An economics, investment, trading and policy blog with a focus on Modern Monetary Theory (MMT). We seek the truth, avoid the mainstream and are virulently anti-neoliberalism.
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Sunday, September 20, 2015
Gabriel Petrus — Dilma’s Dilemma: Welfare-state dream and fiscal reality
It's clear that Brazil doesn't have a solvency problem - at New Economic Perspectives they have done a great job in thoroughly debunking this S&P claim.
However it would be even more important to refute the analysis held by a large majority of Brazilian economists, pundits and politicians: that the country - quite apart from the "solvency" issue - needs austerity in order to:
1. Control and reverse inflation (currently running at an annual 9% rate) and
2. Prevent massive capital flight and thus an even greater pressure on the Real exchange rate, that has already plunged in value in the last few weeks (this will negatively impact inflation, though beneficial to aggregate demand).
Absent an alternative theory/model for diagnosing the causes of Brazil's macroeconomic problems and support non-austerity policies the country looks destined to a sort of repetition of the U.S. deep recession of the early 1980s - not to mention the more recent and infamous experiences of European countries that (unlike Brazil) lack monetary sovereignty.
"Absent an alternative theory/model for diagnosing the causes of Brazil's macroeconomic (MoronEconomic) problems and support non-austerity policies the country looks destined to a sort of repetition of the U.S. deep (MoronFest) recession of the early 1980s - not to mention the more recent and infamous (IMF policy) experiences of European countries that (unlike Brazil) lack monetary sovereignty (you won't have to fire any V2's this time, just come and take our stuff. Really.)."
"Control and reverse inflation (currently running at an annual 9% rate) and"
You control and reverse inflation by allowing things to go bust, allowing jobs to fail and investigating competition. But most of all you do it by making sure creditors take a hit.
If you know putting prices up is almost certainly going to lead to the destruction of your business, job, lifestyle, then you don't tend to do it, and the people lending you the money won't let your do it.
The problem, as always, is that nobody will take the hard decision that upsets other people, and if there is a hard decision to make it always favours making creditor whole.
I say again - capitalism without bankruptcy is like catholicism without hellfire. It doesn't work.
It's no longer a matter of the exchange rate, Brazil now has expectational inflation rooted in the economy which must be addressed by means other than spending policy.
Phase One is a national wage and price freeze. Can be popular if messaging is correct but pressure from growing inefficiencies and injustices will quickly reduce support for the program. Alongside the freeze the government should adopt an Instant Prosperity campaign of spending toward full employment by amending the legal code to permit direct purchases of government securities by the central bank. This will generate the necessary counterpressure giving government the time necessary to move into. . .
Phase Two: a flexible incomes policy that eliminates pressures entirely. Price and wage increases will be allowed in line with average productivity growth and concentrated in sectors with high employment and high demand, retaining the market mechanisms which signal where workers should move to and what goods consumers should direct their spending toward. An Office of Price Administration can be left permanently in place to bring inflation to zero.
Phase Three will reduce the central bank's interest rate and abandon any policy seeking to limit the movement of the national currency on international markets. From hereon the government would pay no mind whatsoever to the relative value of its currency. If investors wish to send their money out of the country, let them on the condition their financial wealth can never return. The central government can provide all the financing necessary for productive investment.
The Real did an epic reversal as the Brazil investment boom collapsed. From a decades high it did a swan dive while food, commodities and fuel are priced in USD. Germany, Japan and China like to get paid in US Dollars or Euros for consumer goods. If the USD is a problem, the simplest solutions is, don't use it. Use the Real instead.
The government can not make the change right now while they are in crisis, a weak position, as it would causes panic and an even weaker Real, but they could have made the change a few years ago when the Real was strong, too strong, and the the government was implementing capital controls to weaken the Real. I haven't seen the data, but the capital controls implemented during the go-go years probably forced industry and banks to use USD debt and investment.
This is something that MMT needs to deal with, how to better design currency markets, best practices, without resorting to ad-hominem about traders, ideological slogans about capitalism and the evils of banking, and try to focus on reality because the entire premise of MMT is that the currency can buffer the economy and keep prices stable. If so, describe how to maximize the benefit, in detail, in reality.
In Brazil something isn't working, or more precisely, lots of people aren't working and there appears to be negative fiscal space -- the currency is no help at all it actually makes things worse.
What does a seawall look like in finance and currency terms?
also
Who would fall into bankruptcy? What companies does Brazil protect from bankruptcy? The most vulnerable look like the poor people that need to buy food and energy.
