How Fake Money Saved Brazil
npr.org
npr.org
* 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 was to break inflation's inertia/momentum. A lot of people already knew it was necessary; but no one else knew how to do it.
* The article doesn't comment on the strict and cautious monetary policy implemented by Fernando Cardoso. It was as much important as the "fake money" trick.
* Big inflation was a huge tax on the poorest people. Because they were poor, they didn't have the knowledge and means to protect against rising prices. It is because inflation ended that they began consuming more and the country increased their internal markets.
[Edit]Wikipedia has a more comprehensive explanation about what we call here Plano Real : http://en.wikipedia.org/wiki/Plano_real [/Edit]
However the fact is that it recovered back again to high levels during Collor's mandate.
The cut down in buying power was achieved mostly through fiscal policy, not consumption restriction.
Besides the monetary policy that you mention, Cardoso also implemented a stricter fiscal policy. There's no way they could have defeated hyperinflation without cutting government spending. He also continued the trend -- started by the previous administration -- of opening the economy (slashing the tariffs, etc) and privatizing state companies.
These were the biggest producers of inflation and were what made Brazilian inflation unique. It was a sort of administrative inflation.
So, three things had to happen:
1. A politician had to admit his ignorance
2. Some bright spark technocrat somewhere had the right solution to a seemingly impossible problem.
3. The right politician asked for help from the right technocrat
They're not kidding. It is a miracle.
The only minor inaccuracy is that we only impeached one president.
Afterward, everyone with a stake in the country's direction realizes that having a technocrat who shares your views and has personal access to the administration is a great way to influence policy. The money spigot opens, and pretty soon having the 'right' opinion is far better for your career than independence. Survivor bias eventually ensures that the technocracy is dominated by people with the 'right' opinion.
And that's when you'll know that your country has achieved parity with the United States.
Once for every generation. Don't overestimate people's ability to remember.
Besides, if you do it correctly, you only need to do it once.
I don't trust the current favorite candidate to keep doing it right, BTW.
It really only works once.
Just like the New Deal only worked once and now every scam just claims it's the New, New Deal.
Sure, the populace might have a memory of a generation but the technocrats have a longer memory and after first success, the next effort is dogged by the realization, "look what I'm going to get, look who I get to be..." (as the gp said, it's the careers of the technocrats one has to look at).
I say this looking at the horrible, awful fail of the current president, a fail of what could have been the renewal of the country but by this very mechanism was fore-ordained to be a lurid catastrophe. Roosevelt sold out a lot to Wall Street too, btw, he just had a clean enough start to make his approach work.
Really, These deals only work once per country...
http://newsroom.ucla.edu/portal/ucla/FDR-s-Policies-Prolonge...
> Recovery came only after the Department of Justice dramatically stepped enforcement of antitrust cases nearly four-fold and organized labor suffered a string of setbacks, the economists found.
That wouldn't have been around 1939-45 or so, would it?
Here is a link seemingly debunking that guise of an academic study: http://www.openleft.com/showDiary.do?diaryId=10644 Fair warning it might cause cognitive dissonance.
Nobody believed it would work because the whole country had lost faith in "magical" economic reforms like the one before it, the Collor Plan.
Imagine you wake up one day and all of your bank accounts are frozen - that's what happened to my parents (and most of the population) on March 16, 1990 when the Collor Plan was announced. It's your money, but you can't spend it - sorry. My father had been saving money in order to buy a new house. Years later he recovered less than 1/10 of the original sum. Lots of small businesses (including family and friends) went broke.
When I talk to my parents about pre-real days it feels like they were born in a different country than I was.
Even if people learn the value of their inflating money with respect to more stable things, inflation STILL eats away at the value of their savings. It does them no good to learn prices are stable (with respect to an arbitrary standard) except to learn they are indeed getting poorer.
Also, freezing bank accounts and banning the trade of foreign currency only makes matters worse. People not being able to access their money does make them poorer still.
1. You can't inflate at leisure without destroying the currency. 2. You can't have a peg to a foreign currency if you keep inflating faster than that currency's central bank. 3. You can't then cover up for the misdeeds of the government by denying people access to their savings.
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 ensure that. And if you try to fix that by force, as you pointed out, the inflation accelerates even more, because it's now happening in a black market with even more waste.
The way they fixed inflation in Brazil was, it appears, by changing people's expectation of what should happen to currency. They had to get everyone to believe that the brazilian currency can be stable. The mechanism they used to do that was the cheap trick of creating an alternative currency and calling it "real". It may be a cheap trick, but from the look of it, it worked.
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.
Those were the days!
It's absolutely impossible for me to say how much I paid for my first car. I know it were 4000 monetary units, but I cannot recall its name nor how much it cost. That's weird.
And then today I read this! What a coincidence! I never would've thought you could scale up this technique up to do it to the whole country!
The best solution is the one my current supermarket uses - the price tags on the shelves are a cheap LCD display, so all they have to do to update the prices are to push the new prices from a database.
Dr. Seuss would be proud.
I have been introduced to this masterpiece by reading some of the books to my daughter and it's a real delight, apparently as much for her than it is for me.
