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How Fake Money Saved Brazil

npr.org

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Re: How Fake Money Saved Brazil

#91

Post by Experimentalist »

sethg wrote: post #42
brc wrote: post #7

It's an interesting story but the frightening thing is the comments of people wondering out loud what's wrong with inflation, or asking for more inflation in the USA. Out of control inflation is a terrifying, society-destroying phenomenon. Stable and prosperous societies rely on stable money values.

The people who are asking for more inflation in the USA are asking for something in the 2% range, or (for those who are truly bold) asking for prices to rise to the level they would be at if inflation had remained in the 2% range for the past five years or so. Stable money is good, but so is providing people with an incentive to spend and invest, rather than incentives to hoard cash and default on their debts.

We already had way too much government investment encouragement with artificially low interest rates for years. People do not need more incentives to spend. btw, we still have rockbottom low interest rates.

What happened in this crisis is over-investment and over-supply. That waste needs to be rolled back and we need to get back to a balanced budget - which is what Brazil did - it's not even mentioned in that article all the strict fiscal policies Brazil enacted like a balanced budget amendment!!!

The easy money policy causes businesses and people to borrow money they do not have (debt) in false expectation of future profits/income, and they spend money wastefully because they think they have more than they do have.

Now people must save and recapitalize and pay off debt. Some bsinesses must fail. Real estate prices must fall. Public expenditures must be reduced.

People are NOT hoarding cash. Ridiculous. Businesses are saving because look ahead and they know rates will have to increase and the hardships are not over. They are are borrowing at low rates in expectation of higher rates in the future (it would be more expensive to borrow in the future when rates rise)

Re: How Fake Money Saved Brazil

#92

Post by Experimentalist »

jacobolus wrote: post #61
diego_moita wrote: post #52

Earlier quoted context omitted.

Sorry, but this is playing with fire. What scientists, technocrats and economists forget is that public policy is rarely driven by rationality. It is driven mostly by private interests, demagoguery, blind ideology, prejudice and the public misconceptions. The idea of taking a little bit of a very dangerous medicine is something that no one should take lightheartedly.

It’s also “playing with fire” to, in the name of keeping inflation down, depress demand so much that it plunges the whole country into a massive recession. In other words, any economic policy can be taken too far, and the dangers of any approach can be caricatured and exaggerated. It’s not like the policy of inflation fighting isn’t equally driven by “private interests, demagoguery, blind ideology,” &c.

Demand should be depressed because it was artificially stimulated before.

ie. if demand for homes was normal and not stimulated by easy money then there would not have been a housing bubble. a dotcom bubble. etc.

Government stimulated demand is the problem not the solution. (see my other post a few msgs above)

Re: How Fake Money Saved Brazil

#93

Post by Experimentalist »

diego_moita wrote: post #37

The article doesn't tell lies, but it certainly spices up a lot the story. Some points to clarify: * The "finance minister who knew nothing about economics" was actually a very respected sociologist, a senator and a very intelligent and skilled politician. He later became known as president Fernando Henrique Cardoso. I.M.O. one of the best 3 presidents this country had. * What Edmar Bacha, Pedro Malan and others did…

Also I believe a balanced budget amendment was enacted in Brazil around that time.

Re: How Fake Money Saved Brazil

#94

Post by Experimentalist »

swombat wrote: post #88
Asdfg wrote: post #79

Earlier quoted context omitted.

There is no such thing as a "real value" as measured in a vacuum. Value only comes in relation to something: a commodity or a basket of goods. What they did in Brazil was to establish a new currency which the government promised not to inflate, then as inflation destroyed the previous currency, the way was open for the new one. This is how inflation was ended in Weimar Germany, post-WW2 Hungary, '90es Serbia/Romania/…

Of course there is no "real value". However, inflation is not solely the result of the government's wishes to inflate the currency (as examples of hyper-inflation obviously show). Inflation is also simply in the minds of the people using the currency. If everyone expects high inflation, and keeps raising their prices to match their expectation of inflation, then inflation will happen - the raising of prices will ensu…

No, inflation is not only in people's minds, it's a real measurable monetary phenomenon.

Sellers can raise prices but if there is not enough money to pay the price then no transactions occur, The sellers would then have to lower their price to sell the items.

In other words an increasing rate of inflation throughout the economy can only occur if there is enough money/credit available to pay the higher prices. You need more money available, an increasing money supply.

What's wrong with this NPR article is for everybody to think a "cheap trick" is what made it work. No, the tight fiscal policies (ie balanced budget) enacted by Brazil at the same time made it work.

The ideas in this article, coupled with Krugman's debt default idea is sending you down a river to a waterfall.