Why have high rates, contributing to raising prices due to increased incomes from the IR channel? Don't provide forex liquidity, force reduced leverage through regulation, don't let the banks provide liquidity for trades, then corporations will be forced to balance their Real/USD balances and liquidate USD assets/reserves (which they got plenty of).
'Starve' them of Real through regulatory changes and that will stabilize the exchange rate and inflation. That will trigger deflation and failing business sure, but then the govt must be ready to steep in and provide labor market stability so the most poor don't end up starving. As long as they don't have increasing inflation the government has policy space, and they won't.
In the end is very simple: don't always let the private sector financial sector do what they want to do, because is not always the best thing. A simple rule some freaking politicians should learn.
before you can diagnose the exact cause and thereby provide some meaningful analysis and policy suggestions, you need to know what the hell is really happening.
inflation indices use dozens or hundreds of product markers and without the data you dont know anything. I dont have the time to get into it but here's a good example:
"Consumer prices in Brazil increased 9.53 percent year-on-year in August of 2015, slowing slightly from a 9.56 percent rise in July. The monthly inflation rate eased for the second straight month to 0.22 percent, the lowest since July of 2014.
On a monthly basis, the highest upward pressure came from prices of personal expenses (up 0.75 percent), followed by health and personal care (up 0.62 percent), education (up0.82 percent) and housing (up 0.29 percent).
In contrast, transport prices fell 0.27 percent, mainly driven by a 24.9 percent drop in cost of air fare while cost of food and non-alcoholic beverages was marginally unchanged."
So what is included in "personal expenses"? Are there monopoly and oligopoly conditions in a relatively large % of this component that prevent competition from doing its thing and keeping prices in check? what about the suppliers to the companies that provide the goods and services in the "personal expenses" category?
Health care sector prices are way up. Its a single payer system, so why the hell is the govt raising its spending so much thereby driving inflation? If inflation is running at 9%, maybe only increase your spending by 5% pulling back on inflation.
Education is another Govt run sector, same thing. You need to anchor spending and inflation with exogenous Govt decision making when inflation is a problem, not drive it onward.
Again with housing, as Matt likes to point about how the Govt is directly responsible for home prices due to their bank regulations. If you relax the down payment standard from 20% down to only 3% down payment, then no fucking shit your going to get home price increases. Clamp down on income to debt load rules.
Transportation gave a deflationary contribution, great. What helped with that? Is there anything specific that happened that can be duplicated and expanded in that industry or potentially others?
CPI is just a moving average, if you want to bring the average down you need to look at the components and try to move some specific things around (reduce an increase here, accelerate a decrease there). Promote productivity and competition, invest heavily in domestic over-production like the Chinese do. Thinking inflation is just some simple thing that can be controlled by changing interest rates is an idiotic and ignorant mythology.
Zimbabwe had 900% interest rates during their crises period and still had hyperinflation. If only they had raised interest rates to 1200% then the central bank would have licked that inflation good.....HAHAHA so dumb.
Well, positive feedback loops everywhere Auburn, coming from the government itself first.
As long as commodity demand was high and that drove Real exchange rate up and capital in it was obfuscated, when the whole edifice blows up then you can see all the problems. I'm pretty sure in half the cases it can be traced back to corruption of some sort with government artificially inflating prices because it benefits some people.
Someone has to give, and it usually can be summarized into either the elites have to give some privileges (and let competition and capitalism happen), or the majority of the population gets crushed through diminished real incomes. Someone has to give.
If people need more healthcare and are demanding more at any price, then inflation in the sector can help allocate more resources to it. But if it is like the USA where intermediaries, labor groups and government collude to swindle consumers, well, then. No way to know without digging in. And in a single payer system, people can demand more than they need because there is no cost to themselves, free appendix removals, get 'em while they are hot! I'm no familiarity with Brazil micro, no idea at all.
Their inflation rate is just about the same as their policy rate...
If they went to ZIRP they would probably get the result they were looking for as far as prices..... or it would at least help considerably...
Yes Auburn, and then they raise the conforming loan amount to $417k and then homes go to $417k and they act all surprised... have their DoD paying $50 for a sheet of 1/2" plywood and wipe out all the yards of inventory then scratch their heads when housing goes to $175 psf... then remove the bid and prices collapse down to $125 creating a banking crisis and they cant figure it out....
