Micromanaging inflation: the Brazilian mistake

Here’s an article I recently found in a blog I follow, Economic Approach, and that I think it may help understand the brazilian economic background. From now on, the writings are not mine, and can be found in this blog.

Micromanaging inflation: the Brazilian mistake

From the implementation of the Real Plan until today, we can divide the economic policy in four periods: from 1994 to 1999 when the exchanged rate, the hikes in the policy rate and the change of the currency anchored inflation. From 1999 to 2002, the implementation of the three macroeconomic pillars that solidified the stabilization: primary surplus, floating exchange rate and inflation target. From 2003 to 2010, the maintenance of the macroeconomic pillars plus the focus on income policies (and the favorable external environment) put the country into a favorable position and consolidated better economic fundamentals. From 2010, a more heterodox approach was implemented and, so far, the results are far from desired.
The three pillars of the previous macroeconomic policy are gone. This per se is not the problem alone, but the fact that the government does not assume it is troubling. The exchange rate is managed, the tolerance with inflation is higher than it should be – the center of the target is 4,5%; the band is to accommodate supply shock and not to be used to achieve other goals – and the focus is only growth, and the fiscal responsibility a mere formality. The results: high inflation (here and here) and low growth (herehere and here). Actually the results though bad were far from a surprise (here).
The economic team has been tackling these issues in a wrong way. They’ve been stimulating demand trough credit market as tax reliefs, while the problem is on the supply side. Moreover, the protectionism (here) that was designed to give some relief to the industry is not helping, as the economic theory would prescribe. Furthermore, inflation has being “contained” viamicromanagement, i.e., the policymakers have been diminishing taxes and postponing price augments in order to keep inflation inside the band. This would be legit, if it wasn’t a bad strategy.
Prices are supposed to reflect relative scarcity of goods. If prices are rising the reasons could be: cost-inflation, inertial-inflation or demand-inflation. There’s an important degree of inertia in Brazilian inflation, but this should be tackled with credible and effective policies. There’s little reason to believe that current problem with overall prices are due to cost-issues. Thus, the demand is the problem.
If prices are rising because demand is higher, tax cuts would cause more problem. Adding the fact that the exchange rate cannot float to adjust and make foreign goods more competitive, it seems that there’s a need for interest rate to increase. However, the Central Bank (CB) seems to be willing to postpone any increase until the last second.
The problem is that monetary transmission takes time to occur. Usually it takes from 3 to 6 months to hit activity and 3 months more to hit inflation. This means that the CB next meeting in April will have more impact on next year’s inflation. Furthermore, if/when the hike cycle starts (I think it will this year), given that there’s a greater lenience with inflation, the cycle will not be as strong as it should be to bring inflation back to 4,5% (some economist estimate the need of a total increase of 400 bps), but a smaller one, just to guarantee that it won’t transpose the 6,5% upper band.
The previous macroeconomic policy scheme may be not optimal – as Dixit would say, the world is always at second-best, at best – but it seems better than the current architecture. Returning to floating exchange rates, inflation target and fiscal discipline could bring the tranquility the government needs to implement other important reforms the country need. Moreover, the political capital accumulated during President Lula’s government could work as a cushion and a political leverage for putting Brazil back on development track. So far, I only see short-run focus, but I still hope for a course change.
– João Ricardo M. G. Costa Filho



The Emperor’s New Clothes

Walking randomly on the internet, I found this amazing article by Robert Nielsen, which complains about the fuzzy people make around econometric models. 
Obviously, I’m not saying (and that’s not the sense of the text) that every single econometric model is wrong. They might be simply incomplete (I mean, very incomplete) and we can’t rely just on them. And we usually do.

The fact is: life can be numbers, but we cannot take it too seriously now. We don’t have all the competencies yet. Even Alan Greenspan released an article last week talking about the advances on how to forecast irrational economic behavior.


It’s not that they don’t know what they’re saying… but they don’t.

It’s an interesting tale… take a look on HERE.

A little bit of Keynesianism on Iceland, by Naked Capitalism.

This post can be originally read at: http://www.nakedcapitalism.com/2013/05/icelands-post-crisis-economy-a-myth-or-a-miracle.html

… and was posted on May 21.

Iceland’s Post-Crisis Economy: A Myth or a Miracle?

Jon Danielsson, Director of the ESRC funded Systemic Risk Centre, London School of Economics.

When the Global Crisis struck in September 2008, all eyes were on the US (Eichengreen and Baldwin 2008). Iceland, however, was the first country to really suffer. Its three major banks collapsed in the same week in October 2008, and it became the first developed country to request assistance from the IMF in 30 years. GDP fell 65% in euro terms, many companies went bankrupt and others moved abroad. At the time, a third of the population considered emigration as a good option (Danielsson 2008).

