2. Dynamic Efficiency as a Necessary and Sufficient Condition for the Economy to Recover from a Pandemic

Some previous considerations are required to review and study the pandemic crisis and its management, as well as its monetary and financial sustainability. There must to be considered the possible structural effects, that could result from a pandemic in the short, medium, and, eventually, long term. In addition, it has to pay attention to the natural increase in uncertainty (caused by the pandemic). Initially, it plays in the increase in the demand for money and in its purchasing power. In the context of (sectoral or general) confinement in which productive activity is temporarily halted, it is particularly important that there is an accompanying decrease in demand, to free up consumer goods and services so that all of the people who are forced to suspend their productive or work activity can continue consuming the minimal amount they need. In other words, the rise in cash balances and the fall in nominal prices make it easier for consumers and economic agents to adapt to difficult circumstances, and at the same time, they enable them all to respond quickly once they can see the light at the end of the tunnel and confidence begins to return.

In any case, the economy must be “dynamically efficient” [29^[6][7],30], if it is to uncover the opportunities [31,32]^[8][9] that begin to emerge and make it possible for them to be seized and for the recovery to get off the ground. The conditions for dynamic efficiency, they are provided by everything that let improve the free exercise of (both creative and coordinating) entrepreneurship by all economic agents such that they are able to channel available economic resources into new, profitable, and sustainable investment projects focused on the production of goods and services which satisfy the needs of citizens and are independently demanded by them in the short, medium, and long term.

In an environment like our present one, of strongly controlled economies, the process by which prices characteristic of the free-enterprise system are formed, and the set must run smoothly and with agility. For this to occur, markets must be liberalized as much as possible, particularly the market for labor and other productive factors, by eliminating all of the regulations which make the economy rigid [19,23,33]^[10][11][12]. In addition, it is essential that the public sector does not squander the resources companies and economic agents need first. To cope with the ravages of the pandemic and survive and, later, when things improve, to make use of all their savings and idle resources available to bring about the recovery [34]^[13]. Therefore, it is imperative that we proceed with a general reduction in taxes which leaves as many resources as possible in the pockets of citizens and, above all, lowers as far as possible any tax on entrepreneurial profits and capital accumulation [35,36]^[14][15].

It is important to remember that profits are the fundamental signal that guides entrepreneurs in their indispensable, creative, and coordinating work [37]^[16]. Profits direct them in detecting, undertaking, and completing profitable, sustainable investment projects that generate steady employment. It is necessary to promote, rather than fiscally punish, the accumulation of capital if we wish to benefit the working classes and, particularly, the most vulnerable. This is because the earn wages are ultimately determined by their productivity, which will be higher, the higher the per capita volume of capital in the form of equipment goods entrepreneurs make available to them in ever-increasing quantity and sophistication. Regarding the labour market, we must avoid any sort of regulation, which decreases the supply, mobility, and full availability of labour to quickly and smoothly return to work on new investment projects [19]^[10].

Hence, the following are especially harmful: the setting of minimum wages; the rigidness and unionization of labour relations within companies; the obstruction and, particularly, legal prohibition of dismissal; and the creation of subsidies and grants (in the form of temporary labour force adjustment plans, unemployment benefits, and guaranteed minimum income programs). The combination of these can discourage people from looking for work and from wanting to find a job if it becomes obvious that for many, the more advantageous choice is to live on subsidies, participate in the underground economy, and avoid working officially [12]^[17] (pp. 453–455). All of these measures and structural reforms must be accompanied by the necessary reform of the welfare state. We must give the responsibility for pensions, health care, and education back to civil society by permitting those who so desire to outsource their benefits to the private sector via the corresponding tax deduction.