I wish I had these books where I grew up.
Or Baudrillard.
Out of control inflation is a terrifying, society-destroying phenomenon. Stable and prosperous societies rely on stable money values.
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.
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.
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)
Therefore it isn't as simple as inflation bad, no inflation good. Rather it is too much inflation bad, any deflation bad, and you need to be in the middle. Which means that you want to maintain a small amount of persistent inflation - just enough to avoid the risk of miscalculating and going into deflation, but no more.
A big worry for the USA at the moment is that the current credit issues could lead to deflation.
An inflation rate of between 1% and 3% is generally seen as a sign of a healthy economy (There is sufficient demand for products that some prices can naturally rise, without causing economic disruption. It also implies a low unemployment rate, in that the economy is sufficiently close to full employment to be able to tolerate some price movements)
Some central banks even go so far as to formally announce a inflation target, which gives the markets a more predictable way to forecast interest rates. See http://en.wikipedia.org/wiki/Inflation_targeting
OTOH, hyper-inflation implies a lack of confidence in the currency and economy.
In a lot of ways this is similar to unemployment. Generally, low unemployment is good for the economy (and presumably society) until it reaches a point where businesses are unable to grow because of a lack of labor. When economists talk about "full employment" they usually mean this point - where labor constrains the economy - rather than an actual 0% unemployment rate. (While this sounds quite harsh, there are good reasons why any economy will have an unemployment rate greater than 0%. For example, often the centers of population do not coincide with the places jobs are)
True inflation (not the manipulated government statistics) is really a measure of the market. To say that inflation is at the wrong value is to say the market is wrong. The Fed has been striking matches for a while now trying to get inflation to catch on and stand by with the wet blankets when it starts to get out of control. The banks are stuffed full of cash but don't want to lend. If they throw any more fuel onto the fire it might catch and spread faster than they can deal with. Then it's the 1970's all over again and your lifetime savings are decimated in the space of a few years.
People believe that more inflation is needed, then you believe the market is wrong and more intervention by central powers is right. It's ok to believe that, but I'll never agree. High inflation punishes the savers, lenders and investors, and rewards the speculators and borrowers.
I'll admit, my investment strategy is biased towards a breakout of inflation. But that's because I believe the central banks are so wedded to the idea they won't let it go, not because I agree with them. You can't double the money supply in under 2 years without a flow-on effect, even if it's not immediate.
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)
The numbers disagree with you:
Capital that was malinvested during the boom period has to be accumulated again to return to previous productivity levels. The method to accumulate capital is saving.
Have any other governments suffering from high inflation tried this?
Instead of calling it a fictional unit, they could also just use an existing currency like the euro for the transitional period, then switch to a new national currency that has an initial exchange rate of 1:1 against the euro. (I'm picking the euro because it has a fairly neutral image, with over 20 countries using it already.)
http://en.wikipedia.org/wiki/History_of_the_Empire_of_Brazil...
I think that probably more accurately describes their intention behind the meaning of the name.
When I lived in Brazil in the 1990's, shortly after the currency changed from Cruzeiros to reais, the exchange rate was around 1.5. Today, it's 1.69 - there have been some relatively mild fluctuations since then but it has stayed remarkably stable.
i don't think zimbabwe has enough control on their economy to pull this off.
They gave up and went to nationally accepting the dollar (USD), pula (Botswana), or rand (SA).
Helped things a lot. :-)
Opposition politicians looking for ammunition to attack the plan -- correction: looking for ammunition to attack the incumbents; they might have had little interest in attacking the plan otherwise -- would denounce the insult to national sovereignty.
That's surely why Brazil called it the URV - unit of real value - instead of admitting that in effect they repriced in Yanqui imperialist dollars. That's not in the linked NPR transcript but was mentioned in the longer NPR Planet Money podcast, linked at the bottom of the transcript.
You can decide to peg your currency against a more stable one eg west Africa and the French Franc - but unless the owners of the hard currency have some political reason to support your then you have to persuade the world's traders that you flobble-bead is actually worth a Euro.
There was no hyperinflation in the 30s. The early thirties saw depression and deflation. This Weltwirtschaftskrise lasted longer in the US than in Germany and is known as the Great Depression, there. The crisis contributed to the rise of Nazism in Germany, though.
Why do you keep mentioning the 30s?
In 2000 years of history that's only an error of 1%
Anyway, there wasn't much Weimar Republic to go around in the 30s. It ended in '33 with the Nazis coming to power. (The term Weimar Republic is just a name historians have made up for that period. Officially Germany was called Deutsches Reich from 1871 until 1945.)
Sorry, I am just a bit annoyed, because I have heard people make this very mistake more than once. I guess I am equally ignorant about, say, Chinese or Vietnamese history.
Sorry, I had thought the hyperinflation + general chaos led directly to the rather unpleasant party seizing power in 1933 and so assumed the bad times were immediately before then (ie 1930-1933). Hadn't realised they were actually a decade earlier.
Hyperinflation is primary caused by government printing money right? So if switching to another currency helped stop this...I get how it could help people changing their perceptions, but wouldn't the root cause be that the government stopped printing money with the new currency?
