The tsunami of ignorance

Senator Oriovisto Guimarães (PSDB-PR) is proposing a bill to establish a limit on the federal public debt. In his proposal, if the 80% public debt-to-Gross Domestic Product ceiling is exceeded, the federal government would be subject to a penalty of an additional 25% primary expenditure adjustment in the first four months after exceeding the target. Currently, this would represent, for example, an increase of approximately R$150 billion to R$200 billion in the federal budget.

It would be interesting to observe the relationships between public and private debt throughout the cycles of economic expansion and contraction. Corporate and household debt increases during periods of growth and "confidence." Banks, under the supervision and regulation of central banks, lend to "spending" companies and households.

In the movement to increase income and wealth, companies turn to financial markets to issue debt securities and property rights (shares), just as banking and non-banking financial institutions issue securities in short-term money markets, to capture the savings and monetary balances of companies and families, values ​​accumulated throughout the successive circuits of expenditure–employment–income and profits.

A sharp drop in investment and consumption spending negatively affects income and profit formation, undermining business expectations. Countercyclical policies aim to protect production flows, asset prices, and debt validity, sustaining liquidity and profits. They aim to preserve asset and risk conditions, including enabling portfolio movements toward greater liquidity.

A situation of reduced investment and consumption spending can only be contained with government intervention, empowered to incur deficits and public debt. In recessions, and even more so in depressions, public debt invades the portfolios of financial institutions to guarantee the value and liquidity of private wealth. Saved from the devaluation of their assets and debt portfolios, private banks and other financial intermediaries safeguard their assets by incorporating government bonds with reduced yields but guaranteed value. The government, as manager of the currency (and debt), prevents a disastrous devaluation of wealth.

In Section II of the Budget Guidelines Law of the 2000 Complementary Law, of the Fiscal Responsibility Law, it says the following:

§ 4 The message forwarding the Union's project will present, in a specific annex, the objectives of the monetary, credit and exchange rate policies, as well as the parameters and projections for their main aggregates and variables, and also the inflation targets, for the subsequent fiscal year.

§ 5 In the case of the Union, the Fiscal Targets Annex of the Budget Guidelines Bill will also contain: (Included by Complementary Law No. 200, of 2023) Validity

I – The annual targets for the fiscal year to which it refers and for the following 3 (three) years, with the objective of ensuring sustainability in the public debt trajectory; (Included by Complementary Law No. 200, of 2023) Validity

II – The medium-term fiscal framework, with projections for the main fiscal aggregates that make up the reference scenarios, distinguishing primary expenses from financial expenses and mandatory expenses from discretionary expenses; (Included by Complementary Law No. 200, of 2023) Validity

III – The expected effect and compatibility, over a period of 10 (ten) years, of meeting the primary result targets on the public debt convergence trajectory, demonstrating the level of fiscal results consistent with the stabilization of the General Government Gross Debt (DBGG) in relation to the Gross Domestic Product (GDP).

Given the native language, Portuguese, it seems obvious that there is already a control mechanism in the law for the federal public debt.

It seems obvious that there is already a control mechanism in the law for the federal public debt.

The delusions of this bill in the Federal Senate will create schizophrenia in the national monetary and financial system. National Treasury Financial Bills (LFTs), considered a risk-free asset with immediate liquidity and guaranteed repurchase by the Treasury, honorable senator, are a currency bearing interest. We're talking about a currency with daily interest that represents almost 48% of the federal government's public debt.

It's worth mentioning: pension and security funds, whether public, private, open, or closed, hold National Treasury Notes Type B (NTN-B) in their portfolios, which currently represent around 28% of the total public debt. Senator, if you have time, which must be scarce in the day-to-day running of the Federal Senate, take a look at the assets of national banks: in the portfolios of financial institutions, government bonds are the assets of last resort, the ultimate guarantee in times of crisis. Public debt underpins the entire national credit system. Approximately 90% of the federal public debt is held by national creditors: insurance companies, investment funds, banks, and pension funds.

The 2008 financial crisis provided an opportunity to examine the economic policy response to market disorganization and panic. The Federal Reserve mobilized Quantitative Easing (QE), which brought to light what was stirring underground: the structural interconnection between the credit system, corporate financial-productive accumulation, and the monetary and fiscal management of the U.S. government.

QE further highlighted the importance of expanding public debt for the cleanup and recovery of financial institutions' balance sheets. Saved from the devaluation of the bad assets they carried and now bloat the balance sheets of Central Banks, private banks and other financial intermediaries guaranteed the quality of their portfolios and safeguarded their assets by holding government bonds with reduced yields but guaranteed value. Treasury bonds with paltry yields continued to attract the greed of panicked investors.

Published in issue no. 1384 of CartaCapital , on October 22, 2025.

This text appears in the print edition of CartaCapital under the title 'The tsunami of ignorance'