MacroScope

Latin America has defied one of the most elementary rules of macroeconomics in the past decade, Citigroup economists Joaquin Cottani and Camilo Gonzalez found in a report.

Lower interest rates reduce the cost of money and therefore should encourage businesses and consumers to borrow, as we’ve repeatedly heard from analysts and government officials for decades. Puzzlingly enough, credit growth accelerated after central banks in countries like Brazil and Peru raised rates, and slowed when borrowing costs fell. Why is that?

The keyword here is confidence. In this commodity-exporter region, with a long history of deep, painful crises caused by currency devaluations and global downturns, perhaps it’s worth paying more attention to what happens abroad than to the cost of money – and how the global background might affect the local business cycle.

Said Cottani and Gonzalez:

A favorable confidence shock, typically coming from abroad, increases credit demand and/or reduces credit rationing. In a context of ample international liquidity and very low interest rates in advanced economies, interest rate hikes might not prove sufficient to restrain credit expansion, especially if the ensuing exchange rate appreciation raises the value of LatAm collateral and therefore boosts creditworthiness, or at least the perception of it by lenders.

This may help explain why Brazil is recovering only slowly even after the central bank chopped interest rates ten times in a row for over one year to a record low of 7.25 percent. It also gives insight on why credit in Latin America’s top economy continues to slow down on an annual basis – prompting Dilma Rousseff’s government to cut taxes and talk up Brazil’s economic prospects to convince businesses to roll up their sleeves.

By Felix Salmon
The opinions expressed are his own.

It’s been billed as the Fight of the Century: John Maynard Keynes vs. Friedrich Hayek. And on Tuesday night at the Asia Society it became a high-powered Thomson Reuters debate, moderated by Sir Harry Evans and featuring Nobel Laureate Edmund Phelps on the side of the Hayekians.

Nicholas Wapshott, who introduced the debate, gives a good overview of what’s at stake in an article for Reuters. It’s particularly germane right now, with Keynes acting as a proxy for Obama’s economic policies and Hayek serving the same role for essentially all of the Republican candidates.

Boiled down, it comes to this: Keynesians see a dreadful economy and say that the government should do something about it. Specifically, the government should get the economy moving again by spending money now. Hayekians, on the other hand, mistrust the idea that the government is the solution to any problem, and suspect that more government spending only acts to make matters worse. It’s a stance that makes for compelling political rhetoric: pay less in taxes, and see the economy grow! Nothing not to like there.

Remember that exchange a couple of months ago between Congressman Ron Paul and Federal Reserve Chairman Bernanke over the definition of money? Pressed by the congressman during testimony, Bernanke said gold is not money. Paul retorted: “Why do central banks hold it?”

Bernanke paused and said: ”It’s tradition, long-term tradition.”

One of the interesting things about the episode was how disparately it was perceived among different audiences. To most economists, Bernanke was stating the obvious. Gold is not money. You can’t walk into a coffee shop and pay for your doughnut with a raw piece of bullion. Not without at least eliciting a “let me get my manager” from the cashier. To Ron Paul’s libertarian supporters, however, this was a major ‘gotcha’ moment for the presidential hopeful.

Gettin’ down with the dismal science

Companies need to actively encourage dissent and aspire to heretical rather than consensus views if they want to avoid being as unprepared as they were for the financial meltdown.

Noreena Hertz, professor of finance, sustainability and globalisation at Erasmus University in the Netherlands, kicked off the CFA Institute's second annual European Investment Conference in Frankfurt with a wake up call for the assembled asset managers and bankers.

"This was not just a financial crisis - this was an existential crisis that exposed a faultline in the system," she said. "The way we thought about the world was profoundly flawed."