3. Depletion of the Extremely Lax Monetary Policy in the Years Prior to the Pandemic

Let us now focus on the current COVID-19 pandemic, which we have been analyzing and using as our main example in this paper. We could highlight a very significant peculiarity which conditions and impacts the future economic evolution of the pandemic more negatively than would be necessary. In fact, this pandemic emerged and spread throughout the world beginning in 2020 in a context in which central banks worldwide had already initiated an extremely lax monetary policy of zero or even negative interest rates [38]^[18] and monetary injections the likes of which, due to their degree of intensity, their widespread nature, and the international coordination involved, had never been seen before in the economic history of mankind. This ultra-lax policy had been adopted many months or even years before the pandemic hit, and central banks had employed it under the guise, first, of aiding the emerging recovery following the Great Recession of 2008 [39,40,41]^[19][20][21] and, later, of dealing with the supposed or real uncertainties which invariably arise from time to time (the populist protectionism of Trump, Brexit, etc.).

Jesús Huerta de Soto in “The Japanization of the European Union” [42]^[22] explains how the extremely lax monetary policies implemented by central banks (before the emergence of the pandemic), have had a counterproductive effect. On the one hand, they have obviously failed to boost prices by close to 2%. Indeed, the massive injection of money has largely been neutralized, in an environment of great institutional rigidity and uncertainty, by an accompanying widespread increase in the demand for money by economic agents, since the opportunity cost of holding cash balances has been reduced to zero. Furthermore, clear opportunities for sustainable investment are not opening up in an environment of constant regulation and economic interventionism that weighs down expectations of profit and prevents a full recovery of the confidence lost beginning in the Great Recession of 2008. As a result, it has also not been possible to complete the necessary rectification of all the investment errors committed during the bubble and credit expansion years prior to 2008. On the other hand, the moment central banks launched their policies of massive monetary injections, quantitative easing, and zero interest rates, they eliminated ipso facto any incentive the different governments (of Spain, Italy, France, etc.) might have had to introduce or carry through the pending economic, regulatory, and institutional reforms essential to fostering an environment of confidence in which entrepreneurs are free of unnecessary restrictions and obstacles and can devote themselves to putting their creativity into practice and making long-term investments that provide sustainable jobs. Indeed, what government is going to bear the high political cost of, say, putting its accounts on a sound footing and liberalizing the labour market if, de facto, regardless of the deficit incurred, the central bank will finance it directly or indirectly and at zero cost – that is, by completely monetizing it? For instance, the political nature of the Euro has led the European Central Bank to save the Eurozone from collapsing breaking existing treatises [43]^[23] by directly and indirectly monetizing Eurozone governments’debts [44]^[24]. As the European Central Bank already owns nearly one third of the sovereign debt issued by Eurozone member states, and the moment it launched its policy of indiscriminate purchasing of this debt, it halted the entire process of economic and institutional reform the member states desperately needed. The conclusion that emerges from economic theory could not be plainer: In a context of great institutional rigidity and economic interventionism, ultra-lax monetary policies serve only to indefinitely maintain the rigidity and lethargy of the economies affected and to increase the indebtedness of the respective public sectors to an extent very difficult to sustain.

