Now we will watch the lecture “The end of the cycle,
or the cycle of the end”. The lecturer is a counselor
at Instituto Mises Brasil, Fernando Ulrich. Good morning. I hope you are quite awake. Those of you who are not
may identify with the lecture. I’ll go straight to the point,
there are many slides to show, though some are just
charts and figures. I consider this one
the most important lecture i ever gave. It encompasses my studies
in ten years of Austrian School, my experience with some countries
and moments in the financial
and real estate market when I saw the crisis unfold,
saw economic cycles moving, saw financial bubbles growing, and what happened
after these episodes. I ask that you pay
close attention, a few slides are
more technical, but I’ll explain
so everyone can follow. Straight to the point,
but I need the remote control. Excellent. First question: are we at the end of a great
world economic cycle? Take the US economy. The US economy is now
in its biggest expansion cycle in history. Since the 2008 crisis, we are in the biggest
economic expansion cycle. If the US economy
keeps on growing after June, it will be the biggest cycle
in history, because the biggest one
until now was the one from March 1991
mo March 2001. This chart shows
US expansion cycles with information from The National Bureau
of Economic Research, compiled since 1854. Each of these bars
is an economic expansion cycle measured in months. We can see how they
get longer over time. The last cycle,
the one we’re in, has been ongoing for
nearly ten years, and if it lasts through June
it will break the record of the one from 91
to March 2001. If we take the average length
of these cycles, from November 1970,
which was 40-month long cycle, up to now, 2019, they have an average
73-month duration. Or from 1914 to now,
the average drops to a 53-month duration. Or from 1854 to 1913, 25-month long. Whoever is more familiar
with the monetary theory will understand
what these periods mean. Classical gold standard,
from the 19th century until 1913, when the
Federal Reserve was created, though it began operations
in 1914. And from 1970 on
with the end of Bretton Woods, a period of completely
nonconvertible currency, that couldn’t be exchanged
at all. These are economic
expansion cycles. We can also see
the economic contraction cycles. The picture is reverse. Whereas expansion cycles
are getting longer, contraction cycles
are getting shorter. Here, we have them since 1973, one of the worst, longest lasting economic crises in US history, it was a time of world crisis,
of silver demonetization, after the US civil war
inflation. We can see contraction cycles
are shorter now. We can compare iconic periods, nonconvertible currency,
Federal Reserve, and classical gold standard. We can ask ourselves… we see the length of cycles
in months, the contraction cycles
in months, but is there quality
to this growth? One can grow for ten years,
but at .5% a year is not satisfactory. What is the quality of growth
during these expansion cycles? Here we see the growth rate
of US GDP per year. Yearly GDP growth. It’s been dropping, which means
the quality of the expansion has also been dropping. The GDP yearly growth rate, now we are possibly
in the biggest expansion cycle for US economy, it will coincide with the worst
GDP yearly growth rate. On the other side,
in the contraction cycles, the red line is
the total contraction, not yearly, but total contraction
in each of these episodes. After the Great Depression, a great downturn
in economic activity, over 25%. From the Federal Reserve on, or from the second half
of the 20th century, there were less significant
contractions, but in 2008 and 2009
we had strong retraction, the worst in the last 50 years
since the end of WWII, around 5.1%. The cycles are longer,
contractions are shorter, as is the intensity
of this growth. I ask you now, is the Federal Reserve
eradicating the economic cycle? There is an expression,
The Great Moderation, that began to be used
by economists in the late 1990s
or early 2000s. It meant a period
of lesser fluctuation of economic growth,
of economic activity, and also of inflation. So we began living in a period
from 1982 to 2004, or 2007 called The Great Moderation, in which fluctuation
of both growth and inflation was lesser. So larger growth
and inflation within goals, or very stable. This is the Great Moderation
period. Here are the three main
FED federal bankers, Paul Volcker, who left in ’87
replaced by Alan Greenspan, then Ben Bernanke, on the left,
took over in 2006. Many people used to call
Alan Greenspan, probably not anymore, the great maestro, for he orchestrated
economic activity. He also used the expression
Great Moderation. There is a coincidence
of events. This book came out
in November 2001. It coincided with the
record growth rate in the US. But from March on,
recession was official. But this is something economists
only register afterwards. The book came out in
November 2001 actually praising Alan Greenspan
and his deeds in monetary policy. I have a video of him
that sums up this idea and illustrates the eradication
of economic cycles. So, he said central bankers
