Remember that 14.25% Selic rate that was in effect between 2015 and 2016? Well, when interest rates started falling in the following years, a collective nostalgia hit, along the lines of: “back then it was easy to make money with fixed income.”
Time has passed. Everything has changed. And we are back to the same place. With an irony: today it is even easier to turn money into more money without taking great risks.
In August 2016, to give you an idea, annual inflation was 9%. With the Selic rate at 14.25%, we had a real interest rate of 5.25%. Now, with the Selic rate at 10.75% and the IPCA at 4.2%, the interest rate above inflation is even higher: 6.5%.
It is not even the highest real interest rate in recent times. In June 2023, with inflation lower than the current DFE (3%) and the Selic at its recent peak (13.75%), it exceeded 10%. But there is a difference. Back then, the bias for the Central Bank's interest rates was downward – and, in fact, they would start to fall in August of that year.
Now it's the opposite. The Selic rate has risen again. And the Central Bank has already warned that the trend is to continue upwards and onwards. Further down, we'll talk about the reasons. For now, it's worth sticking to the practical side: this is a particularly good time to save money.
About saving money: anyone who can afford to set aside an emergency fund should do so. It means leaving the equivalent of a year's salary (or a little more) in some safe investment, that is, one tied to the Selic rate – it could be the Tesouro Selic, the most peaceful of government bonds, it could be a DI fund, it could be anything else that is easy to withdraw and that follows the CDI (the sister rate of the Selic, which yields basically the same as it).
Well then. With the real interest rate at a historically high 6.5%, every R$100,000 in an emergency fund will obviously yield R$6,500 above inflation (excluding interest rates, but let's stick to gross values for simplicity's sake). The nominal value, which will appear in your balance, will be higher: R$10,500 – but these extra R$4,000 are not real income; they only serve to pay inflation. So let's stick to the real yield. At 6.5%.
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Imagine a person who earns R$15,000 and has a healthy emergency fund, equivalent to 15 salaries. They will have R$235,000 saved.
In a reality like the current one, R$230,000 in an investment that follows the Selic/DI rate provides a real return of R$15,000. Our imaginary person here, then, guarantees a 14th salary in hand without any effort – and with the lowest risk on the market, equivalent to that of a savings account (which would provide a real return of less than half that).
And the outlook is that this scenario will not turn into a pumpkin any time soon. Inflation is likely to remain around 4% (above the target of 3%). The Selic, as the Central Bank has said, is likely to rise a little more – precisely in the fight to bring inflation back to the target.
And what we have is a reality that is particularly generous to low-risk investment.
This paradise of “rentism”, however, lights up more than just a warning sign. It shows that, in reality, we are knocking, knocking on the gates of hell.
A Season in Hell
The Selic rate is too high because public spending is too high. The basic interest rate exists to tame inflation. Government spending acts in the opposite direction: it feeds the price dragon (for more details, see here).
Well, the best way to know if spending is beyond the red line is the debt/GDP ratio – because the government takes on debt to be able to spend more than it collects in taxes; and the higher the debt is in relation to what the country produces, the harder it is to pay.
Our public debt closed 2022, way back when, at 75.7% of GDP. It wasn't ok anymore – the ideal would be something around 60%. But now it's at 78.5%. And the IMF predicts that it should reach almost 90% in 2025 (knock, knock, knock).
The rising public spending then pushes the Selic rate up again. The Selic rate makes money more expensive – you have to pay more interest when you borrow money. So do you and the government. As a result, the federal government's debt becomes increasingly expensive, since the government has to borrow at higher interest rates to pay off the government bonds that are maturing. And the situation continues to grow, with the debt/GDP ratio reaching increasingly precarious levels.
Why endangered, after all?
Because any debt, whether it's your Zé da Esquina's or the Union's, can become unpayable.
When Mr. Zé da Esquina reaches this point, he declares bankruptcy. The Union does not. The State, after all, owns the real printers. And our public debt is in real. It is not that the State uses its printers to ease the debt burden – the Law forbids it.
Good thing. If you, the government, do this, you inject inflation into the veins of the economy. The currency becomes Monopoly money. This is exactly what happened in Argentina, Venezuela, Zimbabwe, and Brazil in the past… There is no way it will work.
But… if at some point in the next few years (or decades) the debt reaches a point of no return, the doors to irrationality will open. It is possible that, in the end, the State will change the legislation, and allow itself to commit suicide by issuing currency to cover the debt.
Yes, that's right. This is a great time to build up your emergency fund in an extraordinary way. But if the situation that allows this continues for too long, the emergency may become beyond the reach of any fund.