The financial drain on productive activities has become a global challenge, but it reached grotesque dimensions in Brazil. Raising profits by paying low salaries is still active, but most of the fortunes at the top, and the resulting deepening inequality, result from financial drains on the public sector, businesses and families.

(Ladislau Dowbor)

The national financial system shall be structured in a way to promote the balanced development of the country and to serve the interests of the collective.

(Article 192 of the 1988 Brazilian Constitution)

When financial rentier income, meaning investments in bonds and various financial "products," yields more than starting a company and making a productive investment, money flows to where it earns more: to unproductive gains. For example, when the government raises the benchmark interest rate (Selic) to 13.75%, this value will be paid by the government to private holders of public debt securities, basically, the wealthiest 10% of society, using the taxes we pay. In other words, instead of financing education, health, or infrastructure, these taxes go to large financial groups, which we call "markets." The State did not incur debt to build schools, for example, or for the Bolsa Família program: 82% of the increase in public debt results from accumulated interest. Without any productive contribution, these groups annually drain around 700 billion reais, equivalent to about 7% of GDP, on the public debt alone. This 7% of GDP could be transformed into productive investments, but why would a wealthy individual take risks in the real market when he can earn 13.75% without risk or effort? After deducting inflation, a net gain of 8.5%.

Public debt could be justified if, for example, it financed a technological support program for family farming. This would result in higher productivity and more products, whose consumption, in turn, would allow returns for the producers, entrepreneurs in the food chain, and the State through consumption taxes and at various points of the stimulated production cycle. In our case, the fact that 82% of the increase in debt results from accumulated interest means that we are simply feeding financial speculators. According to research by Carlos Luque et al., "Since 1995, the government has paid debt holders the equivalent of 5-7% of GDP per year, much more than the deficit in pensions or other items of expenditure that are the subject of much discussion in Congress and the media."1

A drain of this magnitude requires a narrative: it would be about protecting the population from inflation. It is evidently a farce since only an overheated economy needs to be cooled down, and therefore, with inflation due to excessive demand, raising the rate of public debt would be efficient. The last year of significant growth in Brazil was in 2013, at 3.0%. In a stagnant economy, transferring more public resources to financial groups that reinvest for more interest instead of financing infrastructure, for example, which would stimulate the economy, constitutes an undue appropriation of public resources2.

This imbalance is exacerbated by private credit. The interest rates practiced in Brazil for individuals and corporations constitute a broader drain. The Central Bank's Monetary and Credit Statistics report from January 2023 presents data on the volume of private credit granted to individuals and corporations, totaling 5.3 trillion, distributed as 1.4 trillion for corporations in free credit, paying interest rates of 23.1% (compared to 3 to 4% in Europe); 1.8 trillion granted to individuals, with interest rates of 55.8%; and 2.2 trillion in directed credit, with lower interest rates. "The average interest rate for new contracts ended 2022 at 29.9% p.a.3" This average on the 5.3 trillion granted in 2022 results in a drain of around 1.5 trillion, 15% of GDP. This financial drain is on the private sector through usury, stalling family demand and business investment. This 15% of GDP adds to the 7% drained from the public sector. These interest rates must be compared to the moderate inflation of 5 to 6%.

People in general have difficulty "visualizing" what one and a half trillion reais represents. But divided by the population, 220 million, it is a cost of 7,000 reais for each one of us. It would also be possible to build 10 million affordable houses. This volume of interest extracted from families and companies drastically reduces private consumption and business investment, also affecting employment and contributing to the deindustrialization of the country. Does any part of this money return to the economy? We don't have that data for Brazil, but the equivalent calculation in the United States, by the Roosevelt Institute, is that it's only 10%. Mariana Mazzucato, in the case of Britain, estimates 15%4. In any case, it is a gigantic unproductive drain that generates the impressive fortunes of Brazilian billionaires featured in Forbes, as well as those of large international asset managers.

This institutionalized rentierism is now legal, as a constitutional amendment in early 2003 removed Article 192 from the constitution, which classified usury as a crime: "Real interest rates, including commissions and any other remuneration directly or indirectly related to credit granting, may not exceed twelve percent per year; charging above this limit shall be classified as a crime of usury, punished in all its modalities, as determined by law." Only the first sentence of Article 192 remained, stating that "the national financial system shall be structured in a way to promote the balanced development of the country and to serve the interests of the collective." This is not about generosity because the money that the bank lends us is ours, and the money from public debt comes from our taxes5. People also don't have a clear understanding of what usury or loan-sharking is. In France, for example, the prohibition of usury is in the consumer code, defined as charging an interest rate that exceeds by one-third the average rate practiced by financial institutions in the previous quarter. As an example, a loan between 3,000 and 6,000 euros, with an average market interest rate of 7.35% per year, cannot exceed 9.80%. For an amount above 6,000 euros, where the average annual rate is 3.70%, it cannot exceed 4.93% per year6 .