Since then, Iceland’s economic recovery has been hailed as a miracle, especially by foreign commentators. It is therefore baffling to many that the Icelanders just voted out the government responsible for the post-Crisis recovery, returning the parties responsible for the pre-Crisis boom and bust to power. What’s going on?

The numbers look good

By first sight, the Icelandic economy looks to be doing surprisingly well. Inflation is 3%, unemployment is 5%, and the government budget is almost balanced. The currency stable and the economy grew 1.6% last year. The government is seen to have dealt firmly with foreign creditors and not bailed out its banks. Domestic creditors and the welfare system have supposedly been protected. Based on this record, the government could be expected to be the most popular in Europe. So why did it get voted out?

The positive economic statistics hide a multitude of sins, relating to government policies in the run-up to elections and bad economic management. OECD (2013) finds that Iceland suffered the worst percentage change in household market income between 2007 and 2010.

The rot underneath

The exchange rate of the Icelandic currency is firmly in the hand of the central bank since the country operates under strict capital controls (see Arnason and Danielsson 2011). Iceland is facing significant balance of payment problems. These will get worse over the coming years because large amounts of money owned by foreign entities are trapped in Iceland by the capital controls. When this money leaves the exchange rate is likely to fall. In spite of this, the exchange rate appreciated sharply in the run-up to the elections, reaching a peak right before the voting date. This temporarily stimulated the economy and held down inflation. Since the election, the currency has been falling.

There are other indications of future inflation, for example public sector wages have been rising in recent months. Based on past history, the most likely response of the Icelandic government will be to inflate away the impact of the salary increases.

Moreover, the national accounts that indicate a nearly balanced budget do not hold up to scrutiny. The recent slowdown in economic activity has reduced government revenue while actual and promised expenditures in the months before the election increased. Meanwhile, official statistics systematically exclude one-off items such as the continuous support for the government housing fund and unfunded pension liabilities. When those are included, the fiscal position of the government is precarious.

The main problem is lack of investment

The main long-run economic problem facing Iceland is its low and falling investment rate. Before the crisis, Iceland invested at the same rate as the rest of Europe, around 21% of GDP. Last year, the Icelandic investment rates fell to 14% of GDP, the fifth lowest in Europe. This is set to worsen. The Central Bank forecasts private-sector investment will fall 23% this year, whilst overall investment may fall by 9%.

Investment has been held back by three main factors:

  • Capital controls.
  • Political views on investment.
  • Tax policy.

Following its crisis in the fall of 2008, the government, the Central Bank and the IMF considered capital controls necessary because of the large amounts of money held by carry traders – this exceeded 40% of GDP. The authorities felt capital controls were necessary to prevent the money from leaving, causing the exchange rate to collapse.

The controls were meant to be temporary – a few weeks at most. Years later, they are still present today, and getting stronger. The controls led to a collapse in investment for the very simple reason that any potential investor is worried about being locked in an unstable currency controlled by a less than competent government. Those with the ability to invest have preferred to keep their options open by keeping their funds liquid.

Investment has also been held back by political interference in economic policy. The outgoing government was composed of two parties: left-of-centre Social Democrats and the left-wing Green Party (the latest incarnation of the Soviet-leaning Communist Party). The government has been overtly hostile to private-sector investment – especially foreign direct investment. They have frequently intervened in individual investment choices.

Investment is also affected by the tax regime. Tax rates in Iceland, not surprisingly, have increased following the Crisis. Moreover, the tax regime has changed frequently, thus increasing the uncertainty for potential investors. This tax risk significantly contributes to low investment rates.

Welfare system and the protection of the poor

The outgoing government consistently maintained that it ringfenced the welfare system and protected the poorest in society. The Icelanders do not perceive it that way. After all, the OECD (2013) finds that market income inequality rose considerably in Iceland.

The welfare system has borne the brunt of the government’s economic policies. The pension system has been raided, especially affecting those with low pensions. Perhaps 1% of the population is dependent on charities for food. The health system has been scaled back, with co-payments increasing sharply. These policies have hit the poorest especially hard.

Loans available to Icelandic households have traditionally been inflation indexed or linked to foreign currencies. This meant that the post-Crisis debt burden increased sharply for many households. Iceland has seen significant debt relief, primarily because the courts have declared foreign-currency link loans to be illegal. This however has mostly benefitted the wealthiest parts of society.