found out it was possible to postpone or stretch out
the adjustment period of economic activity. Not that it can be eliminated, but it can be stretched
through a longer period, and they discovered it
over the years by simply injecting liquidity in a controlled,
almost surgical way, and they manage not to
abolish adjustment, but to stretch it out. We will soon see
if that is possible. That speech was in ’92. Here we can see
the growth cycles. The US GDP compared to
the previous year in three-month periods. Fluctuation is clearly decreased. Or comparing the US GDP
to inflation, the red line. To those unfamiliar
with these charts, the grey bars represent
recession periods in the US. Actually, I must praise the FED. Their statistic and chart system
is fantastic. It’s free for all,
it’s the FRED, from St. Louis. But this will be my only praise
to the FED today. How can the FED interfere
in the economic cycle? It doesn’t produce anything,
it can’t magically create goods, the only way it has,
as Greenspan stated, is by injecting liquidity, creating
monetary instruments, giving money
to the banking system or even to the SWF. This is the central bank’s
only tool, manipulating interest
by injecting liquidity. This is the FED’s only hammer. We can see how the hammer hit
in the past decades. Here I mention Paul Volcker, the tallest banker
in that previous photo. Alan Greenspan
was the longest-lived banker in FED history. Then Ben Bernanke,
starting in 2007, and Janet Yellen,
who has also left. Here we see the US interest rate
in that period. Notice that, in the 2001 hiccup, Alan Greenspan was still
ahead of the FED, and there was a hiccup
in economic activity. What did he do? The Nasdaq bubble, one of the worst until then
since the Great Depression, he lowered interest rates
to resume economic activity. Not just interest, but the money injection
into the system, the creation of liquidity, which I translate as
the creation of bank reserve, the electronic figures
the FED creates and deposits into
banks’ accounts, or currency printing. But here, it is mainly
the creation of bank reserve which is no more than
pressing a key in the computer. I’m not joking. That’s literally how the FED
issues currency today. Typing into the computer. Here we have
the global monetary base from 1970 until now. When it reached 2007… In ’70 it was short from
500 billion, the global monetary base. Here we have Dollar, Euro, Yen,
Pound, Yuan and other currencies. In 2007 it reached 5 trillion.
July 2007. From 2007 to 2019,
it grew another 15 trillion, reaching 20 trillion
in monetary creation by the central banks
with mere electronic figures. That’s why we see
some economists now, like Larry Kudlow, director of the
National Economic Council, saying that he believes that,
within his lifespan, he will never see interest rates
go up again. This was in December,
after the FED retreated and gave up on increasing
interest rates, you will soon understand why. Or the chief equity strategist
at JP Morgan, he said in an interview in April that perhaps the word cycle
is no longer relevant, once we have so much
non-conventional engagement from the central banks. I agree with him, this sums up quite well
why the central banks are, perhaps, eradicating
the term economic cycle. It’s worthwhile understanding
the economic cycle phases. The red line in the chart
is the economic activity. There’s the expansion cycle,
when the economy grows, all investments pay off,
people are happy, as illustrated on the cover
of Isto É magazine in 2010, where it said Brazilians
had never been so happy. Sure, we were in a giant
credit bubble, everybody happy. This is the expansion cycle. When it peaks, we realize
there was some excess. Then comes the bad part, no one likes
to liquidate investments, tu purge excess, but it’s a necessary phase
in the economic cycle, depression, or contraction. Next comes recovery, in which we can recapitalize
our balance sheets and resume a more sustainable
economic activity. If we look at it
from the point of view of family income,
of company revenue, the financial side of
the economic activity, we can understand that
the period of expansion is one of liquidity
deterioration, in which participants
are taking more debt, they compromise their
future ability to pay, taking short-term debt
and investing for long term, which is the portrait
of bank activity anywhere, banks function this way, this is liquidity deterioration. When it peaks, so begins
the struggle for liquidity and agents fight for funding,
they see the party is over. Then comes the phase
to liquidate excesses, when we need to
pay up debts, reduce indebtedness,
begin saving until everyone’s balances
are recapitalized, families, companies,
and government, who is not immune
to economic laws. This image shows that
the central bank interferes only in the financial part
of the cycle, by injecting and removing
liquidity and funding, supporting a few companies,
sectors or governments or letting them break. It’s the only way
the central bank can interfere. How was liquidity injection
in the past few years? Here, things get interesting. This is the FED balance sheet.
