The BCU cut the rate to 5.75%, distorting the economy and the productive structure

porEditorial Team

Uruguay

The Central Bank distorts the economy by making the wrong decisions.

The Central Bank of Uruguay unanimously decided to lower the Monetary Policy Rate by 75 basis points to 5.75%. Seventh consecutive cut. The official statement cites uncertainty due to the conflict in the Middle East, the behavior of the dollar and the risk that inflation — today at 3.46 percent year-on-year — will fall below the target of 4.5 percent. They promise to “monitor” events

This measure is not a technical adjustment. It is the exact repetition of the mechanism that generates all economic cycles: the artificial creation of fiat credit by a banking system protected by a central monopoly

When the Central Bank lowers the rate by injecting liquidity, commercial banks multiply that credit through fractional reserve: they create demand deposits that are not backed by previous real savings. This fiat money—pure ex nihilum creation—reaches entrepreneurs first and makes them believe that there is more voluntary savings in society than

there actually is.

The immediate result is a profound distortion in the temporal structure of production. Investment projects are artificially extended: the stages furthest from consumption (heavy machinery, long-term construction, complex capital goods) are multiplied while the closest stages are neglected. Resources are diverted to uses that would only be profitable if real savers had decided to postpone their current consumption. That is systematic misinvestment: a false intertemporal coordination that cannot be sustained because there are no genuine savings

to support it.

The cycle is inevitable and always follows the same pattern: first comes the boom, with credit euphoria, rising asset prices and apparent prosperity. Then, when projects mature and reveal that intermediate goods are lacking or that real costs are unsustainable, the crisis breaks out: chain bankruptcies, unemployment, credit crunch and forced adjustment. Uruguayan history demonstrates this with painful clarity

The BCU cut the rate to 5.75%, distorting the economy and the productive structure

porEditorial Team

Uruguay

The Central Bank distorts the economy by making the wrong decisions.

there actually is.

to support it.

In the 1960s, monetary expansion to finance fiscal deficits and credit multiplication generated chronic inflation that exceeded 40% per year and culminated in the banking crisis of 1965: massive bankruptcies and loss of confidence. In 1982, the exchange rate “tablet” combined with cheap credit created an artificial investment boom that ended in brutal devaluation, a 10% drop in GDP and massive bailouts of the Central Bank. The 2002 crisis was even worse: the bank run, the holiday and the devaluation of 12% of GDP were not just “Argentine contagion”; they were the logical consequence of years of indebtedness in dollars fostered by artificially low rates and a system that allowed the creation of unbacked fiat money. In each case, monetary interventionism postponed natural adjustment and made it more violent

The inflation that appears “low” today is no victory. It's just the initial phase of the process: while the distortion matures, prices still don't reflect all of the previous expansion. When failed projects demand more liquidity or when dollar pressure intensifies, the system will reveal its true face: devaluation, suppressed inflation or open recession. Invoking “external shocks” such as the Middle East or the strong dollar is the usual excuse to justify the unjustifiable. Those shocks would be simple relative price adjustments in a free market. What interventionism does is block that adjustment and add an extra layer of distortion that destroys

accumulated capital.

This fiduciary expansion doesn't just create cycles. It erodes genuine savings, reduces the purchasing power of the peso in real terms and produces the most unfair redistribution: the Cantillon effect at its best. The first to receive the new money (banks, large debtors, public sector) capture profits; the last—wage earners, retirees, small producers—pay with a loss

of purchasing power and destroyed opportunities.

The root of the problem is structural: the Central Bank, with its coercive monopoly on the issuance and imposition of compulsory currency, enables and amplifies the fractional reserve throughout the banking system. As long as that monopoly persists, Uruguay will continue to be doomed to these recurring cycles of artificial boom, destruction of capital and painful adjustments

The only real solution is to eliminate the root problem: abolish the Central Bank's monopoly, allow free competition in the issuance and use of money, impose a 100% bank reserve on demand deposits and let interest rates be determined exclusively by savers and borrowers in a genuine market. Move towards a monetary system based on a freely chosen market asset (classic gold standard) or, at least, eliminate the legal obligation to accept the fiat peso. Only then will intertemporal coordination be real, the productive structure will reflect society's genuine preferences, and external shocks will become simple price adjustments, never an excuse

to continue looting productive capital.

As long as the interventionist consensus remains intact, each BCU rate cut will be just another twist in the same failed mechanism. True monetary stability is not achieved with more central planning or with more fiat credit. You can do it with less. Much less. Full monetary freedom—with total reserve and competition—is the only guarantee against the cycles that interventionism systematically manufactures. Everything else is a delay of the inevitable.

The BCU cut the rate to 5.75%, distorting the economy and the productive structure

The BCU cut the rate to 5.75%, distorting the economy and the productive structure

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