Friendliness towards foreign creditors

The main reason why the Icelanders voted out their government was its deference towards foreign creditors. Iceland came under significant pressure from the IMF to accommodate foreign creditors, and the government gave in.

The most important dispute with foreign creditors is related to Icesave (see Danielsson 2010). Whilst an overwhelming majority of the population strongly opposed the Icesave settlement which cost Iceland 40% of its GDP, the government pressed ahead.

In addition, when resolving claims by foreign creditors to the remaining assets of the banking system, the government has handed the domestic banks to foreign vulture funds. Meanwhile, it has been accommodating to foreign creditors seeking to repatriate funds locked in Iceland because of the capital controls.

All of these policies were vocally opposed by voters. In the election campaign, foreign creditor friendliness was a major issue, and it is no wonder that the one party that most strongly opposed the Icesave deal – and the one that took the firmest position against foreign creditors – has emerged as the biggest victor in the election.


While it is surprising to many foreign observers that the Icelanders have chosen to return to the status quo ex ante, it is logical given how poorly governed Iceland has been since its crisis.

The voters opted for the same centre-right parties responsible for the pre-crisis boom. They want a government that:

  • Implements sensible pro-growth policies.
  • Firmly opposes EU membership.
  • Takes a firm line against foreign creditors.

All while working to lift capital controls and further integrating Iceland into the world economy. Icelander elected the new government because they have more trust in their ability to deliver on this list than did its left-of-centre predecessor.


Arnason, R and Jon Danielsson (2011) Iceland and the IMF: Why the capital controls are entirely wrong”, VoxEU.org, 14 November.

Danielsson, Jon (2008), “The first casualty of the crisis: Iceland”, VoxEU.org, 12 November.

Danielsson, Jon (2010), “The saga of Icesave: A new CEPR Policy Insight”, VoxEU.org, 26 January.

OECD (2013) ”Crisis squeezes income and puts pressure on inequality and poverty“, oecd.org.

Read more at http://www.nakedcapitalism.com/2013/05/icelands-post-crisis-economy-a-myth-or-a-miracle.html#YwceogP20kwRpq7W.99

Around the Globe 04.22.2013

interesting point of view.


Bernanke to Skip Jackson Hole Due to Scheduling Conflict.


The reason Bernanke is skipping the annual Fedapollooza is because he will not serve a third term after 2014.  It will be interesting to see who leads the Fed at the annual J-Hole conference, because this may telegraph the next Fed head.  My money is on Janet Yellen.

Caterpillar Earnings, Revenue Fall Short; Slashes 2013 Outlook.

CAT 04.22.2013

Caterpillar serves as a bellwether for the mining industry and China.  CAT’s story today is that profits are 45% less than last year’s first quarter results while revenues plunged 17%.  The metals bubble seems to have burst sapping demand for CAT’s mining equipment.  CAT is a China play, and decreaAT.

Barroso Calls for Growth Over Austerity – WSJ.com.

Eurozone Economic Performance

The EU is beginning to play a different tune.  The reason for the policy shift is not a deep concern for countries of the…

View original post 434 more words

Why Germany (Mistakenly) Thinks it Can Kill Its Export Markets Through Austerity and Still Prosper? (Naked Capitalism)

Why Germany (Mistakenly) Thinks it Can Kill Its Export Markets Through Austerity and Still Prosper? (Naked Capitalism)

Although this text (from the blog Naked Capitalism) is very structured and good in numbers, comparing Germany Imports (M) and Exports (X), and their deficits with countries like China, Japan and surplus with Europeans, and says that Germans are killing their own “customers”.

(There is some Japan – China – USA thoughts, but I’ll skip this part for now).

I don’t see that way.

First, the huge deficit that Germany keeps with economies out of the euro zone possibly are all about their production to export, since their export rates are about 90% of GDP. If they’re “dreaming” about finding other markets, it’s because they see this perspective. They sold to Europe while it worth, and if they can change their focus on production to other markets, their imports would not be the same, neither quantities, or deficits.
Second, rolling other countries debt do keep them buying from you is, at least, irresponsible. China and USA are pretty aware of that.

Third, and last, we are talking about 80 million workaholics, thought since young age to be that way, who built and re-built the country 3 times in the last 120 years, and these 3 times, they were between the 3 major economies.

They’re not playing around… 

Worth the visit. http://www.nakedcapitalism.com

Why Do We Print Money? | Robert Nielsen

Text from Why Do We Print Money? | Robert Nielsen. Excellent!
There is a lot more consequences, but simplifying, that’s it…


“Printing money seems like a no-brainer. Surely it’s extremely obvious that printing money is a recipe for disaster that will result in hyperinflation. Surely the obvious action is to not print money and therefore avoid inflation. Yet every year, every country prints money. Why? Surely the money supply should be fixed. What possible reason could central banks have for risking massive inflation? Why do we print money?