The left's answer is to trot out the Joe Stiglitz of the world who all they can say is "things are all screwed up!" .... well no shit sherlock....
Again we are witnessing UNQUALIFIED/INCOMPETENT people at work in this.... have to get them out of there...
People can demand more services but that doesn't mean govt has to raise their price of procedures. Remember that cpi measures price changes and not quantity changes. And there is no strong evidence to support the belief that single payer systems result in major increases in unnecessary services. People don't get operations because they are fun. An increase in services is good and to be expected, its unethical to ration health care on account of low incomes.
"The usual economic theories seem unable to explain the main features of the Brazilian economy."
This sounds very much like Argentina or other S.A. economies tbh. My first suspicion would be a dysfunctional corrupt system where the government controls the currency (ie. not like Greece, where the only options are deflationary due to the system being controlled by other government or institutions) and is not acting competently regarding regulations, instead is being pro-cyclical and bidding up due to private interests and government officials being in the game.
High interest rates help to increase inflation, not the other way around, unless the system is already has very high levels of private debt and low savings. It's pro-cyclical.
"The most vulnerable look like the poor people that need to buy food and energy."
It always does. But that's what rationing and job guarantees are for to catch people as they fall, put them back on their feet and get them going again.
But prior to that policy should ensure that you have diversity of supply and the other *real* structures in place that ensure you have a robust economy.
There is a trade off between resilience and efficiency in any complex flow system. The problem is that neo-liberalism pushes for efficiency over everything else - to allow maximum extraction. That makes the structure highly coupled and brittle.
Business bankruptcies still favour the creditors too much - here in the UK if you have a lease on a property for a business you remain liable for it regardless of whether the business survives or not. Unsurprisingly the inability to 'bankrupt' the lease puts people off setting up businesses. Great for landlords. Great for big businesses. Bad for diversity and renewal.
Without a job guarantee it is very difficult for the government to start collapsing businesses that charge too much.
You need to take a Thatcher approach to the economy and initiate a controlled explosion in the economy to break apart the vested interests.
But it depends how much real power the state has. Argentina for example can never get on top of the powerful agribusiness, and I'd be surprised if the UK could now control its oversized financial industry.
Yes, maybe high interest rates, on balance, help to increase aggregate demand and thus possibly inflation also - but if this is so, the effect is insufficient since the country is now undergoing a recession induced by insufficient demand.
The government now spends over 300 billion reais a year on interest payments to mostly wealthy and domestic creditors (including individuals, domestic corporations and banks). Maybe their propensity to consume on these payments is relatively low. I'm not aware of any studies written here on this highly relevant topic.
Spending on social programs targeted to lower income groups, while increasing in recent years, is still a modest fraction of spending on interest on the Public debt.
"Spending on social programs targeted to lower income groups, while increasing in recent years, is still a modest fraction of spending on interest on the Public debt."
You need to get under the Reals and find out how the price rises stick. Is it habit, a failure to invest, or lack of effective competition?
iirc their internal transportation fuel is alcohol produced domestically while the petroleum they produce for export...
so if the oil price falls they take a hit in terms of trade meanwhile no one benefits domestically from the lower oil prices as they are buying domestic alcohol the price of which probably hasnt changed other than up a bit...
Jose wasn't much of the previous activity driven by foreign investment and export-led growth? The decrease on external demand has "induced" the current recession. on top of that the exchange rate is has gone down due to the commodity prices, this is a driver of local inflation if certain goods are mostly imported.
Have no idea but could be the case for example for certain medicines or medical equipment, capital goods needed for production, and ofc some consumer goods. So you got on the one side disappearing demand because lower exports and higher inflationary pressure due to imports being more expensive in the local currency with new exchange rates.
If you add on top the government not doing anything to stop this, and even bidding up on certain markets due to social, political circumstances or private interests it will also help inducing higher inflation while demand is weakening on aggregate. Locals and corporations are also probably dis-investing and sending money overseas further pressuring the exchange rate down, and the financial system is providing liquidity without restrictions.
Lower interest rates, strict regulatory changes and crushing down liquidity/reducing leverage to reduce forex leakages, and some recession which cleans up the bad business while increasing spending on programs which benefit the low-income households and boost employment meanwhile to increase internal demand should help. This is what happening in China now.
The restructuring of the economy which was built on top of certain sectors will take a while, the inflation hit is probably unavoidable but is a singular event if the govt does its job to not provide liquidity where is not needed (basically stop the financial sector).
