> "We didn't understand what it was," says Maria Leopoldina Bierrenbach, a housewife from Sao Paulo. "I used to say it was a fantasy, because it was not real."
I was 14 during the URV period. It was like that, nobody really understand what URV was, nor could explain to other what it was.
But, it was simple to use. Prices are in URV now, not in the old currency name, not a new currency, it is URV. URV acted as a good parameter, was simple to understand and use in practice, even if hard to understand in theory.
It is not that brazilian had lost faith in the currency, but we lost faith in currency changes and readjustment. Brazilian money had changed names several times in the 80s. And several times government had cut zeros from the currency ("Hey, everybody, now 1,000,000 is actualy 1,000 ok?). So there were no point in just creating a new currency. It HAD to be a virtual one, something different, something that people could not say "yeah, just another name change like all the others...". So they created URV, and it worked.
in Brazil there were a little bit more rationality in our caos: we always cut 3 zeros. That should be insane indeed to keep adjusting your perception at every purchase.
Applied Psychology, in the Financial Transactions Sector. *
I find it amusing that they named it 'real' once it was done.
*- a little inside joke.
While I was dating my wife 15 years ago, I was very self conscious of the fact that I had barely graduated high school, and here I was dating a professor and going to many professor parties. Many, many parties. I would be asked by almost everyone "What do you study?" as a little ice-breaker conversation starter. Since I had no PhD and was not even a college graduate, this made me a little uncomfortable and so I developed the above line to describe my business of buying and selling used capital equipment (which I did out of my pickup).
It went like this: They would ask what I studied, and I would respond with "Applied Psychology in Financial Transactions" and then steer the conversation to their work. I also learned quickly that I should have no opinions on THEIR work, or my night would be bad. It was a rare event to have to explain further, most people were delighted to talk at length about themselves.
"then steer the conversation to their work. I also learned quickly that I should have no opinions on THEIR work, or my night would be bad. It was a rare event to have to explain further, most people were delighted to talk at length about themselves."
Sounds like it's time to add Applied Psychology in the Academic Sector to the resume.
A cute thing is how Portuguese "real" has two different etymologies, one from Latin regalis 'royal' (from rex 'king'), and one from Latin realis 'actual' (from res 'thing'). That can produce some funny jokes (like a title mentioned elsewhere in this thread by motobol, "A real história do Real").
Brazilian here too. Although the URV maneuver did help psychologically, a lot of controlling the inflation had to do with the so-called "economic tripod" implemented with the Real plan, which basically involved:
- Negative primary deficit on the government budget balance;
- Floating exchange rate;
- Inflation targeting.
Addendum: the current government is just so bad at that (fiscal maneuvers to create an artificial negative primary deficit, interfering in the exchange rate by buying/selling dollars at below-market prices, etc) that our inflating is going up again. We just reached 8.17% in the last 12-month period. Compare that to 0.8% in the US for 2014, or even Brazil's 3% some 8 years ago... With the expectation of the Fed raising interests in the US with the improving economy, dollars are going to FLY out of Brazil and the already ridiculous exchange rate (1 USD = 3.15 BRL) is going to explode. Brace yourselves, inflation is coming.
Many of the things I buy in a grocery store in the USA go up 5% or 10% at a time, perhaps every year or two. Same situation with services.
The official inflation numbers for the US are very tricky. There's a lot of "adjustment" going on. I suspect that the rapidly falling prices for household electronic goods plays a big role.
The price of a 55" flat screen declining from (made up numbers) $1,500 to $500 in the last five years is small consolation if the price of meat and milk and cookies has gone up 25% over those five years.
The "basket" they use for CPI calculation is a genuinely difficult problem, since what people buy changes over time. Electronics is a great illustration - if I included 40" televisions last year, should I compare the price of this year's 40" television to last year's, or should I compare the price of this year's 50" television to last year's 40" because that's what people are buying? Both ways are right and both ways are wrong, depending on what you want the number to mean.
But even allowing for these difficulties, I still think the government keeps changing how inflation is calculated in an effort to make itself look better.
When real estate increases dramatically they measure rents, which are (in a hot real estate market) subsidized by people trying to cash in on capital appreciation. In a declining real estate market with rising rents they switch to "rent equivalents" based in some part on the cost of real estate.
You can hide pretty big increases by switching what you measure mid-stream, particularly if you just graph the YoY official inflation rate (including changes) without going back and recalculating every year using the same methodology.
And then there's the reporting. The number you hear on the news may or may not include "the volatile food and energy sectors" depending on which is lower.
There's a reason it seems prices are rising faster than the CPI reported on your drive home. They are rising faster.
That feeling you are describing happens everywhere. In the US, inflation is usually tracked by the CPI [0], which uses the average monthly price of a market basket [1].
The tricky thing is in finding the correct weights of each item in the basket as to be representative. As you can imagine, different people shop differently, so won't experience the same inflation.
I think the CPI is great for what it is, but it's easy to mistake it for something it isn't.
Everything in it is based on averages, and there are lots of differences between individuals that affect your realization of price changes.
Examples: I drive 5 minutes to work, my officemate drives 90 minutes -- gas prices mean nothing to me. If you have 4 kids, meat and dairy escalations hit you harder than average. If you're a vegan, seasonal price swings of produce are more meaningful, and factored out of CPI.
CPI also only looks at consumption. We've had 2-3% price growth with low wage growth. Less buying power magnifies price changes.
'big screen TV' is just about the worst economic indicator there is, yet it's constantly used to insult poor people and imply that their problems are simply due to being wastrels.
I was once wandering through the swampy Mekong delta, and there were huts there that didn't close fully against the weather, with dirt floors, surrounded by mosquito-laden stagnant pods... and they had big screen TVs. They weren't this year's models, and more than a few of them were CRTs, but they were still in these dirt-poor houses.
