Chile’s finance minister Larrain should be ridiculed

Chile’s minister of finance, Felipe Larrain, wrote a piece in the Financial Times yesterday criticizing the United States, Japan, and even the European Union for their easy monetary policies.  He and most other representatives of so called “developing” country governments object to the currency appreciation caused by low interest rates which they see as detrimental to the price competitiveness of their export industries.  Larrain refers to the situation as “beggar my neighbor policies”, a rather revealing Freudian-like phrase it would seem given that the neoliberal paradigm Larrain favors pushes so many of his fellow Chilean neighbors – comprising as they do one of the most unequal societies on Earth – into actual or near beggarship.

It’s quite easy to see why Chile’s peso would appreciate given the gargantuan interest rate differential currently in effect.  Whereas the US and Japan are maintaining short term rates of about zero and the European Central Bank is at 0.75%, Chile’s central bank is paying out a whopping 5%; all while the most recent inflation rate measured from December 2011 to December 2012 is just 1.49%.  If the Chilean government objects to the currency appreciation caused by this interest rate differential, why not just lower the rate?

Why would the government of Chile wish to pay its domestic tycoons $50,000 for every million dollars of accumulated wealth – over six times the median household income of $7,851 – when the “developed” countries are paying almost nothing?  If the government were truly democratic, shouldn’t it leap at the chance to slash this welfare scheme for the rich?

But the rules of the game are as rigged for the Chilean people as they are for everyone else.  High real interest rates and currency appreciation may be bad for employment and new business, but they’re exactly what the doctor ordered for those with substantial hoards of accumulated wealth.  Low interest rates, in contrast, can be an absolute disaster for the seriously well to do – leading as they do not only to lower riskless returns, but to the possibility of currency depreciation, inflation, and rising political power of the lower classes as the economy expands.  The mere whiff of “unorthodox” monetary policies, especially in the land of Allende, will therefore lead to the speedy flight of domestic capital to the safe confines of Wall Street, London, Switzerland, and the assorted international havens.

So a key reason “developing” country governments don’t revel in the opportunity to lower interest rates step by step with the core nations is that their elites greatly enjoy the party.  Come on United States, Japan, and Europe, says our Señor Larrain over a fine Chilean wine, don’t ruin the party, raise your rates and we’ll all be happy!

Meanwhile in less refined circles, average people everywhere seek little more than to make a decent living; and in our globalized economy, exports are increasingly central to that end.  Governments like that in Chile depress their domestic economies claiming they can’t expand further without risking inflation, yet they rule over societies that have indecently high levels of poverty and substandard living conditions.  And all of this while the critically central problem in the greater world is what to do with the vast productive resources that are available.  In the realm of the real, the problem is clearly not inflation – a purely financial term – but rather an “excess” of productive capacity.

The solution to this not very hard to understand “dilemma” must rest primarily at the international level as the basic rules of the global game need to be radically changed.  The proposition that a globalized economy increasingly based on exports can morally exist alongside harsh ground rules that forever ensure poverty and insecurity by limiting imports is absurd and must be rejected.

Felipe Larrain, representing domestic and international elite opinion, proclaims from his gold and marble palace that the essential problem of the world is low interest rates.  He should be ridiculed for such nonsense.