Browsed by
Tag: Brazil

Brazil’s Lost Decade: We Must Free Our Economy – Article by Felipe Capella

Brazil’s Lost Decade: We Must Free Our Economy – Article by Felipe Capella

The New Renaissance HatFelipe Capella

It was a lost decade for Latin America. Years of populist governments combined with a commodity boom turned out to be our oil curse, our Dutch Disease. This disastrous mix made bad public policies look like temporary successes, pushing developing countries to an unsustainable path. The collectivist ideology monopolized the debate for more than 10 years, and now that the natural resource party is over, the harm of these policies have become clearer: deep economic crisis generated by a utopia whose greatest achievement was turning toilet paper into a rare-earth product.

Populist and authoritarian South American regimes have set up government bureaucracies aimed at pleasing special interest groups that provide political support while tirelessly harming the population as a whole. These groups are divided into several small groups with special rights and privileges: judges, civil servants, members of parliament, friendly businessmen. These factions are getting their more-than-fair share while the unprivileged citizen foots the bill.

Latin American politicians played it very well during these favorable times. Cronyism and populism greatly benefited some chosen groups, while the harms were diffused enough throughout the whole country and difficult to measure during favorable economic winds. Brazil is just the biggest and clearest example of that.

How We Got Here 

For many years Brazil’s road to serfdom was being paved by the left through a combination of the world’s worst ideas: a Venezuelan-like project to subordinate decisions of the Supreme Court to the ratification of Congress; an Ecuadorian will to regulate and control the free press; a Russian compassion for cronies handpicked by the executive; Greek style benefits for public servants; Southern European pension costs (for a much younger population); Argentinean barriers for international trade, and an American/EU taste for subsidies.

The former — and now failed — cherry-picked billionaire darling of the regime Eike Batista was showered with tax funds while ordinary entrepreneurs lacked governmental support; friendly national industries were heavily protected, while people were taxed up to 50 percent on food and health supplies. Oi Telecom, a multibillion dollar mobile company, is just the most recent example of Lula’s national-champion policy (the company has just filed for bankruptcy, with 17 percent of its debt held by state-owned banks).

That was the result of 10 years of left-populist government in Brazil, all of them enjoying the applause of the international press. For years The New York Times constantly published articles with a pro-Dilma/Lula tone. Right after Dilma’s reelection — which is now known to have been funded by money siphoned from state-owned companies — The NYT published a piece half-mocking 48 percent of voters that were concerned about Dilma’s economic and political approaches.

The good thing about bad journalism is that reality eventually catches up with it. Since that 2014 article, Dilma has since lost her job and is about to be impeached for illegal budgetary schemes and deep corruption. Her top aides are all in jail or about to be thrown there, accused of stealing dozens of billions of dollars, including former Ministers and three former treasurers of her Labor Party (which some people now deem to be the most dangerous job in the world). Brazil is in its worst economic crisis since the 1930s, which has been worsening since 2014 (while Dilma was coming up with her now-famous accounting tricks to fool the Brazilian voters). Lula had even become a frequent contributor of The Times after his presidency, but now faces criminal charges and has seen the federal police knock on his door with a coercive trip to the criminal courts.

In its recent opinion page about the failed Rio Olympic Games preparation, The NYT’s favorite Brazilian correspondent Vanessa Barbara wrote that “political turmoil has paralyzed the country and frozen the economy.” This rhetoric of blaming “political turmoil” for Latin American calamities does not help to set the record straight. The problems with the Olympic games stem directly from Dilma’s and Lula’s incompetence and corruption. But the problem also lies on media vehicles like The Times, always ready to turn a blind eye to mismanagement and corruption in the name of ideology.

So here we are. Brazil is a failing state after a decade of populist presidents, misguided policies and commodity boom, all under the auspices of the progressive press.

The Need for Laissez-Faire Liberalism

For a long time, Brazil has been a place where liberalism (i.e., the ideology of freedom and free markets) was mostly marginalized, despite its positive track-record. In the minds of most Brazilians, being liberal was conspiring for the wealthy, being socialist is taking care of the poor.

But if The Times does not want to recognize its mistakes, apparently the Brazilian population is more willing to deal with self-criticism. There is now a strong resurgence of liberalism throughout the country.

