Pedro Schwartz begins his presentation by pointing out that inflation, which has been occurring since 2019, is a consequence of the actions of central banks, the Federal Reserve, and the Bank of Spain. These central banks have created too much money, which has led to a decrease in its value. Contrary to what some might think, the evolution of the euro inflation rate shows that inflation started before the war in Ukraine and is not a static phenomenon. However, it is now receding because central banks are reducing money creation (the money supply), and the current concern is the risk of deflation.
According to Pedro Schwartz, central banks have disregarded the quantity theory of money by Milton Friedman, which teaches that the value of money is governed by supply and demand rather than external factors such as war or COVID-19. Schwartz argues that explaining inflation through rising goods prices is a mistake made by all central banks and governments. In reality, the price level rises when the money supply and the velocity of money increase and falls when the production of goods expands.
In response to this situation, Schwartz proposes that monetary policy should not be used as a tool for economic growth, as it must remain stable and conservative. In his view, banks should aim for zero inflation and allow economic growth to lower the prices of some goods. Additionally, they should develop financial security policies and deposits that make them less dependent on the government. He argues against using the Central Bank’s discount rate, as interest rates are an ambiguous tool—sometimes they reduce inflation, and other times they sustain it. He also opposes a European banking union and a common income policy.
During the Q&A session, Pedro Schwartz affirms that low inflation is possible, as it is a monetary phenomenon, and that inflation can also decrease if the production of real goods and services expands. He highlights how an event like the collapse of Credit Suisse affects Spain, as we live in a globalized financial world—evident in how Spain’s three largest banks saw their stock prices decline following this event. He also warns that while excessive money creation was a mistake, an excessive reduction of money supply could also be problematic. Additionally, Schwartz emphasizes that rising interest rates have severe financial consequences; increasing the cost of money does not reduce its loss of value but instead threatens the financial stability of private banks.
On other matters, Pedro Schwartz argues that banks must safeguard their profit margins and acknowledges that mortgage holders will suffer due to past monetary policy errors. He warns that excessive government debt could reach a point where further borrowing abroad is impossible, forcing governments to raise taxes to pay pensions. Furthermore, he stresses that the war in Ukraine has fundamentally changed defense policy perceptions, making public defense spending essential for maintaining the stability of democracies. He also notes that China’s central bank has taken a conservative approach and has not fueled inflation, thereby implementing the correct monetary policy.
Finally, INCIPE’s Secretary-General, Manuel Alabart, concludes by emphasizing that central banks bear responsibility for inflation and that a stable monetary policy is necessary.
Jaime Osorio
Asistente de comunicación, INCIPE