Macro Econ - Brazil

Quote of the week:  (Hat tip - The Guardian)  Yanis Varoufakis, in his 1998 book Foundations of Economics, cites the British Keynesian Joan Robinson: “The purpose of studying economics is to learn how not to be deceived by economists.”


Remember a few years back when the BRICs - Brazil, Russia, India, and China - were the investment darlings of the world?  Don't hear about that much now, do you?

Brazil in an informative case.  Even at a glance, you can see the economy is struggling.  National deficit is up, state/local borrowing is up, and the currency is weakening.

So, what happened?  A couple of things:
1) Brazil has a lot of debt in dollars.  As the dollar strengthens, and Real weakens, the effective rate of interest goes up.  Way up, in this case.  In 2011, one Real would buy you 60 cents.  Today it buys you 37 cents.  Thus, if the nation had gotten loans at 6%, they now "feel" like 9% to the economy, as a bigger fraction of Brazilian GDP has to go to pay interest.

2) Brazil used to be an export nation.  In the late 200s, per Woldbank, Brazil had a current account of $10B, so it was exporting products and importing money.  Today, it is $-50B or more in deficit, so it is importing more.  This means money is flowing out of the economy so products can flow in (back to the equation).  So, it should be no surprise that if money is flowing out from the country, then states and the nation itself, at least one of the two, will be borrowing.  And, if individuals or companies actual save any money, then those entities will end up borrowing or printing more.

What can we see?  As noted previously, it is painful to have foreign-denominated debt.  Like Greece, Brazil is seeing more money go to debt service, which leaves less to invest locally.  If exchange rates go down, then a greater effort goes into debt service, while if rates go up then it is harder to export, resulting in a squeeze either way.    If the gov't tightens money, like "austerity" and the Austrians (and IMF) would desire, supposedly to ensure that debts are paid, there will be less money for investment and less private borrowing, so the economy will slow (it has to stay in balance).  If the exchange rate improves, which is probably, it will slow business more. Net result is likely to be a slowing economy, which then tends to make debt/GDP get larger, which makes things looks worse. Deflation becomes a possibility, and they get their own Depression if things get bad enough. 

At that point, the IMF will likely loan money, which would be a bad idea for Brazil (investment-level banks really want control, not to help you out!).  Instead, they should likely add tariffs on imports and subsidize production for export to balance trade, spend locally and lower taxes to grow jobs and increase GDP, negotiate alternative payments for loans (selling product instead of cash, for example), and as the Real strengthens and dollar drops, pay-off foreign-denominated debt.  Or so it seems to me.

One BRIC down, three to go.  Maybe by then the US economy will start to make sense.