imposed by the sacrament of Inflation Targets.

According to the commandments of the Faria Lima Sect, the Central Bank can only set the Selic rate every 45 days, in accordance with the Focus Bulletin, the holy grail of expectations. Only they talk to God Money! Mortals from screw factories don't understand anchors, only screws! Amen, twice brothers!

The legislation of the Brazucas believers states: “The fundamental objective of the BC is to ensure price stability, in addition to, additionally, ensuring the stability and efficiency of the financial system, smoothing fluctuations in the level of economic activity and promoting full employment”. (BACEN website).

To appease the spirit of believers, thanks to the Old Testament prescriptions of Lord Money, the monetary authority must not engage in monetary policy and escape the deceptive objective of smoothing fluctuations in the level of economic activity and promoting full employment. Why? Because denying the commandments of the Market God is a sin without remission!

In services on Sundays, the most popular, the final song is the most anticipated, where pastor JP Morgan prays the final prayer: fiscal, fiscal, fiscal! The most awaited prayer: our money, which is in heaven. Against Satan: explosive public debt and the wasteful state!

The so-called repo operations are a common instrument used by central banks to control the basic rate set in the interbank market. In our case, unlike our brothers in the North, the monetary authority uses a federal public bond with a repurchase clause, to maintain the basic rate. Very profitable for banks, and zero risk. It is important to note that financial institutions exist to make money. What they can or cannot do is up to the monetary authority to define. Almost anything can be done here, after all, they are the ones who guarantee the credibility of the Central Bank.

Repurchase operations are recorded as federal public debt. It is estimated between 20 and 30% of the total, it would be in the order of almost two trillion reais. These are monetary policy operations, with nothing to do with financing the public deficit. But it serves the mantra of the Faria Lima congregation: tax, tax...

To stop Galileo Galilei's incursions, Cardinal Bellarmine wrote to another clergyman: “... wanting to affirm that the Sun is really at the center of the world and rotates only on itself without running from east to west and that the Earth is in the 3rd heaven and rotates with great speed around the Sun, it is a very dangerous thing not only to irritate all philosophers and scholastic theologians, but also to harm the Holy Faith by making the Holy Scriptures false”.

We return to the heretics of Federal Reserve: During the policy normalization process that began in December 2015, the Federal Reserve used reverse repurchase agreements for the first time overnight (ON RRPs) – a type of OMO – as a supplemental policy tool, as needed, to help control the federal funds rate and keep it within the target range set by the FOMC.

In September 2019, the Federal Reserve used forward and overnight repurchase agreements (repo) to ensure that the supply of reserves remained ample, even during periods of sharp increases in non-reserve liabilities, and to mitigate the risk of market pressures. money market that could negatively affect implementation policy.

The Federal Reserve continued to offer repurchase agreements overnight and, in the context of stress related to COVID around March 2020, term repurchase agreements and overnight played an important role in ensuring that the supply of reserves remained ample and supporting the smooth functioning of short-term US dollar financing markets.

In the Statement on Repurchase Agreements released on July 28, 2021, the Federal Reserve announced the establishment of a nationwide permanent repurchase facility (SRF). Under the SRF, the Federal Reserve conducts daily overnight repurchase operations against eligible securities. “The FUR serves as a backstop in the money markets to support the effective implementation of monetary policy and the smooth functioning of the market.” (FED website)

Our brother from the North does the same type of operation, and it is not counted as public debt! Heretics ask: “Where is our operational autonomy? Why not implement voluntary deposits, and put an end to repo payments once and for all, like the vast majority of central banks in the world?”

The Faria Lima Sect won't allow it. Amen brothers!

The damned heretics continue: “The interest rate on reserve balances (IORB rate) is determined by the Council and is an important tool for conducting the monetary policy of the Federal Reserve. For the current IORB rate setting, see the implementation note most recent issued by the FOMC. This note provides the operational settings for the policy tools that support the FOMC target for the federal funds rate.”

“Time deposits facilitate the implementation of monetary policy by providing an additional tool through which the Federal Reserve can manage the aggregate amount of reserve balances held by depository institutions. Funds placed in time deposits are withdrawn from the reserve accounts of participating institutions during the term deposit term and thus drain the system's reserve balances.” (FED website).

Hello, Cardinal Belarmino, it's time to call the Inquisition!!!

*Manfred Back He is a professor of economics and capital markets at ESPM.

* Luiz Gonzaga Belluzzo, economist, is Professor Emeritus at Unicamp. Author, among other books, of Keynes's time in the times of capitalism (countercurrent). [https://amzn.to/45ZBh4D]


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