About issuing money

Gabriela Pinilla, Fragment of Em pie de Luta, Mural Painting measuring 7 X 11 meters. 2018, Museo del INBA, Ciudad Juárez, Mexico
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By LUIZ CARLOS BRESSER-PEREIRA*

The government is more orthodox than the IMF and central bankers

There is no science more ideological than economics. Which is not surprising because it deals with income sharing, and the stakes involved are very large. This explains why liberal economists are so conservative. They represent the interests of the capitalists. Now capitalists today are fundamentally rentier. They live on interest, rents on dividends; they are not entrepreneurial capitalists, who live on their profits and on their reinvestment.

In this ideological science, it is curious how words change meaning or gain new meanings. Take, for example, the issue of issuing money.

Liberal economists, then called monetarists, were deadly against the issue of currency which they claimed was the cause of inflation. Was not. The increase in the quantity of money only sanctions an inflation that has already occurred.

What can cause inflation is the increase in government spending when an economy is approaching full employment. Because then there may be excess demand over supply.

Since the massive currency issues carried out by central banks after the great crisis of 2008 in order to lower interest rates, it has been proved by A plus B that they do not cause inflation. Interest rates went to zero and inflation was very low.

So, when it became necessary to defend economies from the consequences of Covid-19, central bank economists, who are much more realistic than liberal economics professors, started issuing even more money. They're absolutely right.

They issue money by buying new government bonds; the money thus created is used to finance policies to help the poor, the unemployed, and businesses, and to finance public investments that stimulate the economy.

But, to make their policy more acceptable to a society that still believes that issuing money causes inflation, central bankers began to call issuing money “buying bonds”. A good name.

Now, for example, I read in Valor that the president of the European Central Bank has just stated that it is still too early to rule out the purchase of bonds. In other words, it is not time to stop issuing currency.

Meanwhile, we in Brazil have an Economy Minister who continues to limit the necessary increase in emergency aid and does not carry out the public investments also necessary for the country to resume growth.

The excuse is that public deficit causes inflation, but it has already been proven that this is not true. It only causes inflation when this issue of currency that finances these expenses that lead to excess demand facilitates the increase in margins and prices.

Now, this is not the case as long as the pandemic is limiting demand, mainly for services, and keeping unemployment high.

Really, it is not possible to have a government as incapable as the one that is there in the economic area. A government that is more orthodox than the IMF and central bankers.

* Luiz Carlos Bresser-Pereira He is Professor Emeritus at the Getulio Vargas Foundation (FGV-SP). Author, among other books, of In search of lost development: a new-developmentalist project for Brazil (FGV)

 

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