Re: How Fake Money Saved Brazil

#95

Post by cturner »

quadhome wrote: post #86
brianbreslin wrote: post #25

Earlier quoted context omitted.

you mean somewhere like zimbabwe trying this? It would be particularly tough since they have 1000% monthly inflation or some other insanity. i don't think zimbabwe has enough control on their economy to pull this off.

Zimbabwe doesn't have a currency anymore. They gave up and went to nationally accepting the dollar (USD), pula (Botswana), or rand (SA). Helped things a lot. :-)

I've been wondering - how do they keep the civil service and army moving now? They were using inflation to pay for this. Having lost that ability, what are they doing instead?

Re: How Fake Money Saved Brazil

#96

Post by asmithmd1 »

cbernini wrote: post #44
devmonk wrote: post #23

Hopefully the U.S. won't ever have to deal with this type of issue (out of control inflation). I'm very surprised that inflation hasn't hit the U.S. yet in a big way, but from what I hear that is because China and the U.S. are buying U.S. treasury bonds in a big way.

but the big problem for you guys is: it's expected that China holds something around 1 trillion of the US GDP in treasury bonds. So whenever they feel the US economy isn't trustworthy anymore, selling these will hit like a train. their growth rate is really high right now, so it's a delicate situation.

The Fed bought up 1 trillion in mortgage debt and no one blinked -- that is why mortgage rates are 4%. If China started dumping their T bills the Fed would just buy them up. It wouldn't hit like a train -- more like a tricycle.

Re: How Fake Money Saved Brazil

#97

Post by Asdfg »

swombat wrote: post #88
Asdfg wrote: post #79

Earlier quoted context omitted.

There is no such thing as a "real value" as measured in a vacuum. Value only comes in relation to something: a commodity or a basket of goods. What they did in Brazil was to establish a new currency which the government promised not to inflate, then as inflation destroyed the previous currency, the way was open for the new one. This is how inflation was ended in Weimar Germany, post-WW2 Hungary, '90es Serbia/Romania/…

Of course there is no "real value". However, inflation is not solely the result of the government's wishes to inflate the currency (as examples of hyper-inflation obviously show). Inflation is also simply in the minds of the people using the currency. If everyone expects high inflation, and keeps raising their prices to match their expectation of inflation, then inflation will happen - the raising of prices will ensu…

The price of goods can vary somewhat based on public sentiment, but the underlying cause is the printing of money. And it is correct of the public to mistrust a government that has proven untrustworthy in the past. The first steps to regain confidence are to end money production and cut expenses. A drunkard can't be trusted unless he is seen without a bottle first. So basically the government cleaned up its act first, there was no deception. If deception had indeed happened, money production would have still accelerated.

Re: How Fake Money Saved Brazil

#98

Post by bartwe »

quadhome wrote: post #86
brianbreslin wrote: post #25

Earlier quoted context omitted.

you mean somewhere like zimbabwe trying this? It would be particularly tough since they have 1000% monthly inflation or some other insanity. i don't think zimbabwe has enough control on their economy to pull this off.

Zimbabwe doesn't have a currency anymore. They gave up and went to nationally accepting the dollar (USD), pula (Botswana), or rand (SA). Helped things a lot. :-)

Sounds not all that different from the solution in the article, changing to a trusted currency. The basis of the trust is the largest diff.

Re: How Fake Money Saved Brazil

#99

Post by [deleted] »

gamble wrote: post #53
cbernini wrote: post #44

Earlier quoted context omitted.

but the big problem for you guys is: it's expected that China holds something around 1 trillion of the US GDP in treasury bonds. So whenever they feel the US economy isn't trustworthy anymore, selling these will hit like a train. their growth rate is really high right now, so it's a delicate situation.

The Chinese can't stop buying bonds if they want to keep their currency depressed relative to the dollar. Moreover, they have no intention of stopping the gravy train - tanking the US economy (further) would only hurt their own largest market, and no other large market is as willing to accept one-sided trade and currency policies as the US.

[deleted]

Re: How Fake Money Saved Brazil

#100

Post by forinti »

coliveira wrote: post #55
bd_at_rivenhill wrote: post #22

Earlier quoted context omitted.

The government could do things like building roads, but they are usually just using that extra paper to pay off their debts, which makes investors demand a higher interest rate to hold the debt, which leads to a vicious cycle. Inflation is caused by the speed of money creation exceeding the speed of creation of real value, and the banking sector is not the only actor in the money creation process.

That was the problem in Brazil, money was created not to invest but to pay existing debt.

Not really. Brazil's inflation had an extra factor helping it: lots of prices (as well as salaries) were automatically revalued by "triggers". The plan wouldn't have worked if the government hadn't also dropped all these mechanisms.
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