Here's a practical example: Santander sent me this offer on my cell phone, and I transcribed it verbatim: "Santander: Ladislas, great news for tough times! The interest rate on your account limit has dropped to 5.9% per month until 01/31/2023." I didn't ask for this offer; they invaded my cell phone, and I imagine it reached millions of people. Many people in distress could think it's really "great news" and get trapped in an initial loan they will never be able to repay. Monthly interest rates of 5.9% are equivalent to nearly 100% per year (98.95%). The bank operates with misinformation, as few people will know how to calculate compound annual interest. Santander is the bank where the current president of the central bank comes from.

The debt trap is generalized. It's no wonder that 79% of Brazilian households are mired in debt, working to pay interest and often only prolonging the debt7. In 2023, 70 million adults will be in default, which amounts to a personal bankruptcy crisis on a massive scale8. There is no control; the Central Bank is "autonomous," meaning it is controlled by the very groups it should regulate. Loan sharking equally affects, albeit to a lesser extent, legal entities. The same report from the Central Bank, Monetary and Credit Statistics, shows an average interest rate, for businesses, of 23.1% in 2023. In the rest of the world, this type of credit is around 3%. In China, it is 4.6% per year, which, after discounting inflation of 2%, results in a real interest rate of 2.6%. Thus, companies in Brazil face a triple disincentive for productive investment: families are in debt, and demand is stagnant; taking out loans from banks is prohibitive due to the interest rates charged; and there is the alternative of using their capital to buy government bonds, which offer a solid return without risk, as seen above.

The financial drain caused by interest rates creates a triple constraint on the economy: the government loses a significant portion of its investment capacity, weakening social policies and infrastructure investments; families redirect a large portion of their already limited purchasing power towards interest payments, undermining the main driver of the economy, which is household consumption; and the country deindustrializes, discouraging productive activities. It is important to reiterate that the last year of significant growth in Brazil was 2013, at 3%. Since then, there has only been apparent growth in 2021 and 2022, which was merely a recovery from the recession in 2020 caused by the Covid-19 pandemic. Summing up, the drain on public resources is around 7% of GDP, as we've seen, while the drain on households is around 10% of GDP, and for companies, it's about 5% of GDP. Even if we estimate that 10% trickles back to the real economy, we are talking about a drain worth 20% of GDP, money that could be invested. We could add the estimated 6% of tax evasion, 5% of tax exemptions managed by political pressures, and other drains, but the basic fact is that we are sterilizing around a quarter of GDP through the various financial drains.

The system of extortionate interest rates mentioned above hinders government investment, household consumption, and productive initiatives. It withdraws money from the productive economic circuit, from what is now referred to as the "real economy," to benefit financial corporations. It has been called aptly called “extractive capitalism.” It is not a flaw in the system to be corrected. It has become the system, and it is flawed.

Notes

1 Carlos Luque et al., Uso e abuso da taxa de juros, Valor, 11 de maio de 2022.
2 “Misappropriation” is the term for this type of drain. It is legal, simply because they are the ones who create the laws. There is no corresponding productive contribution. In this sense, it is legal, but not legitimate. See [Unjust Deserts: how the rich are taking our common inheritance], by Gar Alperovitz and Lew Daly, The New Press, New York, 2008.
3 Estatísticas monetárias e de crédito, Banco Central, 27/01/2023.
4 Mariana Mazzucato, The Value of Everything – 2018 – “The financial sector now accounts for a significant and growing share of the economy’s value added and profits. But only 15 per cent of the funds generated go to businesses in non-financial industries.” (p.136) According to J.W. Mason, from the Roosevelt Institute, “In the 1960s and 1970s, an additional dollar of earnings or borrowing was associated with about a 40-cent increase in investment. Since the 1980s, less than 10 cents of each borrowed dollar is invested.”
5 Hermes Zaneti describes in detail how the banks and asset-management corporations took Article 192 out of the Constitution, in [O Complô, a batalha dos bancos para derrubar o artigo 192º da Constituição], Ed. Verbena, 2017.
6 Banque de France, Taux d’usure 2022.
7 Confederação Nacional do Comércio.
8 Serasa Experian, Brasília, Feb. 2, 2023, CNN, 2022.