Back here in Australia, the retail market is so tight for 'big screen TVs' that it's pretty common for retailers to give four-year interest free terms. That's only $10/week for a $2k screen over 4 years, less than one hour's minimum wage, after tax. And, as you say, a big screen TV is a pretty small part of the cost of living, overall.
The sooner we abandon 'big screen tv' as a proxy for measuring wealth, the better.
i've been buying the same items (specific diet craze) from the same whole foods from 2009 to today.
my monthly cost on that alone jumped from $300ish to well into the $500.
it's mostly organic produce, a few meats, lots of seafood (which i grant that it has a very volatile market price but still)
So i'd say for quality quasi-essential products, it is even higher than that. probably because premium shops were keeping their profits a little lower because of the 2008-2010 crisis.
Come on, just look at SELIC during the second FHC government... the interest rates went sky high, the Real had a monstrous devaluation overnight (from R$ 1.32 to U$1 to R$2.16 to U$ 1).
FHC sure helped to stabilize inflation rate, but he almost destroyed brazilian economy. His second government was nothing short of a disaster.
FHC govt is interesting. It was the govt that mostly opened up to USA control. He borrowed a lot from the international funds, and made every effort to never pay more than the interest.
Also sold all state owned companies, which mostly dealt with infrastructure, creating huge foreign owned monopolies. For a while, mobile and internet was worse than it is in the USA now, but the last two governments made improvements there (for example, now for US$0.30 a day --US$9/mo!-- you have a prepaid phone with unlimited calls, text and data ...well data was pulled out of that law last months. it is now 200mb instead of unlimited)
But it was also one that most spent in advertisement. So the public loved it. And even attributes the Real to that president.
The last goverment managed to pay out all the international funds FHC borrowed from.
I am from Brazil, and although I don't like FHC party either, I remember even during the crisis of his second government, I didn't hear people blaming him all the time, I think because at the time it was understood because it had to do with the Asian crisis (the 1998 crisis affected Brazil badly), and because people still remembered how bad it was before him.
Now replying your specific question: "The current government is just so bad?"
Yes.
Many of our numbers are the worst in 20+ years, without a solid external economy justification, our troubles are not because lack of exports or other serious effects caused by other countries that were unavoidable, but purely incompetence (or malice...)
Brazil consumers have the lowest confidence in 22 years, our GDP will have the biggest decrease in 24 years, inflation is the highest since FHC fixed it 20 years ago, the income of people, even if you ignore the exchange rate and count only in absolute BRL numbers, is decreasing, and although unemployment is "low" according to the government, the actual number of employed people is low too*
Also the president batantly lied at her campaign (she said she would not do lots of things she immediately did as soon she was re-"elected"), and lied about the energy situation.
The energy situation lie: Because the lack of rains in Brazil (that seemly is linked to the lack of rains in California), we can't rely on Hidroelectric powerplants, but the distribution lines are not all done, meaning that brownouts in some areas are likely (and we even had a country-wide blackout this year, when in the hottest day for some time, the extra power draw from air conditioners made the power lines overload), the president made several discourses with lies about this, trying to hide the situation for her upcoming campaign, she ended forcing the government as whole to give lots of conflicting information about the power situation, as result lots of important business that rely on great amounts of electricity (for example several types of metallurgy, manufacturing, cement industry) to stop investments, this started to cause unemployment and other issues long before Petrobras problems came to light.
Who in their right mind would invest in a country where you can't find reliable information about the infrastructure situation?
And of course, we have Petrobras issues by itself (for example for some problems caused while the president was working for Petrobras and even signed documents that caused the issues, she just stated she didn't read the documents... so she is grossly incoptent, or a malicious liar)
Of course, I might be biased, since my family has a personal bone to pick with the president (the president approved some stunts in 2013 and 2014 that led to several companies that work for the government get defaulted, my family in turn sold stuff for those companies, that defaulted us, saying they would pay us when the government paid them...)
* Brazil copied US bullshit unemployment number: you are only "unemployed" if you have zero income, government handouts included, and is looking for work, if you gave up, or get money from the government, or has income, even if it is tiny and from an illegal source, you are not unemployed
Good points. I just don't agree with the rethoric that this is the worst Brazil ever had. Specially ignoring that in the nineties no corruption scandal was ever investigated... there are numerous cases... sadly all hidden under the carpet.
I hope that someday people will judge their representatives not based on their sympathy for a given party, but on actual meritocracy.
I don't think the actual government is the best, I just think it is the least worst we could get at the present time.
So we agree to disagree. The PT (workers party) government changed Brazil forever by:
- creating thousands of politically-appointed public servant jobs and other money-sinks.
- corroding the power of one of the best legacies from the former Cardozo president: Lei de Responsabilidade Fiscal (fical responsability act), that was meant to prevent the executive from overspending.
Their ideas are close to the "Chavismo" that destroyed Venezuela, and they are doing a pretty good job trashing Brazil.
You do realize lack of water and power is a problem of the State government (governor) and not federal government (president), right?
Edit: which for sao paulo, where i guess you are from, it all started with PSDB, same party as FHC. Also same governor that started to use military police on pacific protests.
Energy: it was the Federal policy of subsidizing energy and the price caps that led to the energy crisis. The (few) private companies had little incentive to invest in improving capacity of the grid, the state-owned ones were a mere instrument to keep the cronyism going. The government has been chanting about Petrobras and pré-sal for at least 10 years now, even though they know that it is yet to be determined if it will be net-positive in terms of revenue. If at least it was a calculated risk but Petrobras was well-managed, then so be it. But it isn't, and Petrobras corruption scandal is directly linked to Dilma.
Had the Federal government a sound plan for reducing the dependency on hydro-electric power, or at least allowing the construction of new plants, the brownouts wouldn't have happened, even if the "drought" was real. Hadn't the Federal Government managed to completely dilapidate Petrobras for pure political benefit, it could've been given the benefit of the doubt. But it didn't, and it should be pointed as responsible for the current crisis.
