Preparing a country to battle the Covid-19 pandemic requires resources. Simultaneously, governments have to organize their national health systems — if they have them — avoid letting companies go bankrupt, and provide support to the unemployed and most vulnerable strata of the population. Around the world, these mounting duties led to the quasi-consensus that governments would have to increase public spending. In Brazil, however, with the public debt reaching 75 percent of GDP before the pandemic hit, the country has very little wiggle room to ramp up spending. The solution, according to some economists, is an unorthodox tool called quantitative easing, which is an indirect method of printing money.
The idea — initially tested by the U.S. Federal Reserve in 2008 — is typically used as a last resort, when interest is so low that monetary stimulus packages become ineffective. Therefore, by increasing the monetary base — i.e., printing more money — the Central Bank would be able to purchase bonds, avoiding permanent deflation caused by the constant fall in prices, as people hold off on spending when they know prices may go down in future.
Now, with the new “War Budget” approved by Congress allowing the Central Bank to purchase public and corporate bonds, and with benchmark interest rates at a historical low of 3 percent and potentially falling further, some economists believe we have reached the conditions for quantitative easing (QE) to be employed in Brazil. Even Economy Minister Paulo Guedes has floated the possibility. “If we fall into a liquidity trap, in a zero-inflation scenario, the Central Bank may, indeed, issue lots of currency and purchase internal debt,” said Mr. Guedes, speaking before the Senate.
Central Bank Chairman Roberto Campos Neto, however, considers the strategy dangerous and believes the country’s economic recovery will not come through quantitative easing. So, what makes QE so attractive and, yet, so controversial?
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