Assets above, liabilities below. It shows how it started
at the 2008 crisis. The QE1,
the quantitative easing, the first round of FED’s
large-scale asset purchase that began in March 2009. Remember this date,
we’ll get back to it. What did the FED buy? US treasury securities
in all sorts of terms, from three months to
thirty years, an family mortgages, that the banks were holding
in their balance sheets, and were considered toxic assets. The FED bought those
and put it in its balance sheet. We wonder, isn’t that just
the FED’s role? Isn’t it the lender
of last resort, what it should do
in moments of crisis? Just hand out loans and keep the system
from collapsing? That is what Walter Bagehot,
a British 19th century journalist who wrote
about the financial market, and his 1873 book,
Lombard Street, is a description
of the money market. He wrote an aphorism that central bankers stuck to
until recently. It says central banks should
lend freely at a penalty rate, against good collateral. But was it what central banks did
these past years? Here are the assets purchased
by central banks. In the center, sovereign debt. The FED bought a lot of debt
from the US government and family mortgages. The ECB bought all sorts of bonds from countries in the Euro area
and around, especially those in trouble
such as the PIIGS, Portugal, Ireland, Spain,
Italy and Greece. But not just that. The ECB began to buy
corporate debt. Here are some examples, imagine debentures
these companies could issue, and the ECB buys that. It bought debt from ABInbev,
from French railway company SNCF, from BMW, Volkswagen,
Mercedes-Benz. Its as if BACEN were here
buying debt from Inbev, Vale, Petrobras, Gerdau. That’s the sort of asset
central banks are buying in these countries. This obviously has
a relevant effect because these are signals
and incentives. This was in 2015,
the same week the ECB announced its corporate debt
purchase program. If you were a company,
what would you think? That now is the time to leverage,
the ECB will buy my debt. How wonderful! They can print money
to buy my debt, yay! That same week,
all of these companies also announced
they were going to the market to raise debt, obviously. Then the Swiss National Bank, not only bought
sovereign and corporate debt, but began to buy shares too. SNB has over 80 billion dollars
in US companies shares. Apple, Amazon… Since it’s not a fund manager, it takes the share index
and buys in bulk. It sweeps all the shares
in the index. The SNB is one of the main
Apple shareholders. When we look at the Bank of Japan
things get truly scary. The BOJ bought all of this,
plus real estate funds. Imagine the FIIS we trade
on stock exchange, the BOJ has those too. It also has ETF,
exchange traded funds. But it doesn’t just have ETF. It holds 80% of the country’s
ETF market. 80% belongs to the BOJ. In terms of percentage, it’s the biggest case
of quantitative easing, or liquidity injection,
in relation to the GDP. The BOJ balance sheet
surpasses 100% of the GDP. In Europe, it’s 35%,
same as in the US. What are the effects
of liquidity injection? The lowest interest rates
in the planet’s history, in 5000 years, for both short-term
and long-term rates. In some cases,
negative interest rates, as in the ECB,
the SNB, the BOJ, banks from Sweden, Denmark. Banks with accounts
in the central bank have a monthly charge that translates into
negative interest. Take our Celic at 6.5% a year, imagine Roberto Campos Neto
announcing it will now be -1%. Does it make sense?