Regarding water: I'd buy the argument that it was a state-level issue if it was only seen in one or two states, but it is ongoing in the whole Southeast and Midwest of the country. And while levels of waste in Brazil are bad, the cheap cost of water to farming and deforestation are much worse.
This "is a state-level problem" is just an excuse from PT to take a jab at São Paulo's governor. They never point out the problems existing in PT-governed states. Another thing is that those pro-PT argue that the problem in São Paulo is due to Sabesp being a private company. This is just a lame excuse to support the notion that it should be state owned. The problem is not being private or public, the problem is that it is a monopoly.
If ANA (a federal agency, by the way) was serious about solving the issue, they could enact a bunch of norms to force better control of the resources and break all monopolistic companies into smaller ones and force competition. But because "privatization" and "free market" are verboten words in this government narrative, it will never happen.
---
Just an aside: this whole thread has already derailed completely from the original link and it has become a point for the Brazilians to discuss politics and each to show their allegiances. I'm all for a good, rational discussion, but I'm yet to see this irt politics, especially in Brazil. Instead of arguing on the ideas, people make "their" political party as part of their identity and simply refuse to have constructive dialogue. It is worse than football. How about we keep this off Hacker News?
>> Just an aside: this whole thread has already derailed completely from the original link and it has become a point for the Brazilians to discuss politics and each to show their allegiances. I'm all for a good, rational discussion, but I'm yet to see this irt politics, especially in Brazil. Instead of arguing on the ideas, people make "their" political party as part of their identity and simply refuse to have constructive dialogue. It is worse than football. How about we keep this off Hacker News?
This is what I meant when I said that I wish for the day when people will not make judgements based solely on their political affinity.
Sadly, it is almost impossible to talk about politics when people start to see you as an enemy just because you disagree with them. It is even worse when you see, as it happened in Brazil, people with good education going to the streets asking for a military coup... that is crazy. A democracy is better than a dictatorship, even a corrupt democracy, at least you can change the president after a couple of years.
Looks like we are not getting out of this discussion, so here we go...
This "people with good education asking for a military coup" is blown out of proportion by supporters of PT. Perhaps a few crazies do indeed think that, but most of the ones during the protests were talking about "intervention", due to considered abuse of the institutions by this corrupt government. And even that can be done in a totally legal and according to a due democratic process.
However, what the supporters of PT keep repeating is that "the opposition wants a coup", you included. So you are doing no better than "the other side of the trenches". If you really want to engage in the discussion, you should be prepared to argue with the "best" part of the opposition, instead of just trying to invalidate the whole other side based on a few exceptions.
> It is even worse when you see, as it happened in Brazil, people with good education going to the streets asking for a military coup... that is crazy
That's such a silly thing to point out. In every single anti-government protest that happened so far, pro-military groups were the tiniest minority. Look up Datafolha's research about the Paulista protests - even though that research has several problems, it makes it pretty clear that almost everybody there opposed a coup (or "intervention").
aren't they building several new hydro plants across the crountry, even the controversial itaipu (which i completely disagree with)?
and you are completely paradoxal... try to read your comments before posting :) should the water company be state owned or private? you keep changing your mind every paragraph
2) It is not ready yet. The current project is being discussed since 2002. Estimated date to open is ~2019. Which is yet-another sign that they are simply ineffective, incompetent, or both. Even if they are aware that a plant will take 15+ years to be built, they'd have to come up with a plan to support the grid in the mean time.[1]
3) So you want to play armchair energy expert: without building something like Belo Monte, how would you secure Brazil's energy needs? What do you think is a viable plan that allows the production capacity to increase, keep costs low and fair? [2] Please don't say "Solar" or "Wind" if you don't have any actual cost analysis and a feasible strategy.
---
Regarding public vs private: I really should recommend you reading again, and showing me any passage where I defend one or the other. In what I wrote previously, I haven't said anything of some sort, rather I just pointed out the flaws in the argument used by the "SABESP-is-bad-because-it-is-private" and the "none-of-this-would-happen-if-it-was-a-public-company" crowds. What I said is the situation of monopoly is bad. Which part you don't understand?
Also, do you see how this conversation is already completely off-topic? Now you want to include "police violence against peaceful protests" in your laundry list of talking points. I really don't want to go down this hole, when you can't even realize that the "water crisis" is not restricted to São Paulo, and that the Federal Government is also responsible. If you really want to discuss the topic at hand, fine. If you just want to shout against your political opponents, count me out.
---
[1]: One of the most valid criticisms against São Paulo government is in how slow they are to extend public transportation. What happens is that a metrô station is planned for one demographic and by the time it is opened, it is already under-dimensioned. But at least they try to establish plans for the time of construction. The Federal government not even gets to do that.
[2]: The current mechanisms give the illusion of low prices when they get their bill, but the true costs are hidden because the subsidies are only possible through taxation. So people pay low bills, but a lot in taxes. It is perverse.
First elections in Brazil are mandatory, people tend to vote on the "least worst" candidate, or in the one they remember more from ads.
Second, elections in Brazil don't have vote re-counts, when you input a candidate in the electronic pooling stations, they just add a "+1" to some variable, or at least this is what they should do, the government don't allow third parties to examine the stations, so there is no way to know what they are really counting.
Finally, in lots of nearby countries there has been elections with similar results (members of Forum de São Paulo winning with around 51 or 52% of the votes) and the same company took care of the elections in all those countries.
The electronic devices are, from a technical point of view, flawed. That doesn't mean the votes have been tampered... though I agree that this should be fixed.
On the other side, this same electronic devices are in use since 1996, thus all elections ever since fall under the same suspicion (even the one won by FHC).
The problem is that political parties only act when they are loosing. Now, the losers claim the devices can be tampered with... of course they can. But why didn't they make these devices right when they were in power?
