"You will know them by their
fruits," says a passage in the Holy Bible, Matthew 7: 15-20 and the fruits
of the austerity policies imposed on the countries by the International
Monetary Fund to grant them loans are not exactly good.
The Monetary Fund starts from a basic
premise: that the fiscal balance represents the fundamental condition to avoid
inflation and keep the economies of the nations healthy. But that premise is
false. The irrefutable proof of this is that the two countries with the largest
fiscal deficits in the world, Japan and the United States, do not have
inflation. This forces us to look for the origins of inflation in other causes
and not in the fiscal deficit, which is why the IMF theory on the matter falls
and loses its rational and logical sustenance. This then leads to the following
question: what is the origin of inflation?
In the book Critical Appreciation of Monetary Policy, Bolívar Oro (Monte Ávila
2007) expressed that "The main causes of inflation are: a) devaluation of
currencies b) usury: exaggerated elevation of interest rates c) the excessive
increase of the taxes d) the increase of the prices of the energy, especially
of the oil and e) the increase of the demand before an insufficient supply
"and added that" the causes of the inflation are essentially by the
side of the costs and, ultimately, on the demand side. "Page 138.
1. The economic policy
measures of the IMF are incoherent
Incoherent means that they are not related
to each other and oppose each other.
The policies of the International Monetary
Fund fail because they employ contradictory measures such as the following; I
will explain:
-
The decrease in public spending
in search of fiscal balance as the IMF imposes on countries contradicts the
expansion of investment and public and private consumption, because money is
the blood of the economic process and what determines the stagnation, reduction
or expansion of the economy. Consequently, a reduction in public spending has
effects throughout the economic chain and social life.
-
The raising of interest rates
to conserve or attract capitals generates the opposite effect because investors
and speculators, seeing the excessive increase in rates, flee because they know
that the crisis is just around the corner and very soon they will lose their
money. This influences the decrease in public resources and contributes to the
devaluation of the currency.
-
- The increase in the prices of
public services in search of more income to balance the budget drives inflation
and subtracts money from people to invest in other needs.
-
The growth in interest rates
also stimulates inflation because it raises production costs and, in turn,
increases credit to consumers, negatively affecting consumption.
-
- Investors and speculators
seek to appropriate the most profitable companies in the countries and not the
companies that give losses, consequently, when privatizing companies or public
services, the State loses important sources of income and the fiscal deficit
increases.
As demonstrated in the
previous paragraphs, none of the measures used to reduce or eliminate the
fiscal deficit in the nations fulfill their purpose and rather have an effect
totally opposite to what is intended with them; that is why the measures fail
in all the countries where they are applied. The most recent example is the
case of Argentina in 2018 and 2019. In this country, as a result of the
adoption of contradictory austerity measures by the IMF, there was a significant
augmentation in poverty, unemployment, inflation, devaluation of the currency,
interest rates of usury, increase in prices of public services and fall in
production and consumption according to the official statistics of Argentina.
2. The natural tendency is to
grow
The tendency of the world population is to
grow; the exception is the countries affected by the demographic transition
process. The increase of the population by natural evolution or by the effect
of migration brings as a logical consequence the raise in needs and the
consequent additional expense for the State whose obligation is to provide
basic services to the population. When the national currency does not grow at
the same pace as the increase in the needs of the population, the fiscal
deficit appears. This is the key issue because the issuance of national
currency to meet the deficit depends on the amount of available reserve
currencies, monetary gold reserves and country securities (SDRs) in the
International Monetary Fund.
3. By reducing spending,
recession and inflation are decreed
When adopting a policy of reducing spending
for purposes of fiscal balance without taking into account the total needs of
society, the economic recession is automatically induced; this happens in
practice in all countries where the adjustment programs of the International
Monetary Fund are applied.
The failure of these programs is not to
recognize that the growth of the population generates new needs that must be
addressed by the State. It is very simple: for example, if a person gains
weight the logical thing is to buy wider clothing and not cut the existing one.
The same happens to the nations. But the austerity measures of the IMF force
countries to the contrary, that is, to cut spending.
4. Where does the crisis come
from?
The solution then is to lift up spending and
not reduce it but this possibility is limited by the inability of nations to
sufficiently raise their national currencies whose increase or decrease depends
on their currency reserves, monetary gold or securities in the IMF.
5. The predominance of the dollar
Most of the international financial and
commercial operations are carried out in the United States dollar. This fact is
the determining factor of the world economy. If a country does not have enough
international means of payment (reserve currencies), it enters into crisis
because it must find a way to obtain them. One way is to sell, export your
products to receive payments in foreign currency and the other is to borrow
from the international financial system. When countries cannot increase their
exports or get external loans from the private system, the situation becomes
more complicated and they have no choice but to resort to financial
institutions such as the International Monetary Fund and the World Bank that
impose their conditions. The main one of these conditions, as has already been
sufficiently explained in this document, is the search for fiscal balance
because the IMF considers that this should be the ideal of the economy and the
way to stop or eliminate inflation.