That’s what happens there. Also very important, here’s the total global bonds that yield below zero. Negative yield. It surpasses 10 trillion. There are 10 trillion bonds
that yield below zero. Another way to see it is
investment-grade bonds, the safest, investment-worthy, pension funds invest in them. A fifth of the
investment-grade bonds already have negative yield. An even more
staggering picture, here are the bonds by country, I’ll leave this on for a while, and each bond’s term,
so the yield curve, ranging from six months
to 30 years. Notice Switzerland,
Germany and Japan, their yield curve up to 10 years
is negative. It never happened before
in the planet’s history. Other countries also have
negative interest rates. But this is not just
nominal interest rate, it is also real interest rate,
if we subtract price inflation abstracting from how arbitrary
and subjective price index is, interest rates are also negative. Nearly all of these countries,
Germany, Switzerland, Denmark, Netherlands, have negative interest rates. Back to our cycle chart, what happens to the central bank
and the economy is that when the central bank provides
liquidity to the system, it supports economic activity
and halts that adjustment Greenspan said they were merely
stretching over time. They are, indeed, stopping it. They prevent companies
from reducing their activity, or even from breaking,
in some cases. Bankruptcy is a part
of the economic activity, it’s a part of capitalism
just like economic growth. Success and failure are part
of the system. And it’s necessary
to purge excess. But what central banks
want to do is to simply cross out the part
of depression and contraction and keep us in a constant state
of rapture, permanent growth, in which we never need
to adjust the economy, liquidate excess,
purge bad investment. It’s constant happiness,
it’s economic nirvana. It’s refusing the hangover. Is it possible
to avoid a hangover? No. At some point
we have to pay the price. A body needs a hangover
to recover. So I ask, doesn’t this situation
have any adverse effects? Can the interruption, or boost,
of liquidity deterioration or of extending this deterioration have unintended effects? This is an author I admire,
Nassim Taleb, he is a philosopher, a trader, he allies practice and theory, he is a theorist from practice,
not the opposite, I recommend several of his books,
they’re fundamental for Austrians. The Black Swan, Antifragile,
and Skin in the Game. One of his quotes says: These attempts to eliminate
the business cycle lead to the mother
of all fragilities. Just as a little bit of fire
here and there gets rid of the
flammable material in a forest, a little bit of harm
here and there in an economy weeds out the vulnerable firms
early enough to allow them to “fail early” so they can start again, and minimize long-term damage
to the system. Taleb also uses a word
I find amazing, iatrogenesis. The doctors here
surely know the word. It refers to when the medicine,
or the dosage, or medical error, compromises the patient’s health. Instead of saving the patient,
the cure can end up killing them. This slide illustrates it so well. If I kill you, you don’t pay.
This is the doctor. I suggest a reflection. What if we have,
in the economic field, we have a case of
economic iatrogenesis, born from policies that are
unconventional, arbitrary, discretionary and extraordinary? Isn’t it exactly what is happening
in the economy? Those who study economic cycles
or are familiar with the subject have certainly come across
the circus parable. I’ll explain it a little
because it is fundamental. Imagine the circus comes to town,
and the town’s businesspeople, restaurant and hotel owners, see economic activity
and demand for their business grow overnight
after the circus arrived. They think demand is too great,
and decide to invest, to increase
their business capacity, hire more employees,
rent another spot, remodel, to meet the demand. They go and do all of this,
some of them get into debt. One fine day,
perhaps a few months later, the circus just breaks camp
and leaves. That demand entrepreneurs thought
would last forever, just collapses and rolls back
to what it was before the circus. Given this situation, what’s the solution,
the correct attitude? It would be to adjust business, perhaps, unfortunately,
lay off employees who are now redundant
in the staff, maybe rent whatever
spare capacity they have. It’s to adjust to real demand. Or is it to go to the bank
make another loan and keep on asking for funding to maintain an
artificially supported operation that has no latent demand? You know the answer. But I suggest a reflection: the circus parable is precisely
what goes on in global economy now on an unprecedented scale. We witness now the largest
misallocation of capital, and mispricing of risk
that has ever happened. But not all these effects
are visible to the naked eye. Some cannot be identified. Others, however, are quite visible
and I’ll show a few examples. You all know
these companies, right? Who came by Uber?
Look at that. Who watched Netflix this week? These companies,
these startups, no exaggeration, neither of them would exist it it weren’t for the age
of negative or zero interest and abundant, cheap credit
that began in 2008 or 09. Or at least, wouldn’t have reached
such global breadth, such economic activity level. They wouldn’t. They are all the spawn
of quantitative easing. Let’s talk about them. First, Uber.
