Opinion – Helio Beltrão: Interest rates need to be raised dramatically before the dragon breeds

Since Paul Volcker broke the back of American inflation in the early 1980s, the developed world has become accustomed to low inflation. The period –which became known as “the great moderation” (continued growth with well-behaved prices)– ended abruptly with the crisis of 2007/8.

At this point, the dragon of inflation thought itself extinct; but there was still a petrified egg. With the crisis, central bankers were more concerned with avoiding an economic winter: deflation, their biggest nightmare.

They decided to revive the dragon by hatching the egg with a bonfire of money. Resurrected and kept in chains, he was fed continuously and generously for 12 years. The idea was to use “domesticated” dragon fire to fight the cold and avoid winter.

They didn’t conceive that the dragon could eventually escape. After all, they think, they are specialists in domestication.

This arrogant resignation could become the greatest catastrophe of this generation. Inflation and the eventual reaction of central banks is the most important issue in the global economy.

And 2020 came. The pandemic allowed central banks to dare to implement policies that were once considered heretical.

Central banks were found to have been using genetic engineering in the laboratory to achieve teen dragon function gains: MMT (Modern Monetary Theory), “helicopter money”, negative interest, CBDC (digital central bank currencies), credit guarantee of the banking sector. This is the new post-pandemic central bank normal, the spurious merging of monetary and fiscal policies.

With MMT and “helicopter money” the idea is for the government to spend more and more, to contract a lot of debt, and for the BC to print money to make the spending possible; that is, nothing that has not been tried before, always with resounding failure.

In the past, the mission of central banks was to control inflation. With the laboratory dragon, they imagine preventing recessions, rescuing everyone in need, combating inequality and climate change, and allowing direct income distribution.

It is not clear how, but in the meantime the transgenic dragon escaped from the laboratory and traveled the world. American inflation reached 6.2%, the highest in 30 years. In Germany, where the trauma of hyperinflation in the 1920s and 1940s still weighs heavily on the imagination, inflation reached 6%, also the highest in 30 years. In the Eurozone as a whole, it reached 4.9%, more than twice the target. In Brazil, where progress takes time to arrive, but the delay is replicated at a gallop, inflation has already surpassed 10.5%.

Central bankers insist that as supply chain disruptions are resolved, inflation will cool. So they intend to justify the unjustifiable: super negative interest rates, 5 percentage points below inflation!

After months swearing otherwise, on Tuesday (30) Fed chairman Jerome Powell finally admitted that inflation in the US is not transitory.

In fact, he tacitly admitted that inflation is a result of the monetary expansion caused by the Fed, which increased the supply of dollars in the world (M2) by more than a third in the last 18 months. There were nearly $6 trillion printed by the Fed and sent to the population’s checking accounts.

The market appears calm for the time being, but there is general unrest. A (Malcolm) Gladwell “turning point” is approaching, which will precipitate an abrupt end of the cycle, with the triggering of sales of risky assets.

The current phase, of contagion, is the most decisive: prices contaminate prices, which contaminate wages, which contaminate prices again. The origin, as always, is monetary. Therefore, you have to dramatically raise interest rates before the dragon breeds.

Winter is coming.