4. The Reaction of Central Banks to the Unexpected Outbreak of the Pandemic

It was in these very worrisome economic circumstances, in which central bankers had already practically depleted their entire arsenal of unconventional, ultra-lax monetary-policy tools, that the COVID-19 pandemic unexpectedly broke out in January of 2020. The reaction of monetary authorities has been simply more of the same: They have redoubled monetary injections even further. To do so, they have expanded their financial-asset purchase programs (and the price, much to the delight of large investors, such as mutual funds, hedge funds, etc., has continuously risen, and in this way, central banks have made the fortunes of a few people even greater, while the economy of most citizens is contracting and entering a recession). In addition, the new money is, de facto, increasingly being distributed through direct grants and subsidies financed via monetized public deficit, such that a large portion of the newly created money is already starting to reach the pockets of households directly. However, since at least as far back as 1752, when Hume [45]^[25] pointed it out. Hume expressly states that if, by some miracle, every man in Great Britain woke up one morning to find five more pounds in his pocket, the only real effect would be a decrease in the purchasing power of money (that is, an increase in nominal prices), since the productive capacity of the United Kingdom would remain the same (p. 299). With his famous “helicopter drop,” Friedman simply copied and modernized this Hume´s example). We have known that the mere equal distribution of monetary units among the citizenry has no real effect. In that sense, Mervyn King, former Governor of the Bank of England, he has recognized about it: “The prevailing narrative tells us that the combination of fiscal and monetary stimuli has been a success against the pandemic, but at this point, I cannot quite see the benefit of the activism of central banks. I have been arguing with my wife for days about whether or not it is time for us to have dinner at our favourite restaurant: The tenor of that argument is not going to change because interest rates keep falling” [46]^[26]. For this reason, monetary authorities ultimately do not wish to even hear about Friedman’s famous “helicopter money” as a tool of their monetary policy, since the latter produces apparent expansionary effects only when just a few sectors, companies, and economic agents initially receive the new money, which is accompanied by all of the collateral effects of an increase in inequality in the distribution of income in favor of a small group (as it was mentioned before, this group in connection with the effects of quantitative-easing policies as a determining factor in the enrichment of actors in financial markets). In any case, it is certain that, sooner or later, and to the extent that it is not sterilized by private banks: the relationship between monetary authorities and private banks is “schizophrenic”: Monetary authorities flood private banks with liquidity to lend out but constantly threaten to increase their capital requirements and to very closely monitor their choice of borrowers. Also, it is unmotivated entrepreneurial sectors, the new money will end up reaching the pockets of consumers and generating inflationary pressures, as the Hume effect of an inexorable loss in the purchasing power of the monetary unit appears [12,47]^[17][27]. This effect will become increasingly obvious as the initial uncertainty of households is gradually overcome, and their members no longer feel the need to maintain such high cash balances or they are simply obliged to spend the money they receive in the form of subsidies to subsist while they are unemployed and unable to produce. At any rate, everything points in the same direction: A growing monetary demand on a production which has declined due to the pandemic leads inevitably to an increasing upward pressure on prices [48]^[28]. For instance, non withstanding the prudence that is required when interpreting price statistics [49,50]^[29][30] the tendency of price evolution is clear. The price of agricultural products has continued to rise and has reached its highest point in three years. Freight charges and the prices of many other raw materials (minerals, oil, natural gas, etc.) have also soared, even to record highs.

5. Central Banks Have Gone Down a Blind Alley

The first thoughts could not be more obvious. Central banks have truly gone down a blind alley. If they make a forward escape and even further advance their policy of monetary expansion and monetization of an ever-increasing public deficit, they run the risk of provoking a grave crisis of public debt and inflation. There is a movement from a scenario of “Japanization” [42]^[22] prior to the pandemic to one of near “Venezuelization”. After it, they halt their ultra-lax monetary policy, then the overvaluation of public-debt markets will immediately become clear, and a serious financial crisis and economic recession will follow and will be as painful as it is healthy in the medium and long term. In fact, as the “theorem of the impossibility of socialism” [12,51,52,53,54]^{[17][31][32][33][34]} shows, central banks (true financial central-planning agencies) cannot possibly correctly determine the most suitable monetary policy at all times.

It is very enlightening, in the extremely difficult situation we now obviously find ourselves in, to pay attention to the reactions and recommendations which are ever more anxiously and restlessly (one might even say “hysterically” ^[1]) coming from investors, “experts”, pundits, and even the most renowned economic and monetary authorities.

For instance, new articles and commentaries appearing continually (particularly in salmon-coloured newspapers, starting with the Financial Times) invariably tend to reassure markets and send the message that zero (and even negative) interest rates are here to stay for many years to come, because central banks will not deviate from their ultra-lax monetary policies, and thus, investors can relax and continue to get rich by trading in the bond markets. Central bankers, in turn, overcautiously announce a revision of their inflation targets to make them more flexible (obviously in an upward direction) on the pretext of compensating [55]^[35] for the years they have been unable to achieve them and to justify not taking monetary-control measures even if inflation skyrockets. Other advisors of the monetary authorities even propose abandoning the inflation target and directly setting the target of adherence to a certain curve of – especially low – interest rates (that is, zero or even negative rates for many years of the rate curve, for which all open-market operations necessary would be carried out). And all of this is applauded by representatives of so-called “Modern Monetary Theory,” which, despite its name, is neither modern nor monetary theory, but simply a potpourri of old Keynesian and mercantilist recipes more characteristic of the utopian dreamers of centuries past (since they hold that the deficit is irrelevant because it can be financed without limit by issuing debt and monetizing it [56]^[36]) than of true economic theorists; this theory is wreaking havoc among our economic and monetary authorities [57,58]^[37][38]. Now we come to the last of the “bright ideas”, one that is becoming increasingly popular: the cancellation of the public debt purchased by central banks (which, as we have seen, already amounts to nearly one third of the total).