Do you know when it started? March 2009. It coincides with the first round
of quantitative easing. Uber is 10 years in activity,
grows a lot, it had an 11 billion revenue
last year, it keeps on making loss
year after year, it can’t sustain activity
by its own operation, it needs to acquire debt, it needs to issue shares,
gather more shareholders. It went public last Thursday,
yesterday was the first trade, it fell 7%, but the market
was a little off. Lyft is the same. And there is still no perspective
of profitability and self-support. Same with Lyft. Do you know when
Netflix started? 1997, on the internet boom. Do you know
what its main business was until around 2007? Some of you may be old enough
to remember video rental, we rented movies to watch at home,
rewound and returned them, then shifted to DVD,
took them from the video rental, no need to rewind, thankfully. But we’d go there, rent, return. Netflix created a system
with a monthly subscription, they sent three DVDs
via post for a fee. You returned them
whenever you wanted, then they sent more. They still have this business, but their main thing
is video streaming, that began in 2007. Video on demand, streaming. From 2014 on, the company started
a business model in which it needs to
produce content and buy licenses. It demands massive
anticipated capital expenditure to a future revenue
that comes from subscriptions. This means it now follows
a funding model in which the operation
doesn’t support itself and it needs to issue debt
constantly. From zero debt in 2014
to 10 billion in 2019 against a 15 billion revenue. Its business model
is explicitly based on this. It says “I can’t pay
for my business, so I’ll issue another 3 billion
in debt this year and go on like this
for the unforeseeable future”. WeWork, another company
with a 2 billion revenue and the same in loss. Not just accounting loss. Netflix, for example, has accounting profit
but no flow to support operations. Finally, Tesla,
I even made some videos about it. It’s the same, they issue debt
to pay for their products, to support its operation, they gather shareholders
in what resembles a Ponzi scheme, I made a video about it,
watch it. These companies have
spectacular technology, I’m a customer, I love them,
friends work for them, but they are not
economically viable. They only survive
due to this that I call the age of cheap interest
and zero debt. Another interesting fact. Have you heard
of the SoftBank group? It’s a Japanese company
that has nothing of a bank, it’s more of a hedge fund,
a corporation, venture capital, casino gambler,
something like that. It’s based in Japan. In the early 2000s or 2010s,
I don’t remember exactly, it raised 100 billion dollars
with the Vision Fund. It holds 16% of Uber,
it’s the main shareholder. It also put 6 billion on WeWork. WeWork has raised 12.8 billion,
half of it from SoftBank. It’s the second main shareholder,
behind only the company’s founder. Now this is interesting. The founder of WeWork is not only
the CEO and main shareholder, but he also owns
several properties that WeWork rents
from the company owner. A huge conflict of interest,
but we won’t mention it because WeWork has free beer,
tea, a nice space. Back to SoftBank
to finish this point. The main shareholder in SoftBank
is the founder, called Masayoshi Son. Do you know who the second
largest shareholder is? The Bank of Japan. The country’s central bank
is the second largest shareholder in a company that invests
in hundreds of unicorns worth billions of dollars. The Bank of Japan. The company raised 130 billion. To measure its magnitude, this is half of the Argentina
external debt. Last year alone it rolled over
80 billion of this debt and it can raise debt
with 1.6% interest a year, and it’s stretched,
with 5 or 10 year terms. It’s the greatest fantasy island
ever in history. It’s unprecedented debt recycling
and financial engineering thanks to the intervention
of central banks. This chart, it’s from
the SoftBank earnings call, the result of the trimester
released this week. Isn’t it great, unicorns flying up
and increasing value for the SoftBank Group
shareholders? I’m running against the clock
but I need to finish, we’ll have no time for questions,
but it’s worth it. What are the side effects
to all of this? I’ve already shown the obvious. By providing free liquidity,
they prevent debt solution, extend liquidity deterioration,
boost it, even. This situation sends signals
and funds activities that wouldn’t otherwise be funded
by consumers’ choice. One of Uber’s chairmen and founder
in a recent interview at CNBC said that when they started
the company, there was so much cheap money their policy was to get
as much free money as they could. Free money, the very words
of an Uber chairman and founder. This sends signals, and the conjuncture encourages
riskier activities and business that wouldn’t
be funded otherwise. It also makes the system
addicted to low interest and encourages institutions
to take even more risk. For example, pension funds, in order to beat their
actuarial targets, in a scenery of zero
or near-zero interest, need to take more and more risk. I ask you, your parents’ or grandparents’
pension fund, would it be prudent to invest
elderly people’s retirement money on Netflix? That’s exactly
what some pension funds are doing. Putting elderly people’s money
on Netflix. This is to take more risk,
they have targets to beat. Simply putting money
in the Swiss or English treasury, that yield .5% a year,
it doesn’t add up. Another problem, here’s
the banking system as a whole, I’ll explain this chart,
it may be difficult for some, Ignore the circle and the sum,
they’re wrong. I took it from an article
at Zero Hedge. This is position. What does this chart point to? Here is the unrealized loss of the bonds that banks
hold in their balance sheets. Banks have bonds
in its spread sheet, some of them
are carried out to term, others, they trade and resell
in the market. The ones they keep to resell
they need to mark to market. It means that if bond prices drop,
it must be registered. It’s an unrealized loss, it becomes realized
if they sell it. So here is potential loss. It hasn’t affected company cash,
it’s just in the spread sheet. Here are
the financial institutions secured by their FGC,
the FDIC. From 2008 to the end of 2018,
the third trimester, it reached the highest level
of unrealized loss registered in the balance sheet. This is important because,
in a moment of stress, these are the very bonds
banks need to sell to fund themselves
and roll their debt. But in a moment of stress,
they’ll have to take loss. It may break a few banks,
it may break the system. So it’s a problem. The FED was obviously
watching this, that’s why, in December, Jerome Powell said “are we really
going to raise interest rates?” “I don’t think so”. Here is a similar chart, it’s unrealized loss
from major banks. Interest rate is in red. We see that in 2016,
when interest began to rise, what was unrealized gain before
became loss, it reached again the worst level
since the financial crisis. Notice the situation of banks
in 2008. Why did the FED have
to take action and help banks? That’s why.