Partido Novo (“New Party”) is a new political party created with a clear liberal approach to the economy, and it is just one of the recent examples of how liberalism is growing in the country, waking up millions of Brazilians who were orphans of a liberal political leadership. Many creative and hardworking people that do not think that socialism (or heavy-handed South American social democracy) will make our countries more prosperous. There are substantial constituencies that want public policies driven by research, metrics and actual public interest.

Free Trade Is the Key

The European Union has no appetite and no urgency to negotiate any comprehensive trade agreement with Mercosur or other Latin American countries. The United States faces a choice between a populist protectionist and a trade-dubious democrat (to put it mildly).

It is essential for the world that someone — anyone — pushes forward the liberal pro-trade agenda. As we natives well know, it is never wise to bet on Brazil as a global force for good. But maybe — just maybe — because we are suffering first-hand the harms of a decade of interventionist, protectionist, and corrupted government, we can somehow understand that populism is an illusory lucky charm that actually curses a country for years to come; and maybe — just maybe — we can do something to redeem ourselves.

Now that international trade seems under constant attack from all places and political spectrums, and no big world economy wants to step up and bluntly defend the liberal track record — including the United States — maybe Brazil could become the champion of good policy at last, pushing for reforms throughout Latin America and holding the liberal torch high in these dark times.

As Roberto Campos advised decades ago, for us Brazilians there are only three ways out of the current mess: Rio’s airport, Sao Paulo’s airport, and Liberalism.

Felipe Capella is an attorney turned entrepreneur. He is a former law professor at the Federal University of Santa Catarina (Brazil), former attorney at Sullivan & Cromwell (New York) and the Inter-American Development Bank (Washington, DC), has Master degrees from UPenn/Wharton and Universidad Francisco de Vitoria (Spain), and holds an MBA from FGV (Brazil).

This article was published on and may be freely distributed, subject to a Creative Commons Attribution United States License, which requires that credit be given to the author.

Asset-Price Inflation Enters Its Dangerous Late Phase – Article by Brendan Brown

Asset-Price Inflation Enters Its Dangerous Late Phase – Article by Brendan Brown

The New Renaissance HatBrendan Brown
August 12, 2015

Asset price inflation, a disease whose source always lies in monetary disorder, is not a new affliction. It was virtually inevitable that the present wild experimentation by the Federal Reserve — joined by the Bank of Japan and ECB — would produce a severe outbreak. And indications from the markets are that the disease is in a late phase, though still short of the final deadly stage characterized by pervasive falls in asset markets, sometimes financial panic, and the onset of recession.

Global Signs of Danger

A key sign of danger, recognizable from historical patterns of how the disease progresses, is the combination of steep speculative temperature falls in some markets, with still-high — and in some cases, soaring — temperatures in other markets. Another sign is some pull-back in the carry trade, featuring, in particular, the uncovered arbitrage between a low (or zero) interest rate, and higher rate currencies. For now, however, this is still booming in some areas of the global market-place. Specifically, we now observe steep falls in commodity markets (also in commodity currencies and mining equities) which were the original area of the global market-place where the QE-asset price inflation disease attacked (back in 2009–11). Previously hot real estate markets in emerging market economies (especially China and Brazil) have cooled at least to a moderate extent. Most emerging market currencies — with the key exception of the Chinese yuan — once the darling of the carry traders, are in ugly bear markets. The Shanghai equity market bubble has burst.Yet in large areas of the high-yield credit markets (including in particular the so-called covenant-lite paper issued by highly leveraged corporations) speculative temperatures remain at scorching levels. Meanwhile, Silicon Valley equities (both in the public and private markets), and private equity funds enjoy fantasy valuations. Ten-year Spanish and Italian government bond yields are hovering below 2 percent, and hot spots in global advanced-economy real estate — whether San Francisco, Sydney, or Vancouver — just seem to get hotter, even though we should qualify these last two observations by noting the slump in the Canadian and Australian dollars. Also, there is tentative evidence that London high-end real estate is weakening somewhat.