First of all, the growing number joining the chorus in favour of this cancellation clearly give themselves away, for if, as they affirm, central banks will always repurchase at a zero interest rate the debt issued to meet maturities as they come due, no cancellation will be necessary. The mere fact that people are requesting it precisely now reveals their anxiety at the increasing signs of a rise in inflation and their accompanying fear that fixed-income markets will collapse, and interest rates will go back up. Under such circumstances, they consider it essential that the pressure on wasteful governments be reduced by a cancellation which would amount to a remission of nearly one third of the total debt issued by those governments. Such a cancellation, it is felt, would be detrimental only to an institution as abstract and removed from most of the public as is the central bank. But things are not as straightforward as they seem. With a cancellation like this, the effects will be the next:

First, central bankers have limited themselves to creating money and injecting it into the system through financial markets; thus making a few people exorbitantly rich without achieving any significant real long-term effects. Besides the artificial reduction in interest rates and the simultaneous destruction of the efficient allocation of productive resources. It is a real tragedy that experts, politicians, and citizens have forgotten that the interest rate (or price of present goods in terms of future goods). This is the most important of all prices (and hence, of all prices, it is most vital that this one be set by the free market). They can not be manipulated with impunity by governments and central banks without blocking economic calculation and the correct intertemporal allocation of productive resources.

Second, the popular outcry against this policy, it would be so great were this cancellation to occur that central banks would lose not only all credibility. Among other reasons, without assets to sell (due to the cancellation), central banks could not drain reserves from the system if a rise in inflation made it necessary in the future. Only in the context of an irrevocable transition to a 100% reserve banking system like the one, proposed in chapter 9 of Huerta de Soto´s book “Money, bank credit, and economic cycles” [12: 791]. It would make sense to cancel the public debt in the hands of the central bank, to keep it from becoming the owner of a significant portion of the real economy when, as it was suggest, the debt is exchanged for the banking assets which now offset demand deposits.) but also the possibility of pursuing in the future their open-market-purchase policies (quantitative easing). Under these circumstances, central bankers would be obliged to confine themselves to giving money injections directly to citizens (Friedman’s “helicopter money” [45]^[25]). These would be the only “equitable” injections from the standpoint of their effects on income distribution, but since they would lack any real expansionary effects observable in the short term, they would mean the definitive end of central banks’ capacity to influence economies noticeably in the future via monetary policy. Third, and from another perspective, the quality of money [59,60]^[39][40] would be reduced because the central banks´ capacity to drain reserves by selling their assets would be hampered. Central bank´s balance sheets, whose evolution is important for the quality of money [61,62,63,64,65]^{[41][42][43][44][45]}, would be impaired with equity ratios falling, and equity, possibly, becoming negative.

In this context, the only sensible recommendation that can be given to investors is that they sell all their fixed-income positions as soon as possible, since we do not know how much longer central banks will go on artificially keeping the prices of these securities more exorbitant than they have ever been in history. In fact, there is more than sufficient evidence that the most alert investors, like hedge funds and others, by the use of derivatives and other sophisticated techniques, are already betting on the collapse of fixed-income markets, while, officially, they continue to leak reassuring messages and recommendations to the press through the most prestigious commentators (like Krugman). This should come as no surprise, since they wish to get out of the debt markets without being noticed and at the highest price possible.