The system was about to break. It came close to it again
in 2018. Why did it happen? If you’re not aware, bonds have pre-fixed
interest rates, and when prices go up,
the implicit interest rate drops, and the opposite too. Price drops, implicit
interest rates go up. If a scenery of increasing
interest rates, bond prices begin to drop. This is what this chart shows. Banks’ potential losses. It means that raising
interest rates is not trivial at all. The FED, as well as other
central banks, runs the risk of making
the whole system collapse, for making potential loss
become actual loss. The FED itself is insolvent,
look how nice. The FED, with its 27 billion
net worth, has over 66 billion
in unrealized loss. For the FED that’s no problem, it is technically insolvent,
but it can print money and the treasury can recapitalize
whenever it wants. Back to the lecture title, The end of the cycle,
or the cycle of the end. Are we actually witnessing
central banks’ success in eradicating the economic cycle? Or is it what I call end cycle
of this great experiment with managed money, elasticity that brought us to
an interventionist cycle an intervention doesn’t work, so another comes to replace it
and so on. Of course you know my answer,
but I’ll show a few more examples. Not only are interest rates
at the lowest level ever, central banks think of
reducing them even more. The FED has already said
it will hold back, lower it even. Other central banks might enhance
the rate reduction round and possibly buy more assets. What’s wrong
with negative interest? It’s paper currency, we can’t tariff
circulating paper currency. So what’s the situation? In order to fix
a failed intervention, let’s bring another intervention
and abolish cash money. This is Kenneth Rogoff,
author of This Time is Different, and he one of the advocates
for the end of paper currency. There are many others like him,
he’s not alone. This is the level of intervention
we face, these are the options
on the table. This is from the BOJ website,
it’s fantastic. It says they have
a price stability target of 2% and quantitative and qualitative
monetary easing and the best,
with yield curve control. It controls just everything. Also, the idea of
inflation overshooting commitment, so it made a commitment to not just
beat the 2% inflation target, but surpass it and keep it
for several years. But it hasn’t worked. Maybe we should send them
Guido Mantega, Arno Augustin, Alexandre Tombini,
they’ll do it in no time. As if it weren’t enough
that it’s not working, what solution are they
thinking of? More public expenditures.
But how? Countries are in debt,
have high deficit, and can’t fund it anymore, because they’ll bring deficit
over the GDP and debt is already high, how can we do it? Simple. Modern monetary theory. Problem solved, just issue money
and give it to the government. Just monetize
the government debt, there’s no need to issue debt,
just give money and the sovereign spends, it doesn’t go through the deficit
or the government debt. If you think
this has no supporters, here’s a Google Trends chart showing the number of searches
for this term, in March it hit maximum. More and more big names
advocate for this. The modern monetary theory
has nothing modern at all. You can say “that’s ok, we can print money like in 2008 and it didn’t result
in price inflation for consumers”. Inflation is near zero,
or .5% or 2%, as in most European countries
and the US. It’s fine. But it’s not fine, and Austrian school economists
can point it out, the absence of prince inflation
doesn’t mean there’s no imbalance and distortion in relative prices. It has real effects
in the economy. So saying zero price inflation,
or 2% a year, is fine, no, it’s not fine. These policies are creating
serious distortions to the productive structure
of the economy. And I ask, given all of this,
what’s the economic pathology? What ailment do we suffer from?