Your replies make me assume you like PT and dislike PSDB and assume I like PSDB...
that is not my point, and I has always been against the electronic ballots, I don't trust election results of any election since the electronic pooling stations, I am only more distrustful at these elections, because of the other things I mentioned (several friends of PT winning with 51%, the same company working on all those elections, some cities where people proved there was outright fraud, for example in one city people found memory cards and voter lists in the trash) and because of the popularity pools (before, and after the elections Dilma was unpopular, only DURING the elections her popularity suddenly rose... I don't believe people are THAT stupid)
For lack of a better option. I left Brazil, so I don't vote anymore, but had I still been there, I would probably have voted for Dilma even though I'm strongly against her party. She was the "least worse" alternative.
Yes, voting is compulsory (required by law) in Brazil. Citizens can also cast a null/blank ballot if they feel that the candidates on the ballot should not be elected. Despite this, only 76% of citizens actually voted in the last presidential election. 69% of the population voted for one of the candidates, only 7% voted null/blank. [1]
as i said in another comment, FHC is the one that most spent in advertisement.
Yes, GDP is bad now, but employment is at an all time high. while it was at an all time low during FHC.
employment rates is something odd. while GDP everyone fells somewhat equally, employment is only felt by that group of people. So you have to try hard to not alienate yourself on those matters.
Yes, the SELIC exploded and the Real was devalued overnight as soon as people realized that the party currently in power had chances to win an election.
Disaster is what we are living through now. Can you get any example of hight inflation happening at the same time as hight interest rates on Brazil since the Real Plan? Or, can you get any other example of hight inflation at the same time as a decreasing GDP? Or can you get any failed coup from FHC times?
FHC surely didn't do everything right. I have plenty of complaints. But to even compare his government to any of PT's is absurd.
Get your facts right. The devaluation happened in 1999, a time when thinking that Lula would win an election was actually a joke.
If you go to BACEN you can look for yourself to get the historic data on inflation and SELIC interest rates. FHC was able to both have high interest rates, high inflation rate and a broken economy (or did you forget that brazil had to ask IMF for a huge money lend?)...
I don't know what you mean by a coupe... but it is well known that FHC paid congress men to pass the law allowing him to be re-elected. Curiosly, now they think re-election is bad... go figure.
alberich, these kids debating politics today don't like to take leverage of internet to understand what really happened in their country. And then they come here to HN to say bad things about Brazil looking for "liberals" support. Silly boys.
FOUR DRINKING BUDDIES CAME UP WITH THIS CRAZY, UNLIKELY PLAN TO STOP INFLATION, YOU WON'T BELIEVE WHAT HAPPENED NEXT!
I can see that in some social media clickbait site.
The "Original Sin" of not Governments not being able to get debt in the same currency they are able to collect taxes.
So, when the main source of USD suffers in some sense (export prices, or some kind of supply shock) the Government (unable to get funds) must retort to fiscal policy to meet its commitments. And fiscal policy is the number #1 recipe to get (hyper-)inflation
Primary deficit is how much debt is generated every year by a government, ignoring old debts repayments.
If you primary deficit is positive, you need to borrow money even if all your creditors decided to pardon your old debts.
Fernando Henrique Cardoso made a law that mayors, governors and president are criminably liable for reaching the end of their term with primary deficit (thus putting the next person in charge in trouble).
Dilma Rouseff in 2014 had a primary deficit of positive 10 billion (meaning the government would need to borrow 10 billion more than usual).
She circunvented this by pulling a ugly stunt on the congress (she sent a law to the congress, where the law said that some of government spenditure "don't count" toward the balance, then she threatened to not sign the bill that allow congressmen to spend some federal money to help their homebase unless the congress approved her law)
Yep... The term the guy used is the english name for it, in portuguese we call it "surplus" and that is it :P
So in short: Fernando Henrique in 1994 made a law where if you don't make a surplus before debt payments, you are a criminal (of the sort that get arrested)
Dilma Rouseff not only made a deficit (instead of a surplus), she made a law to circunvent the previous law, also her law has the pecualiarity that the project that "don't count" in the debts are her party pet projects (the projects that they put on TV to ask for votes), a possible loophole in the law is that she can spend "infinite" money on her pet projects now.
It used to be this way, but she is using "creative accounting" in order to do that, for example, by making state-owned companies pay some expenses and arguing at the supreme court that these operations are not loans. These maneuvers are nicknamed "pedalada fiscal" (fiscal bike-shredding).
I guess she will be allowed to get away with this because by now the workers party has appointed most of the judges.
Any resemblance with the situation at Venezuela is not mere coincidence, including the situation of the huge state-owned oil monopolies on both countries (Petrobras in Brazil and PDVSA in Venezuela).
> It went something like this: 1. New President comes in with a new plan.
2. President freezes prices and/or bank accounts.
3. President fails.
4. President gets voted out or impeached.
5. Repeat.
Yeah... no. Between '64 and '85 we were living under a military dictatorship. No president during that period got voted out let alone impeached.
I'm a fan of Planet Money, but this particular episode made a lot of extraordinary claims (by the standards of the usual formulation of macroeconomics) and did not present a any extraordinary evidence to back up these claims.
As others in this thread are pointing out, the episode was very hand-wavy about previous attempts at limiting the money supply in the country and how effective those attempts were.
TL;DR: Brazil switched to dollar for a moment (to get out of inflation) and then to a new (stable) currency. The theoretical basis for this is the previous works from Persio Arida, André Lara Resende and Edmar Bacha.
Two important books about this subject:
* A real história do Real;
* A saga brasileira.
Inflation in Brazil was indeed rampant at this moment, but the cause (when URV entered the scene), wasn't public spending anymore.
It was a so-called inertial inflation (a theory, of course. See "Inertial inflation and monetary reform in Brazil"[1]), caused by public (merchants, industry etc) perception (or fear) that prices were always going up.
Before that, government made a great job reorganizing the budget, untying public prices from inflation, renegotiating debts with Wall Street and making new debts with the FMI.