The first and most obvious reason for printing money is to replace old notes in the system. Notes get worn down through use, so it’s necessary to print new ones to replace them. Take a moment to think through why we do this and what would happen if we didn’t. Businesses would start to suffer from a cash flow problem. It would be harder to pay bills and wages, and spending as a whole would slow down. As spending is what drives the economy, this means the economy would slow down. In this sense, printing money is a bit like oiling the gears of an engine, it helps the whole system run more smoothly.

This leads onto the second reason we print money. This is because a growing economy requires it. Think about it, if the economy is getting bigger (through economic and population growth) then there is a greater demand for money. As there are more people, there are more customers. As they are more goods being produced, there must be an increase in the amount of money to buy these goods. If the money supply does not increase, then the economy creates bottlenecks which act as a brake on growth.

Most people assume that printing money automatically leads to inflation without thinking through the steps of how this happens. If you do, you realise there can be exceptions to this rule. Let’s say the government prints a lot of money and puts it into the bank. The bank then lends this money out to people who spend it. Here’s the crucial part. Inflation will occur if demand exceeds supply. If there are more people willing to buy the goods than the shops can sell, then businesses will raise their prices.

However, it should be clear that there is a big hole in this logic. This will only hold true if businesses are at or near full capacity. If there is significant unemployment of resources, then there will not be large amounts of inflation. If a business is struggling and near bankrupt with a large amount of unsold stock, then an increase in demand will not lead to a price rise. If factories are not running at full capabilities but instead are in a slow period, then they can easily increase production in the short run without increasing prices. In other words, if the economy is not at potential output, then printing money may not lead to inflation.

This describes our current situation. The economy is not at full capacity, most businesses are in a slow period. Inflation is very low and demand is weak. Hence the large increase in the money supply in America (called Quantitative Easing) has not led to run away hyperinflation despite the warnings of Austrian Economists. This is because the economy is so weak that it can absorb the increase without resulting in inflation. Even more important is the role of the banks. As I mentioned before, newly printed money is usually deposited in banks. However, if banks are near bankruptcy they will be unwilling to make new loans, so the money supply may not actually increase if money is printed. Why do it then? Well if the newly printed money is held as deposits, it helps the banks starve off insolvency and collapsing, which would bring the rest of the economy down with it.

So is printing money bad then? Well yes and no. As I discussed, there are times (like right now) when it doesn’t lead to massive inflation but can actually help boost the economy and give it a stimulus. So does that mean we can print our way out of recession? Well, no. You see, printing money only works if the economy is under-capacity, at a certain point the limit is reached and after that inflation kicks in. So if a business is operating at 50% of possible production, an increase in demand is helpful and doesn’t lead to inflation. However, once it reaches 90% or thereabouts, it cannot keep up with demand and will have to incur extra costs to meet demand, causing prices to rise. So a little money printing isn’t damaging, but too much is (a rule that applies to most things in life). So what is the right amount? The problem is no one knows for sure and there is a great deal of hit-and-miss in the process.

Even when inflation does occur, this isn’t always a bad thing (I’m referring of course to moderate single digit inflation). It acts as a spur to the economy to keep it going. For example if you know that something will cost more tomorrow than it does today, then you will buy it today. This keeps the shop in business and its staff in a job. The Irish housing market is an example of this system in reverse. House prices are declining, so no one is buying houses (why would you when it will be cheaper next month?). This means businesses in the housing sector go bankrupt because no one is buying, leading to unemployment and economic decline. The lack of inflation causes uncertainty and slow down. What the housing sector needs is rising prices, so although it sounds counter-intuitive, inflation would be a good thing for it. Inflation is also good for reducing the size of debts, which is a good sign in our heavily indebted economy.

Now hopefully, you’re still following me, but you might be thinking about Weimar Germany. Didn’t printing money lead to massive hyperinflation and Hitler? Well, that’s an example of a policy taken to an extreme. I’m not suggesting unlimited money printing, only a moderate amount. Anything taken to an extreme will be disastrous. (And it was the mass unemployment of the Great Depression that lead to the rise of the Nazi Party who were insignificant during the Great Hyperinflation). When you look at examples of hyperinflation in history they almost always happenduring times of political instability and war. The chart below lists the worst hyperinflations in history and it is clear that almost all occur when the state was on the verge of collapse, mostly around the time of the First and Second World War and the collapse of the Soviet Union. (Zimbabwe is the main exception in that it wasn’t at war, though it was very politically unstable). Simply printing money by itself is never the sole cause.

