The President against the Deep State – 02/17/2023 – Demétrio Magnoli

“The regulatory agencies and the independent BC are attempts at a deep state in Brazil”, wrote Reinaldo Azevedo, quoting Walfrido Warde (FSP, 10/2). Criticism of autonomous central banks circulates both in the discourse of the Latin American left and the European nationalist right. Even so, it is an argument – ​​and deserves, therefore, merit examination.

Independent or autonomous central banks are the norm in advanced democracies (US, EU, UK, Japan, South Korea). Several developing countries have adopted the model (South Africa, Mexico, Colombia, Chile, among others). None of them, however, is an entity above politics.

All BCs are subject to popular sovereignty. At the time of German reunification, the powerful Bundesbank warned of the inflationary effect of converting the eastern mark at market rates. Helmut Kohl’s government ignored the Central Bank’s alert, converting it to par.

Autonomous BCs do not do what they want: they operate monetary policy to fulfill functions defined by law. In the US, the Fed tries to reconcile low inflation and low unemployment. The European Central Bank, like our BC, pursues inflation targets. Around here, it is the government that sets the inflation target, using its majority in the National Monetary Council. Lula does not need to shout against the 3.25% target: it would have been enough to have raised it on Thursday.

The management of BCs responds to elected representatives. In Brazil, when the inflation target is not achieved, it must be justified by means of a letter to the Minister of Finance. The president of the BC has a fixed mandate and does not coincide with that of the head of state – but he can be removed by decision of the President of the Republic endorsed by the Senate.

The BCs’ autonomy is intended to separate the monetary policy cycle from the electoral cycle in order to produce lower inflation rates. It works, as attested by econometric studies of price dynamics in developing countries (see, among others: ).

Turkey illustrates the danger of submitting monetary policy to the whims of the incumbent government. At the end of 2021, reversing economic theory, President Erdogan, an authoritarian populist, decided that reducing interest rates would reduce inflation. The Central Bank obeyed, cutting interest rates repeatedly when inflation crept. In the span of one year, the inflation rate jumped from 20% to 85%.

The trauma of hyperinflation triggered the process of autonomy for our Central Bank. The trajectory began with the Real Plan (1994), went through the inflation targeting regime (1999) and ended with the 2021 law. interest rates to serve the presidential will, reaped an inflationary spike and ended up raising interest rates to the stratosphere. Under Dilma Rousseff, the highest interest rate was recorded since 2006. Our Central Bank gained legal autonomy as a result of society’s political choice.

Deep State? The expression sheds light on typical apparatuses of authoritarian regimes: the hidden gears of repression. In unique cases, it also identifies state apparatuses that are installed in democracies, but below the citizens’ horizon of vision. Using it, however, to discredit autonomous central banks teaches nothing about central banks – but sheds light on the subject of the discourse.

The populist left uses the deep state to accuse BCs of serving the greedy market. The populist right uses this to accuse the BCs of serving the demonic “globalists”. Some and others resort to conspiracy theories to expose democracy as a farce: the guise under which the deep state operates. Democracy is just dictatorship in disguise – that is the basic message.

The President (i.e. the People) against the Deep State (i.e. the Elite). Lula has extensive company when he adopts this line of propaganda.

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