After the roots of inflation where addressed, it's "inertial psychological" component (as they called it) was shut down with URV.
URV, of course, was no virtual or fake currency. It was an index based on (or simply copied from) US dollar price.
The real deal here is: how a lean team with a very strong leadership solved this big mess. Those guys were no amateurs and at least on of them were a inflation specialist Phd from MIT (Persio Arida, a Brazilian).
The first book was written from a member of staff of this team and it's description of the team gatherings is awesome.
Right, that all sounds very sensible and something virtually every economist would agree with, the only question is if the concept of the URV really made any difference (which was the main claim of the "Planet Money" story).
The fact is that the value of currency is impacted by controlling demand (which the URV was attempting to do with a psychological hack) or by controlling supply (which was being accomplished by the many other very sensible changes)
In the PM story at least, it was unconvincing to me that using a "traditional" currency instead of the URV wouldn't have led to the same result.
The psychological part of it was really not 100% the cause of its effectiveness a part of the reality of why it worked is the government couldn't print more URV.
This is why it was a great trick, it was a trick to the people but also a trick to the government.
Inflation is just as much about public confidence as it is about the actual amount of money in circulation. That money doesn't have intrinsic value. People give it value by using it.
The claim is that public in the government-issued currency (what ever they renamed it to) was nil. This 'hack' brought back public confidence by saying that it wasn't "really" a currency. Once public confidence built up for the URV, they merged the "not currency" with the real currency, riding the coat tails of that confidence.
The problem with a new traditional currency is that Brazil had already gone through many currency changes[1] during the hyperinflation period so just doing that wouldn't work anymore. Supermarket owners got used to a pattern of bumping prices everyday by 2%, contracts worked so that payments were adjusted by the official inflation rate and so on. By switching to URV, you stop this "inertial inflation": supermarkets didn't have to relabel their prices every day, contracts went back to having fixed values for payments, etc.
Before the introduction of the Real, there were 5 occasions when they introduced a new currency to "cut three zeroes" from the old currency. It really got out of control in the 80s and early nineties and there was even a point where they resorted to just stamping the old bills instead of printing new ones.
A fun side effect of all of this is due to all the currency changes and to the need of printing bank notes with higher and higher numbers, they ran out of famous people to put on the bank notes. By some point they starting using general themes like "Gaucho cowboy" or "Bahia woman" on the bank notes and the current Real has pictures of native animals.
I understand the claim, I just find in unconvincing that supermarket owners would keeping raising prices on their goods if your stopped printing more money, once it's clear to everyone the oversupply has stopped.
Hyperinflation leads to some really strange things going on that are a bit hard to imagine when you live in a time with modest inflation. One example that really surprised me when my parents told me is that buying a car was considered an investment. Nowadays this sounds insane because cars are expensive and depreciate in value quickly but back then you needed to spend all your paycheck ASAP before it evaporated and cars are something you can purchase that has high liquidity.
For something that is closer to answer your question, one thing that happened in those times is that interest rates were really high in order to make it possible for people to keep money in the bank instead of having everyone run away with their money and spend it on physical goods. In a way, this kind of forced the government to print money to pay its debts, which perpetuated the oversupply of money. The disastrous Plano Collor tried to solve the problem from this angle by freezing all the money in savings accounts.
In the end the root of the problem is that the Brazilian economy got so dysfunctional that market prices started to be based on the inflation rate instead of it going the other way around. The URV system got rid of this coupling, which is something a regular new currency can't do. By tying the prices to the US dollar you can cause prices to stop changing in a much more direct way than hoping that everyone is going to simultaneously that the money supply is stable and therefore they should stop raising prices.
It's also worth noting a counteracting event: the inflation caused by the switch to the euro in many European countries like Italy [1], Spain [2] and Finland [3]. These were sometimes actual inflation and sometimes more a matter of perception -- a price hike in a few products and goods may not show up significantly in the official price index radar, but it does wonders to skew public perception.
"In common with other countries with low-value currencies, where people are accustomed to paying in units of hundreds and thousands, the introduction of the euro, which was valued at 166 pesetas, led to stealthy but rapid inflation. Within in year a cup of coffee that in most bars cost 100 pesetas was priced at €1 while the cost of a 1,000-peseta three-course lunch leapt to €10 – a 66% increase." [2]
Of course, there were two components: the physical (stopping the runaway printing of money) and the psychological (changing people's expectations). So the title should more properly be something like "How Current Abstraction Helped Stop Runaway Inflation in Brazil."
----
"You have to slow down the creation of money, they explained. But, just as important, you have to stabilize people's faith in money itself."
You simply can not have hyperinflation without the government printing money. In normal situations, there's not enough money to keep an economy running after a 1000 times increase on the prices level.
Now, if you are arguing that the government started printing money because the energy crisis destroyed its budget, then yes, the energy crisis caused the printing of money, that caused the hyperinflation. Thus, in some indirect sense, the energy crisis caused the hyperinflation.
This idea of Milton Friedman's that "inflation is always and everywhere a monetary phenomenon" needs to die already. It's wrong in every possible sense.
You want to present some evidence for that claim? Some alternate ideas? Some argument on why Friedman's claim is wrong? Something besides just a contemptuous dismissal?
The evidence is staring you in the face. Brazil's hyperinflation in the 70s was triggered by a supply shock that had nothing to do with their money supply.
Zimbabwe was similar, in that they destroyed their agricultural sector but continued to buy food.
If you keep the level of money printing and spending the same but your ability to produce goods and services is suddenly hit, you will experience inflation.
If that inflation reaches a trigger point, it will start to feed upon itself in a positive feedback loop, causing what we know of as hyperinflation.
Reduce income inequality and promote social rise creates inflation, too. In the past you could pay someone R$300/month and have her cleaning your home everyday. Now the same value doesn't pay one week. Inflation to the riches, better work for the poors.