Is it puny growth? Is it a too low price inflation? Consumer inflation
is not that high, but financial assets surpass
historical maximum, stock rates, government debt,
corporate debt, real estate in several countries. Yes, there is price inflation
to several prices, just not consumer’s. If the goal is actually
to inflate prices, I’ll suggest a few measures
that may seem weird, but are infallible. First, a purchase program
in retail and wholesale. Instead of the central bank
buying government debt and stock shares, it should go to the corner shop
to buy goods and products. It should buy capital goods,
refrigerators, TV sets, anything that night impact
price level. If it fails, we can try
a mandatory re-pricing program. If we can control prices
to avoid them going up by forbidding companies
to raise prices, we can also make prices go up
by making companies mark up. Isn’t it simple? Or a minimum purchase law
by family unit. Why are families spending
so little? They have to spend more. That’s the problem,
inflation too low. Don’t save, spend. We’ll make families spend more. Or an infrastructure
civil deconstruction program. Let’s tear down buildings,
bridges, roads, then build them again. It’s a modern version
of Keynes’ hole digging. It can’t fail. Finally, an alternative product
consumption program. Instead of buying products
and consuming them, let’s be radical, let’s buy goods
and destroy their production. How about that? You can think this is totally… Now I’ve crossed the line.
This is totally stupid. Unless we remember that,
in 1930, our country, under Getúlio Vargas,
burned billions of tons of coffee to support coffee prices. What do you think? Brazil was a trailblazer
even in that. I’ll finish now,
I must have overdone my time. When we see this state of things,
the diagnosis, system situation, intervention levels,
alternatives on the table, how mainstream economic science
is facing the problem and the solutions it proposes, to me, there are
three basic questions that if properly asked
and answered, all of this would fall apart. First, what is price for,
after all? Is price an arbitrary thing? Price is the most important
information in the economy. It signals to abundance
or scarcity. It allows us,
families, individuals, companies, to coordinate our behaviors
in a harmonic and pacific way. Price does all that. Managed price is an oxymoron. There’s no managing price. It is determined by free
demand and supply. The market determines it. If you define prices by law,
it’s not price anymore, it’s arbitrary data. When we bring this lesson
to the financial market, what central banks are doing is to fabricate the greatest
price falsification in history. With that, the worst risk pricing
ever in history also. When we analyze
asset prices today, just as the price of any good
indicates its scarcity or how it is demanded,
or its abundance, asset prices, asset interest rates also signal to its underlying risk whether from the issuer
or from the business itself. So interest rates are
a key price to the economy. Another essential question, what is wealth, after all? How is wealth created? Is it money, is it to simply
print currency? Wealth is goods, it’s merchandise,
it’s things we can consume. It’s better living standards. Simply printing out money,
whether with bank reserve or paper currency, however it is, will not magically create
more goods overnight. It won’t create more wealth. The source of wealth
is voluntary exchange. Exchange among individuals,
that’s the source of wealth. Exchange, increased productivity. In its turn, productivity is
based on savings and investment. Exactly the opposite economists
and central bankers want us to do. They think we have to spend more. Another question
along these lines, does the government
create wealth? By spending the public budget
that comes from our pocket, does it create wealth? Or does it, at best,
just distribute wealth? Or, more economically correct,
it squanders wealth? At last, final question,
what is money? Dear Lord, we are in 2019, 20 trillion were magically made,
with no economic effort, just pressing a computer key. What is money? Today, money has become
an instrument of manipulation, of artificial economic support,
of government rescue, of succor to industries,
sectors, banks. What is money for? Worst of all, not only today
it is a complete abstraction as it is also a control system
by central banks and the financial system
as a whole. On top of it,
it’s a control system. When we look at all of this, the diagnosis,
the state of things, the alternatives at hand,
how economic science sees it and how economists
and central bankers are incapable of answering
these three questions. If they do, they can’t accommodate their answers to their policies. If they were able,
they wouldn’t make such policies. What I can gather is that
we are really at the end cycle of this monetary experiment
that began in the ’70s with the end of paper currency
convertibility. We are truly in a monetary age with no restrictions
to central banks, so they print currency at will. How can we solve this,
what can we propose? Some may ask if there is no way
to remodel the system. Isn’t it just to make
the central bank more independent so it can better apply its
monetary policy, in a more definitive way,
it will solve all problems. Maybe in Brazil, today,
more independence is positive. But do you think the FED
is not independent enough yet? As I see it, there is no way
to rebuild the system of central banks
and currency monopoly. The only possible solution
is to abolish it completely once and for all and right now. Thank you.