It seems like it would have been almost as effective if they had simply stopped printing more of the original currency until things stabilized?
Maybe I'm missing something. But the article seems to put too much weight on this clever idea of shifting to a new currency. While if monetary policy had stayed the same with the new currency I don't think it would have made any difference. The monetary policy here was the important part, not the new currency.
In the medium-to-long term, economic agents begin to forecast inflation and to use those forecasts as de facto price indexes that can trigger price adjustments before the actual price indices are made known to the public. This cycle of forecast-price adjustment-forecast closes itself in the form of a feedback loop and inflation indices get beyond control since current inflation becomes the basis for future inflation (more formally, economic agents start to adjust prices solely based on their expectations of future inflation). At worst, inflation tends to grow exponentially (leading to hyperinflation).
The reasoning behind it doesn't fully make sense to me.
Simple reason: people spending money as fast as they can (the shot in the arm that can accelerate hyperinflation) has a natural limit: when people have no more savings! So I don't think it's correct to call this a positive feedback loop. It has a natural limit that could be reached quite quickly under hyperinflation.
Indexes can only takes things so far too - if you (as a business owner) follow them and nobody can afford your products, you'll quickly figure it out and drop prices. So it seems weird to say indexes could cause hyperinflation over any medium-long time frame.
Reminded me of the quote: "All problems in computer science can be solved by another level of indirection"
Yes, those are indirections.
Really.
For most uses, like prices of eggs, it's close enough.
However, I do keep one non-virtual slide rule around just to whip out and show the kids now and then. Nice mahogony base, teflon slide, the works.
The Planet Money folk unashamedly try and explain economic current affairs and stories as simply as possible. It's essentially their self professed raison d'être and they do a good job of it.
Quibbling about the the accuracy of their simplified examples is missing the trees and the forest.
This serves as a good reminder that you will be swiftly punished on HN for making a comment that doesn't add value.
In my defense, I didn't miss the trees and the forest. I was merely pointing out that the story was dumbed down, as you put it, "as simply as possible." And replying to a post pointing out their overly simplified math. Seriously, implying that 1 x 1.8 = 2 isn't even back-of-the-envelop close.
However I did enjoy learning about how the Real came to be.
Divide 72 by the periodic interest rate to find the number of periods to double the money.
Dr. Albert Bartlet of University of Colorado has an excellent lecture on its implications for population growth, environmental degradation, and other big picture problems:
I just worked it out; at 80% inflation it would take 1.18 months to double, not 0.9 like the rule of 72 would suggest. That's a fair difference, and certainly more in line with intuitive expectation.
Not that the OP isn't being overly finicky. Both round to 1, and only one significant digit was given anyway. But still.
One liberal wonk wonders if this is a sign that the country is facing a consumer debt bubble. (http://yglesias.thinkprogress.org/2010/10/tomorrows-credit-b...)
their growth rate is really high right now, so it's a delicate situation.
China is the only emerging market that needs the US economy going and for the American consumer to keep its purchasing power. China can only stop buying when their domestic market gets big enough to sustain the hit that it will eventually come.
Leaving aside the oh-shit-we-are-all-fucked scenarios (ie, collapse of trust in the US currency or maybe another 70's era oil shock) what on earth could cause inflation at the moment?
Sure, your interest rates are low, but domestic demand levels are so low that everyone are desperately cutting prices to try and create some demand. Combine that with very high unemployment and it's simply not a high inflation environment.
I'd be more worried about deflation than inflation at the moment.
http://blogs.forbes.com/greatspeculations/2010/10/04/looking...
Adding more currency without backing is a sure way to cause inflation, I hear. How they've been avoiding this is by China and then the U.S. sinking money into U.S. Treasury bonds, I hear also. When the U.S. makes claims that the economy is not good (which they've done quite a bit), I wonder if they are trying to influence investors to invest in these bonds rather than stocks, or if they were really trying to warn us that something bad is coming. Either way, as a consumer, I'm worried.
Has a startup ever benefited from using a fake currency? In what ways?
It's about gaming the market. It really drives the idea that the market is only a shared somewhat consensual hallucination.
It also explains recent posts on lying on stage and PR efficiency.
The catch is that not all people wake up at the same time.
I worked with someone who built a popular facebook RPG game, and part of what made it popular was that as you became an established player the amount earned per day rose exponentially. As the game became more and more popular the virtual economy started to hyperinflate almost out of control, and the established players started hitting the MySQL integer limits. The author never expected that would ever be possible, but the exponential rate of inflation plus the exponential rate of new players joining created a giant pyramid scheme.
They can look exponential... until they hit the limit.
Let's assume gov. X, printed an additional $3bn. Will prices increase? No, they won't. The gov. can use this money, to do things, like building roads, schools... These expenses has to be considered as investments; if roads are built, industry will benefit and exports will increase lowering the inflation that the gov. had already made.
So the gov. can print as much papers as they want. It's paper in the end. But the ROI of the money they spent/printed, is going to decide if inflation will happen or not (in the future).
If inflation is spiking, it means the gov. lost control over the banking sector and a new currency needs to be made to return confidence to people and companies.