I think you miss understood him. Money is just like any good subject to suply and demand. So if a country produces goods that they sell only in their national currency the more you produce of this goods the more demand there is for your money. So imagine there is a fixed quantity of money and a certain level on demand based on the quantity of the wealth produced. If suddenly you stop producing this goods then demand for your currency sinks. If this happens what you are left with is inflation. And all of this without the need to create money. For example the us prints masive amounts of money and they can do so because of the Bretton Woods system. Because the dollar is the international currency they print based on demand for their money that commes from goods produced all around the world by many countries. So it also depends on the power the nation has to oblige others to use their money.
Hyperinflation is a completely different game. Your explanation also does not cut it, because a country's GDP simply does not reduce 1000 times in a month, month after month for years. You can not have it if your government isn't printing money like mad.
Also, no the 4 QEs of the US since 2008 weren't not nearly enough to create hyperinflation. They are not even growing exponentially.
>a country's GDP simply does not reduce 1000 times in a month, month after month for years. You can not have it if your government isn't printing money like mad.
Yes, but the trigger almost never a government that goes insane and decides to print money like mad. The money printing is ramped up in an attempt to maintain the same level of spending in response to a supply shock.
>Also, no the 4 QEs of the US since 2008 weren't not nearly enough to create hyperinflation.
QE actually causes retail deflation. Which is counter-intuitive, I know.
(the reason is that money printing doesn't cause inflation - spending does, and QE actually reduces spending in non-investment products)
Considering the terrible tax / spending policy and massive amounts of money being printed at the time I have my doubts the energy crisis was nearly as important as you suggest.
Also of note the inflation rate in 1991 was very close to the 1970, and 1976 rate of six percent. So spiking to up another 6% to 12% percent briefly was clearly related, but 1/2 of that total was directly from failed policy.
>Considering the terrible tax / spending policy and massive amounts of money being printed at the time I have my doubts the energy crisis was nearly as important as you suggest.
The inflation spikes that happened all around the world at that time in other countries that also experienced the 1970s oil crisis should clue you in.
That's not to say that the hyperinflation might have been avoided if the Brazilian military dictatorship spent a little less at the time. But this was still mainly cost push inflation, not demand pull inflation.
First off hyperinflation is when "monthly inflation rate exceeds 50%", US monthly inflation was ~1% though this time period. http://en.wikipedia.org/wiki/Hyperinflation So, clearly the US never had anything close to hyperinflation even with the oil shocks.
Second, a ~6% annual inflation spike due to increased oil prices is significant. But, the US baseline inflation rate from 1970-1990 was ~6% so the oil shocks at most explained 50% of US inflation.
For a country to turn a ~0.5% monthy shock into 50% monthly price increase means something else is clearly very wrong with their economy.
>First off hyperinflation is when "monthly inflation rate exceeds 50%"
This was always an arbitrary definition that never really touched on the actual mechanism - the positive feedback that causes inflation to feed upon itself and increase exponentially when spending is > the capacity of the economy.
>clearly the US never had anything close to hyperinflation even with the oil shocks.
Clearly. Which is why I used the term "inflation spike" and not "hyperinflation".
I'm sure there have probably been some economies that have gotten close to the hyperinflation trigger point without realizing it, though (not America, however).
>For a country to turn a ~0.5% monthy shock into 50% monthly price increase means something else is clearly very wrong with their economy.
It means that their economy was probably spending at close to full capacity already and they were heavily dependent upon oil imports. This exposed them to the supply shock, but still, without the supply shock, the hyperinflation trigger point would probably have been avoided.
"Wrong" is a normative judgement. You wouldn't use it to describe physical phenomena. Why would you use it to describe economic phenomena?
A somewhat similar pricing mechanism seems to be developing today for payments in Bitcoin. Very few things you can buy in Bitcoin are actually price denominated in Bitcoin. You'll see things selling for $25 worth of Bitcoin, rather than 0.1 BTC, considering the historic volatility. Almost all merchants accepting Bitcoin use the USD as a base pricing denomination.
URV was a nice hack, but people overestimate these economists brilliance. Here are the dates when the latin america hyperinflation ended in each country:
Mar. 1990 Brazil
Aug. 1990 Peru
Mar. 1991 Nicaragua
Mar. 1990 Argentina
So what's was the essence of the trick: did Brazil have some special case of inflation where country was in fact economically healthy, but the people massively underestimated its economical health? Sounds so unreal (maybe that's why the currency was named so :) ).
The essence of the trick was convincing people that the money that they received wasn't going to suddenly become worthless, so they wouldn't go out and spend it immediately, perpetuating the inflation - killing off the vicious cycle.
i.e. it was a hack to reduce the velocity of money in Brazil.
In all likelihood inflation would have come down anyway at some point around that time. Energy prices had stopped rising. Perhaps this made it happen a few months or even a year earlier, though.
If they'd tried this trick in the beginning, while energy prices were still rising it would have done fuck all.
"Real" in Portuguese has two meanings, one is the same as in English, the other is "related to the king".
Brazilian money had this name since we had a king, then, at the inflation time its name was changed, a dozen times or so, and came back to the original.
I lived through it. The URV was the turning point for inflation in Brazil, and a huge part was in fact the impression people had the the price was not going to change in the next day.
In addition to slowing the production of money, the URV program essentially tied wages to the inflation rate. To me, that seems like a fundamentally important step in both restoring the people's faith in the currency and maintaining the standard of living for them. By only printing less money, they could easily fall into a period of widespread poverty while inflation rates continued to rise -- albeit at a slower rate.
Of course, I'm just an armchair economist, so perhaps there's part of the picture that I'm not seeing.
Mandating that salaries are tied to inflation is an interesting concept indeed.
I'm still majorly confused as to why not all legislation uses "inflated dollars" or some metric that keeps things in line with inflation. Well not confused, per say, more like disappointed.