How to Identify Late Stages of Asset Inflation

We can identify similar late phases of asset price inflation characterized by highly divergent speculative temperatures across markets in past episodes of the disease. In 1927–28, steep drops of speculative temperature in Florida real estate, the Berlin stock market, and then more generally in US real estate, occurred at the same time as speculative temperatures continued to soar in the US equity market. In the late 1980s, a crash in Wall Street equities (October 1987) did not mark the end-stage of asset price inflation but a late phase of the disease which featured still-rising speculation in real estate and high-yield credits.In the next episode of asset price inflation (the mid-late 1990s), the Asian currency and debt crisis in 1997, and the bursting of the Russian debt bubble the following year, accompanied still rising speculation in equities culminating in the Nasdaq bubble. In the episode of the mid-2000s, the first quakes in the credit markets during summer 2007 did not prevent a further build-up of speculation in equity markets and a soaring of speculative temperatures in winter 2007–08 and spring 2008 in commodity markets, especially oil.What insights can we gain from the identification of the QE-asset price inflation disease as being in a late phase?The skeptics would say not much. Each episode is highly distinct and the disease can “progress” in very different ways. Any prediction as to the next stage and its severity has much more to do with intuition than scientific observation. Indeed some critics go as far as to suggest that diagnosis and prognosis of this disease is so difficult that we should not even list it as such. Historically, such critics have ranged from Milton Friedman and Anna Schwartz (who do not even mention the disease in their epic monetary history of the US), to Alan Greenspan and Ben Bernanke who claimed throughout their years in power — and these included three virulent attacks of asset price inflation originating in the Federal Reserve — that it was futile to try to diagnose bubbles.

We Can’t Ignore the Problem Just Because It’s Hard to Measure

Difficulties in diagnosis though do not mean that the disease is phantom or safely ignored as just a minor nuisance. That observation holds as much in the field of economics as medicine. And indeed there may be a reliable way in which to prevent the disease from emerging in the first place. The critics do not engage with those who argue that the free society’s best defense against the asset price inflation disease is to follow John Stuart Mill’s prescription of making sure that “the monkey wrench does not get into the machinery of money.”Instead, the practitioners of “positive economics” demonstrate an aversion to analyzing a disease which cannot be readily identified by scientific measurement. Yes, the disease corrupts market signals, but by how much, where, and in what time sequence? Some empiricists might acknowledge the defining characteristic of the disease as “where monetary disequilibrium empowers forces of irrationality in global markets.” They might agree that flawed mental processes as described by the behavioral finance theorists become apparent at such times. But they despair at the lack of testable propositions.

Mis-Measuring Increases in Asset Prices

The critics who reject the usefulness of studying asset price inflation have no such qualms with respect to its twin disease — goods and services inflation. After all, we can depend on the official statisticians! In the present monetary inflation, a cumulative large decline in equilibrium real wages across much of the labor market, together with state of the art “hedonic accounting” (adjusting prices downward to take account of quality improvements) has meant that the official CPI has climbed by “only” 11 percent since the peak of the last business cycle (December 2007). The severity of the asset price inflation disease makes it implausible that the official statisticians are measuring correctly the force of monetary inflation in goods and services markets.

What Is the Final Stage?

A progression of the asset price inflation disease into its final stage (general speculative bust and recession) would mean the end of monetary inflation and also inflation in goods and services markets. What could bring about this transition? Most plausibly it will be a splintering of rose-colored spectacles worn by investors in the still hot speculative markets rather than Janet Yellen’s much heralded “lift-off” (raising official short-term rates from zero). What could cause the splinter? Perhaps it will be a sudden rush for the exit in the high-yield credit markets, provoked by alarm at losses on energy-related and emerging market paper. Or financial system stress could jump in consequence of the steep falls of speculative temperature already occurring (including China and commodities). Perhaps there will be a run from those European banks and credit funds which are up to their neck in Spanish and Italian government bonds. Or the Chinese currency could tumble as Beijing pulls back its support and the one trillion US dollar carry trade into the People’s Republic implodes. Perhaps scandal and shock, accompanied by economic disappointment will break the fantasy spell regarding US corporate earnings, especially in Silicon Valley. As the late French President Mitterrand used to say, “give time to Time!”

Brendan Brown is an associated scholar of the Mises Institute and is author of Euro Crash: How Asset Price Inflation Destroys the Wealth of Nations and The Global Curse of the Federal Reserve: Manifesto for a Second Monetarist Revolution. See Brendan Brown’s article archives.

This article was published on and may be freely distributed, subject to a Creative Commons Attribution United States License, which requires that credit be given to the author.