World economic activity has reached its nadir due to the Covid-19 pandemic. Both governments and central banks responded with unprecedented fiscal liquidity measures (the former) and increased expansionary monetary policy combined with near-zero interest rates and mass securities markets (the latter).
Combined with the easing measures of commercial banks taken by supervisors, they provided ample liquidity to the economies by squeezing government bond yields, making any fiscal policy effective.
In this way, fiscal policymakers have been able to keep demand at a reasonable level, preventing the economic downturn from escalating further.
In this context, a wide range of companies, regardless of size, were subsidized with loans on very favorable terms that far exceeded their leverage potential.
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But what do we conclude about the consequences for the effectiveness of monetary policy in the future?
1. Almost zero interest rates are sure to last for a long time.
This is since excessive lending has caused exceptionally large budget deficits but also an increase in the Public Debt / GDP ratio. If for any reason the interest rates rise it would lead many companies of any size to bankruptcy as they would not be able to fully meet their loan obligations. The options and flexibility of interest rate policy have evaporated.
2. Given that medium- and long-term interest rates are “doomed” to remain at almost zero levels, it
is certain that future investment cycles in favor of big investors will be unequally affected, big – measured in terms of capital size.
Large investors are favored in many ways compared to small investors measured in terms of capital size, due to:
a) higher leverage rate
b) higher rates of return on their invested capital
c) the rise in prices in various categories of real estate, services, and products.
The subsidies of the companies were aimed at the “operational maintenance” of the companies and not at the strengthening of their growth prospects.
Small investors (individuals and/or companies) will have access to cheap financing, but comparatively their small credit report and possibly difficult access to bank financing will not allow them to take advantage of the environment of favorable interest rates.
But this is also the basis of inequality and the unfair redistribution of wealth and income in North America and Europe, as the investment cycle of small investors is as limited as their profitability prospects.
These conclusions led President Joe Biden’s administration to discern the impending dangers by responding to the following policies:
1) Increase in the taxation of the highest incomes.
2) The simultaneous reduction of the tax rates of the middle- and low-income classes, respectively.
3) The imposition of a minimum tax rate of 15% for large companies.
Useful lessons for the future:
1) Fiscal financing policy should be conditional funding to strengthen production infrastructure, upgrade the quality of products produced, productivity and competitiveness of enterprises.
2) Its goal (1) is to create sustainable, modern, and profitable companies to increase employee incomes and reduce income inequalities.
3) The subsidy should aim to create wealth through the productive process. Wealth must then be distributed fairly and proportionately.
4) The policy of almost zero interest rates will favor large investors.
5) Only with a favorable tax policy can small investors be favored and with
simultaneous imposition of high taxation of the highest incomes.
Only with the courses applied above can sustainable social prosperity and self-sustaining development be achieved.