I think legislators are already arguing about both increases of spending and metrics of inflation. Remember the whole "chained CPI" debate about the metric to use to calculate cost-of-living increases for Social Security benefits?
sure, but in the case of minimum wage, for example, it would still be rising by some (certainly imperfect) metric. Legislative deadlock would not stop these things from rising at least a little.
Sorry, but that's exactly wrong. There was widespread indexation before the URV or, more precisely, before the Real Plan. Salaries, pensions, interest rates, fees, etc, everything was tied to an inflation rate or another.
The Real Plan did away with the indexation.
I lived in Brazil for 3 years during the early 90's and I distinctly remember two currency changes: Cruzeiro to Cruzados and then Cruzados to Cruzados Novos. While living there, our strategy was to keep our money in US Dollars until the last second when we decided that we wanted to buy something because inflation was so crazy. Then I remember hearing this story on NPR almost 2 decades later and I was blown away about the psychological game that was used to stabilize Brazilian currency.
Lets not forget that economics is a social science like psychology or history. Also lets not forget that there is no such thing as "fake" and "real" money and that the economy is a social construct. The concept of fake dollars pesos or reales its a valid one but fake money is just nonsense.
Mexico has an interesting similar concept, it's called UDI: (Unidades de Inversión, Investment Units), it's a currency tied to inflation, its a currency tied to inflation and it's used by financial entities to hedge against inflation.
I think the Pinochet dictatorship expanded the UF to be used in financial transactions like mortgages. Large loans such as for cars or college are also in UF.
It would be interesting to know whether Chile's UF served as inspiration to these brazilians.
Everything have long lines, because your money would be worth nothing in the next day, so everybody went in the markets in the 10th day of the month, when they received their paychecks.
I'm from Argentina and a similar plan was implemented there. The REAL plan was to subscribe free market principles, sell state owned companies and reduce the fiscal deficit.
This fake currency was attached to USD price in Brazil. In Argentina was created from the beginning and it was also attached to USD.
Sorry to bother with the reality, I'd prefer the Big Fish style story that was told in this article, but it was a fake.
Corrolary: solving price stickiness problems, or changes in the demand for liquidity by changing the money supply itself is a horrible hack.
All of the (stated) goals of monetary policy can be achieved by using a price index layered on top of money, whith none of the distortionary effect and seignorage.
naming things is difficult period. It is under valued but naming things is so important in many areas of life. (This is the reason why there are so many Jr.?)
There are only two hard things in Computer Science: cache invalidation and naming things. -- Phil Karlton
Yes and no. The quantity of money governs the price level in the long run but people's expectations about inflation are very important in the short run. Volker showed that you can simply slow down the creation of money to bring inflation under control at the cost of a certain amount of short term economic distress.
What was cool about the Real story is that they mostly managed to stop inflation without the normal period of distress. This was super important because I believe the Brazilian central bank doesn't have the Fed's level of independence and probably wouldn't have been able to do it the hard way without being stopped.
A reduction to the absurd reveals that the quantity of money is relevant to the price level. Try to run the economy with one dollar changing hands and, since it can't change hands fast enough, that single dollar is priceless. Try having an absurd (approach infinity) number of dollars and, even if circulation speed is near zero, dollars will have near zero value.
Naturally, it is monetary mass coupled with circulation speed. If you change the monetary mass and no other economic variable, within the tolerance envelope, circulation speed will adapt and price levels won't budge. Exceed tolerance levels, and you will influence price levels.
You saw this applied in practice recently. Quantitative easing is a correction using monetary mass to an abnormal reduction in circulation speed (via reduced lending).
>Try having an absurd (approach infinity) number of dollars and, even if circulation speed is near zero, dollars will have near zero value.
That only matters if those dollars are being spent and remain in the flow of funds. Say the Treasury printed a few trillion dollar notes and buried them in a hole, it's not going to affect the price level any (aside from the real resources used).
According to the article, that had been tried and failed several times in the past. Slowing down the creation of money would have eventually stopped inflation, yes. But it would have taken a lot longer and created some really nasty side effects in the economy during the period when inflation exceeds monetary growth. Those side effects were nasty enough to topple several governments, and the government change stopped the slowdown before it had time to take effect.
You have to slow down the creation of money, but in a hyper inflationary setting, the assumption that inflation exists creates money itself. So not only do you have to slow down the creation of money, you have to do it in a way that strips away the assumption that the government will just create more money. In this case, by embracing the fact that the government was just printing money and pegging a currency to the expected inflation rate, they were able to prevent people from doing this sort of math in every transaction they encounter.
All of this only works if you have an economy that is otherwise relatively stable. Brazil happens to have an abundance of diverse natural resources (oil, timber, mining, etc.), which provides a lot of economic stability. Now if you tried the same tactics in, say, Argentina (which currently faces many of the same problems that Brazil did with regards to cyclic inflation/deflation) I would expect different results. Because Argentina has approx. 15% the population of Brazil, its economy is much less diverse.
Argentine here. Both economies are pretty similar. Both are pretty diverse in their composition but not in their contribution, so you have the fact that primary activities (farming, oil, etc.) are the great contributor to the tax base and basically all other activities receive subsidies. This is the reason ar & br have one of the highest tariffs for electronics.
The root of the inflationary problem both in ar & br is, and has always been, the printing of money to cover for the fiscal deficit. Government hikes taxes every year and every year it consumes a bigger % of the pib.
Printing of money to cover for the fiscal deficit is not rare or bad by itself. Inflation can be a form of taxation if the goverment fully controlls the creation of money. The problem is that goverments are stripped from their right to do so and evey cent they create is actually borrrowed from the central bank.
Thats what i said. Goverments can't print money they need to borrow it from the one that prints it. Also borrowing from normal banks is creating money.