6. Domestic debt and external
debt
Domestic debt is the one acquired in the
currency of one's own country; external debt is the contracted in the currency
of another nation.
Issuers of the five world reserve
currencies, dollar, euro, pound sterling, yen and yuan do not face any problem
because they can sovereignly issue their national currencies that are accepted
as means of payment internationally. The issuance of currency for them is
internal debt. That is its great strength. The United States, for example, has
a fiscal deficit of trillions of dollars and continues issuing sovereign debt,
fiduciary, without sufficient support in gold but it is a debt in its own
currency, that is, an internal debt. The situation is completely different for
the rest of the countries of the world, which do not have enough foreign
currency and are forced to borrow in the international financial system and
incur external debt for which they must submit to all the conditions imposed by
the lenders. That is its great weakness.
7. The movement of capital
determines the political and economic power
The ability to generate and accumulate
sufficient own resources in foreign currency creates the economic freedom of
the countries; the lack of it causes the opposite, that is, the dependence and
economic subordination of nations to the world centers of financial power. The
international economic system is specially designed to function in that way.
8. The law of the funnel
The currencies of the five major financial
powers, the reserve currencies, are fiduciary instruments, that is, based on
good faith and their acceptance by the rest of the world and do not have
sufficient support or obligation to be redeemed in gold as they were in the
past when they were tied to the gold pattern. But the currencies of the rest of
the countries are required to have sufficient support in foreign exchange and/or
gold and this determines their appreciation or devaluation. It is the law of
the funnel: the width part for the five reserve currencies, especially the
dollar, and the narrow for the rest of the world currencies. The greater or
lesser support in reserve currencies and gold determines the appreciation or
devaluation of the currencies of the rest of the world. This leads to an
increase in external loans from countries to strengthen their national
currencies and finance their ordinary needs. For example, if a country needs to
build a large highway and does not have enough money in its national currency
then it asks for an external loan, in foreign currency, of course, and thus
increases its external debt by making itself more vulnerable. It would be
different if with its own national currency, that is, with internal debt, it
could finance that highway. In a case such as the one indicated, it is
justified to request an external loan only to finance the imported component of
the work. Let me explain: if to build the highway you need goods or materials
that must be bought abroad and you do not have the foreign currency to do so,
it is justified to ask for financing that portion by an external loan but the
rest of the work should be financed with resources own of the country, that is
to say, with internal debt. Nevertheless, the international financial system is
created especially to force the most vulnerable countries to acquire and
increase their external debt.
9. A major change in the
global economy
In my most recent book A Welfare Society, my political proposal to Venezuela (Amazon 2019)
I have proposed an idea that would contribute to improving the conditions of
countries with less financial resources but with valuable natural resources
such as oil, gold and food. The aim is to recognize the financial value of
these resources and use them as international means of payment to replace cash
or acceptance of the physical exchange of those resources for other goods, that
is, to create additional non-financial mechanisms to facilitate trade. A
country like Venezuela, for example, that has oil, could change oil for food or
medicine. And, conversely, countries that have food in abundance could change
those foods for oil or other goods. This would be a useful contribution to
international economic relations.
10.
Money is a creation of man
Money is a creation of man who gives it its
value and, consequently, can determine how much money to emit and how much no.
In the past, in times of the gold standard, the possession of gold was the
mechanism used to limit the issuance of money. Now it is the possession of
currencies and especially the dollar, the instrument used to control the
issuance of money in the rest of the countries of the world.
11.
An important objective of the international financial system
Money should grow in the appropriate
proportion to meet the needs of nations but in practice this does not happen
and this leads to two extremes: misery when it is lacking or hyperinflation
when it abounds.
The amount of money should increase
rationally, in its fair measure, to avoid the two extremes mentioned above and this
should be a central objective of the international financial system.
12.
Conclusions
- Fiscal balance is not the
remedy against inflation as wrongly state the IMF; If the fiscal deficit were
the main cause of inflation then countries like Japan and the US that have the
highest deficit should suffer high inflation but it is not like that but quite
the opposite.
- The devaluation of
currencies, the alteration of the exchange rate against the dollar is the main
cause of inflation in most cases.
- The IMF's austerity policy
fails because it uses a contradictory method: it seeks to promote economic
well-being by balancing public finances reducing the public spending but this
fact affects the investment and consumption generating poverty, inflation,
devaluation, unemployment and less production