The worst cases of hyperinflation in history

The worst cases of hyperinflation in history

So that’s why we print money. It may sound strange and a recipe for disaster, but it is actually a necessary part of the economy, especially in times of recession. When the economy is not fully using its resources, it can provide a necessary boost. So long as it is kept under control, there is no reason to fear massive inflation. So it turns out there is a method in the madness after all.”

Economy and Business

I know, I know…


This blog was about the vision that we, Brazilians, have on our economy, and what we think about what’s happening around the world, but I almost can’t control myself.


I’m excited with the possibility of bringing to Sao Paulo a workshop of the Lean Startup Machine. They purpose seems to be what I wanted and waited for having around.


Well, on our prime subject, we have the new rules set up by the government over the Savings accounts. As Prof. Dr. José Oreiro said in his blog, if the “selic” (the basic interest rate) falls to 8.5% y, Savings accounts will be more profitable than Investment Funds, which implies on difficulties to the government to rolls its debt, and to the larger investments. In Brazil, 70 or 75% (I don’t remember the exact number, but is around this) must be directed by banks to the Real State financing system.



So, we must have probems ahead? I don’t think so.. Dilma’s government had been fast enough on several subjects, but it can delay some important changes.


And, but not less important, we had, few days ago, an forced reduction on our direct credit rates. It fell by 50% for some people. It must re-arm the economy.


Thats all for today. have a nice day!

Greece and Brazil Issues

Hello Gentlemen,


Today, I am a little mesmerized about a thing that happened this week. The “mama’s boy” Thiago Aguiar, a Sao Paulo University student that went to Greece and made a video with a greek saying to the University Director, João Grandino Rodas, to leave his chair.

http://blogs.estadao.com.br/ponto-edu/fora-rodas-diz-militante-grego/ (chrome will make a poor translation, but you can get to the point).

Look, I am a USP student, and all we know is that this riot attempt is made by few mama’s boys, from upper middle class, that usually have their own cars (paid by daddy’s, once a car in Brazil costs 3 times than US, cause of the taxes, and they would never pay themselves this bill) and are “touched” by the desire to smoke marijuana in peace, but hide it from the society saying that the police are truculent and demanding they leave the campus. It’s briefly this.

I won’t speak about marijuana legalization, but one thing I know: do it in your homes, university is not a place to get high. Heck! (sorry about this!)

Despite of the millions of “not of your business” I’ve been hearing around here for this “greek manifest”, I should say then to not to trust what these guys says… they’re as dangerous as Angela Merkel plan for Greece!

By the way, George Soros is one guy that must be admired. He built his fortune and is beeing able to keep it trough a great crisis. No one can say that he don’t know deeply what he does on financial markets.

And he said Merkel is “leading Europe in the wrong direction”:


and I do thinkthis way, either. Even before he said that. Why?

Well, it’s innocence to think that a leader of another country, specially a richer one that have lot’s of money in your hands, will care for the good of your people. They are trying to save lots of German investment banks. That’s it, only it.

The fact is Greeks spent money they didn’t have, in goods they didn’t produce, with jobs broadly given by the government. The bill is there to be paid, and no one will do it for them. They will suffer the consequence of to believe in a easy life promise… and they can’t blame their politicians, they had time to see something was wrong, before feeling they were great, as most Europe people feel (and act) about the rest of the world.

They only are needed in Europe, now, as a glue, that keeps Spain, Portugal and Italy in the EU, believing that pay their debt is quintessential, and saving and keeping the German advantage above all markets.


In other words: if Greece take 10 years to recover by yourself, it will take 3x longer with EU.


That’s it for today.


Have a nice weekend!

Digeus SnapIt

Hi again, twice this day uh?!

I am back here just to give few words about a product I’ve been testing and proved to make my life easier.

It’s a Screen Capture app, very usefull for capture anything you see on your PC screen.

You can do it with SnapIt. It is convenient tool for bloggers (like me) who capture and crop images for their posts or graphic designers who needs to create snapshot videos, for tech writers who need to describe menus and interfaces of applications, web designers and those who work with graphics every day. It captures and auto saves images with one click.

Digeus SnapIt

* Supports hotkeys, auto-saving, clipboard

* Automatically copies screenshots to the clipboard

* Tracks capture history, auto-saves captured images

* Saves files in BMP, GIF, JPEG, PNG and TIFF formats

* Auto-names captured images

Feel free to contact Digeus and test their software, by this link:
Screen Capture Software