That is true for the goverment printing but the central bank printing its just printing i mean if you follow the chain to the creation maybe the BIS or something. Because when you print money you don't pay interest to anyone so instead of borrowing you could just jump the middleman and just print he is printing anyways. If you borrow you need to pay exponential sums. Using inflation to collect taxes was normal when the logistics were a nightmare. Its dangerous maybe but not necesarily bad and there are a lot of financial gambels done by goverments which are more dangerous.
>Because when you print money you don't pay interest to anyone so instead of borrowing you could just jump the middleman and just print he is printing anyways.
>Because when you print money you don't pay interest to anyone so instead of borrowing you could just jump the middleman and just print he is printing anyways.
While that's true technically, when governments borrow from the central bank they tend to roll over the debt instead of paying it back, so the interest is never really paid.
The big advantage to borrowing from the central bank is the average person thinks you can only borrow deposited money and doesn't realize what's happening.
> the assumption that inflation exists creates money itself.
That seems like a claim that's hard to defend... If the government stopped printing money, it is true people would continue to adjust prices upwards for a while, but people would quickly realize that they were running out of actual money and stop doing this.
This isn't the kind of situation where borrowing & lending is indirectly increasing the money supply, if no money is printed people would simply run out of bills and the inflation would stop, regardless of "assumptions" and "psychology".
No, if the quantity of money stays the same, but the velocity of money increases, that's still inflationary. And if the velocity increases because people know there's inflation, that's a positive feedback loop.
But it will eventually fix itself, because there are physical limits to how high the velocity of money can go. Once that's reached, then the velocity-caused inflation stops, and then the velocity no longer becomes necessary, and things start to return to normal.
The assumption that inflation exists is taken into account when setting interest rates on loans. So borrowing / lending activity does create money in the form of an IOU. The money doesn't become "real" in a money supply sense until the IOU is paid out, but the effects of high inflation can linger long after the government stops printing money.
Under normal inflation scenarios this would be largely restricted to the financial sector which can be managed by a central bank, but with the type of inflation Brazil saw at times, this permeated even simple business transactions. Something that would be as simple as "Oh, we've done business for 30 years so I know you're good for it, just pay me on Friday" becomes an interest-bearing transaction.
Basically, because inflation is so high, individuals have to charge interest on even the smallest transactions. This makes people more reluctant to loan, but even the most basic real-world economies don't function without credit; and when you issue debt, you are creating future money supply. In stable, low inflation scenarios, the central bank can adjust to this by increasing the money supply accordingly. But if you stop issuing currency, money does not stop being created.
Fiat currency is debt. Its in its definition. Gold coins is gold. But you are right i should have said fiat currency not money. Thanks.
Edit maybe fiat currency is only debt when created through borrowing (like most of the currencys right now). But its a bit ambiguous to me because if it was diferent and goverments were alowed to produce money instead of borrowing it from the ones with the monopoly of money creation. The first time they introduce a surplus of currency to the system or the first time the currency apears the party accepting the currency in exchange for value would be making a loan of value to the goverment or an investment.
Fiat currency is simply currency that is not backed by something physical - in itself it has nothing to do with debt.
In modern economies, a central bank can and does create fiat currency out of nothing - literally declaring it into existance. This has nothing to do with debt. And yes it is an advantage for the central bank / government to be able to do this - this advantage is called seigniorage.
Usually the central bank creates money to increase financial liquidity in the banking system, and as such it wants the newly created currency to enter the financial system. The most common way to do that is for the CB to buy something - usually a bond, but it could be anything. The person selling just gets the market value for their product - no special advantage in selling to a central bank vs anyone else. But the total amount of fiat money in the system goes up. In this way the creation of money is often seen to be linked with debt but is not a fundamental link.
Then there is a second, entirely seperate kind of money that is not fiat money which is called bank money. Bank money is entirely based on debt - it is the debt of fiat money. And bank money is the most common sort of money we use, much more common than fiat money e.g. I typically buy larger purchases with bank money (a bank card transferring the IOU of my bank to a shop) instead of with fiat money (notes and coins).
I agree this stuff is entirely not too obvious & the misconception that all money is based on debt is incredibly common.
Thanks. I was talking about the genesis of the first bond. And the debt refers to the debt the goverment of the country gets when "creating money". So that the money created its created trough a loan from the CB. Then the high-powered money serves to cretae more debt money. But its a complex process that i havent studied yet and its allways nice to have a conversation about money.
Not a real story. Hyperinflation in latin america was systemic and ended in almost all countries around the same time, most of them didn't change their currency. And with sucessive crashes (97, 99, 2002), we can't call it a success.
Of course, some of the measures were "effective" against inflation. The Brazilian Central Bank fixed 1 BRL to worth 1 USD and lowered a lot of import fees, flooding Brazil with US goods. This helped put prices down at cost of our own industries.
Yeah, probably some of them (the economist and his buddies) thought the same and didn't give a shit. What happened them? Most of Brazilian industries got broke or were acquired under great circumstances by foreign companies. Long live plutocrats.
If you think that hyperinflation would solve itself without any of the policies adopted - fiscal tightening, privatization of troubled state owned companies, opening up the market, etc - I'd love to hear about your explanation for the current state of Venezuela.
But given Brazil's economy compared to the others, and it's inherent influence on the others because of that, wouldn't it be reasonable to say it might be a story?
I was 14 during the URV period. It was like that, nobody really understand what URV was, nor could explain to other what it was.
But, it was simple to use. Prices are in URV now, not in the old currency name, not a new currency, it is URV. URV acted as a good parameter, was simple to understand and use in practice, even if hard to understand in theory.
It is not that brazilian had lost faith in the currency, but we lost faith in currency changes and readjustment. Brazilian money had changed names several times in the 80s. And several times government had cut zeros from the currency ("Hey, everybody, now 1,000,000 is actualy 1,000 ok?). So there were no point in just creating a new currency. It HAD to be a virtual one, something different, something that people could not say "yeah, just another name change like all the others...". So they created URV, and it worked.