December 8, 2022
Assine Estadão

It is necessary to learn economics from history, not just mathematical models

Many despise history, preferring the convenience of sports models. I respect both, but I give a lot of importance to the story.

There is no de Bretton Woods system, the operating system United States of America They fixed the price of gold at $35 an ounce, and other countries maintained a fixed exchange rate against the dollar. Fifty years ago, on August 15, 1971, President Nixon closed the “gold window”, which allowed the signatories to that agreement to convert their reserves into gold at that price. That was the “beginning of the end” of that monetary system, which was only officially extinguished in 1973.

In those years, as much as now, the monetary policy of feed it It was dedicated exclusively to domestic goals. “Oh dollar It’s our currency, but your problem,” Secretary John Connally said. To fund the Vietnam War and maintain full employment, the Fed was expanding the currency supply because exchange Steady, raising the global money supply was born a inflation all over the world. Banking activity was stimulated, the euro-dollar market boomed, which continued to grow after 1973, as countries did not immediately abandon the fixed exchange rate.

When the second oil shock occurred in 1976, increasing the value of its imports, the Gesell government had the illusion that it could use the crisis as an opportunity for growth. The second PND program was launched through which it financed investments in the production of capital goods and basic inputs through external loans. Replacing imports was supposed to save dollars that would make it possible to pay the increase in a bill petroleum, taking advantage of economic growth.

Industrialists praised the president’s foresight and deluded themselves that we were entering a new world in which too many cheap loans were the result of recycling petrodollars instead of the Fed’s expansionary monetary policy, which must come to an end. We generated an external debt of 50% of GDP, which led to the external debt crisis of the 1980s. During the II PND, Brazil grew 7.5% annually, but at the cost of throwing us into the low growth trap, which we no longer get rid of.

I don’t know if this episode is still taught in economics courses, nor if comparisons are made with the current world. But students should be warned that despite many institutional transformations, we still have a vestige of the past, which is the “exorbitant privilege” of the United States – the advantage of using its own currency as an international reserve currency. It’s the only country that runs a current account deficit, and you don’t have to worry about financing it. It pays with its own currency and influences everyone else’s monetary policies.

One example is the effects of the monetary expansion caused by the COVID-19 crisis on exchange rates in countries without serious financial and political problems. When the pandemic broke out, the federal funds rate was set to technical zero, and about $2 trillion in Treasuries were purchased. The result of this massive monetary expansion has been a 10% weakening of the dollar against a basket of currencies that includes the euro, pound, yen, Canadian dollar, Australian dollar, Swedish krona and Swiss franc – DXY. It was not only these seven coins that were appreciated, but almost all the others. The world thanked the United States. After all, this stagnation required a sharp drop in interest rates, which was facilitated by the opposite effect of inflation from strengthening their currencies.

Monetary stimulus in the United States leads to a global monetary stimulus, but the reverse is also true. Inflation has been on the rise, but I haven’t seen any concerns yet. “Average inflation targeting” provides great convenience; The demographic transition has lowered neutrality rates in the world; Inflation above 5% in the US is not blamed for overstimulation, but for supply shocks. Likewise, the significant increase in “price earnings ratios” in the S&P500 is not attributable to an excessive reduction in the discount rate, but to the strength of the US economy.

Why worry about change when the Fed itself is confident it can withstand rising inflation? I would like to have that calm. But respect for history and the lessons it gives us prevents me from having it. I’ve seen so many hopes dashed by facts that many think are irrelevant, and that has worried so few.

Former President of the Central Bank and partner of AC PASTORE & ASSOCIADOS. write every night