Current fiscal and monetary policies in the United States and Europe risk increasing government control over national economies, resulting in weakened political strength throughout “the whole of the western world,” the Vatican’s top banking expert said.
Ettore Gotti Tedeschi has been head of the Vatican's bank, known as the Institute for Religious Works, since 2009. He has a long career in finance, having served as the head of Banco Santander, the largest private bank in Europe, as well as on the boards of some of the continent’s leading financial institutions.
He is known as a staunch capitalist with a deep concern for the Church’s social teaching. He is also a former professor of financial ethics at the Catholic University of Milan.
Writing in the Jan. 14 edition of the Vatican newspaper, L’Osservatore Romano, Tedeschi warned of the growing influence of “Keynesian” economic theory on both sides of the Atlantic.
John Maynard Keynes was a prominent 20th-century economist whose theories were widely embraced by world powers to jump-start their economies after World War II.
Tedeschi cited a 2009 book, "Where Keynes Went Wrong: And Why World Governments keep creating Inflation, Bubbles and Busts," by the American economist and philosopher Hunter Lewis.
He said Lewis had spelled out the "doctrinal errors and practical disasters" of Keynes' theories.
In simple terms, Keynes taught that in times of economic crisis, consumer demand must be stimulated by government investment and an "attitude of saving" must be discouraged, Tedeschi wrote.
He said Keynes' crisis-averting tactics can be seen in the U.S., where government economic policy has focused on increasing public expenditures – and public debt – in order to stimulate private economic activity, including consumer demand and employment.
In addition, also following Keynesian wisdom, the U.S. is printing more money and has looked at increasing taxes in an effort to generate more public revenues.
Tedeschi warned that these policies are leading to a "nationalization" of private debt in the U.S. He also criticized the government bailouts of private banks that offered too much credit without adequate guarantees. This too is leading to increased government control of the economy in the U.S. — a “nationalization” that is being paid for with newly printed currency.
In Europe, he said, the issue is the opposite. Because of the lack of widespread private debt, a "privatization" effort is being enacted to absorb the large public debt of banks and businesses.
This also is Keynesian policy, which "perseveres against the scorned savings," Tedeschi said.
Governments on both sides of the Atlantic, he said, are committed to Keynes' policy of increasing public debt to sustain levels of economic production, consumption, and employment.
He said artificially low interest rates are another key to the strategy of increasing spending and discouraging saving. With no incentive to keep money in the bank, those who would have otherwise been savers are pushed to spend.
"Zero interest rates factually equal a de facto transfer of wealth from he who was a virtuous saver (although not for Keynes) to he who has become virtuously (for Keynes) indebted," he said. "Practically, it's about a hidden tax on poor savers, a tax transferred to the wealthy, (that is), over-indebted states, business people and bankers.”
Although the alternative to zero interest in such a situation is economic collapse and eventual default, the zero-rates "are not sustainable and are dangerous," Tedeschi warned.
"They destroy savings, which is an essential resource to create the base for bank credit; they promote speculation on real estate and securities, create illusory artificial values rather than scaling them down; they push consumption to more risky debt; they alter the market with artificial values and thus lead to belief that the very markets do not know how to correct themselves."
The biggest danger, Tedeschi said, is that zero interest rates "permit, or impose governments into management of the economy, without correcting inefficiency and facilitating distortions in the competition."
He warned that the greatest economic impacts may be on the way.
In the future, he said, inflation might be used as the "maneuver" to absorb the enormous debt in both the U.S. and Europe. Debt levels are now three times as large as the gross domestic product in most countries, he observed. Governments have thus far been able to control inflation by controlling consumption rates.
"Someone," he said, "is hoping for new taxes to sustain a new statism that reinforces a rather weak political class in the whole western world."