Unfortunately private interests and a weak state will stop this from happening though...
The basic position of neoliberalism about free markets, free trade, and free capital flows is advertised as being an economic panacea that delivers maximum prosperity in the short time and in the most efficient way. That assertion is a gross overstatement of the facts based on history.
The reality is that all choice involve tradeoffs, which means winners and losers. Neoliberalism is rigged so that TPTB and their cronies and minions are the winners and the rest of the people, the vast majority, are the losers.
There is no fixing this. It must be changed to put the people first.
Neoliberal "capitalism" is putting capital first, and making the people and environment serve capital.
"Socialism" is putting the people and environment first and making capital serve them.
Let's not beat around bush, but rather go for the throat.
The left's answer is to trot out the Joe Stiglitz of the world who all they can say is "things are all screwed up!" .... well no shit sherlock....
Trundling out Noble winners to reinforce this is actually hugely important in a world in which perception is reality, and celebrity is a means of managing perception. All PR people and political strategists-operative know this and practice it assiduously — and get paid big bucks for it.
Overuse of medical services owing to prices being too low is a neoliberal myth. It is total nonsense, like all unemployment being voluntary. It just follows from the model so it is asserted as necessarily true wrt reality.
That involves a logical fallacy.
Descriptions assert a possible state of affairs and asset that it is true or false semantically, that is, wrt to fact. But no descriptive proposition can show that the assertion or negation in actually true independently of fact-checking.
The medical claim is specious since medical treatment is a need and not a want, and it cannot be hoarded either. The only issue is hypochondria, and that is a medical condition that requires treatment.
Brazil's unemployment rate is high and accelerating which makes the current rate of inflation unlikely to be a problem of excess demand. If demand/spending/Inflation I were the problem we would not expect to see simultaneous depression.
From my limited POV, the situation is Brazil seems to be to be caused by endemic corruption that difficult to root out, and years of control by an elite that got used to getting its neoliberal way.
Left to itself and with adequate power, the leftist government could likely reverse this as it had been doing before the crisis. But powerful forces now seem to be digging in to make use of disaster capitalism to reverse previous losses from their POV.
Again, this appears to be chiefly a social and political issue involving class status and class power rather than primarily an economic one, as it would appear, so that economic means alone will likely not suffice.
There is a trade off between resilience and efficiency in any complex flow system. The problem is that neo-liberalism pushes for efficiency over everything else - to allow maximum extraction. That makes the structure highly coupled and brittle.
Perfect and neoliberals consider that a feature than a bug. In fact, it's built into the design of the system for extraction, which what neoliberalism is about behind the façade of propaganda, including conventional economic and financial theory
"Socialism is putting the environment first" I don't think political system is about the environment.
Capitalism has a mixed record. Got any big successes you can think of among socialist nations? I'm dubious, so I'm of course thinking about the failures, Lake Maracaibo, Russian Energy and Nuclear pollution and waste, China's unprecedented pollution.
Capitalism has had failures, Fukushima comes to mind in recent times, though electricity and nuclear in particular in Japan is mostly socialized and centrally planned. Apple and their pollution evasion in China with the cancer plumes was the worst of capitalism/socialism until they got caught and cleaned up their act. Neoliberal Capitalism has done a better job of ensuring companies pay for the costs of their pollution once it is discovered in recent decades than in the past. I don't know socialist records on pollution as well.
With the real rate of interest running so high, investment would have to be heavily rent-extractive to be competitive against that rate wrt risk/reward.
That's the standard answer to "socialism." Just like "Weimar and Zimbabwe" to MMT.
It is a logical fallacy to claim that social can never work anywhere in the future because it either got hijacked by another elite that replace the previous elite, or the socialist government could not pull it off in a capitalistic global environment in which it was being opposed political, economically, financially, and even militarily.
China is showing, for example, that it is possible to have a market economy under socialism rather than neoliberal capitalism.
They are also dealing with the "endowment" of a political elite as an "inheritance" of the Revolution, which actually was a huge blessing for China considering its imperial past. The problem with it is that as the spirit of the revolution wanes, corruption creeps in. Now it is nearly as endemic as it was in imperial times under the feudal warlords.
Corruption is an ongoing issue in politics, which is about power, hence wealth also, in any political system. Frequently changing governments with democratic elections has not removed that or even reduced it greatly.
In sense, the US more corrupt that China. In China those at the top of the financial system would have been investigated, tried and some executed under the current rules there. In the US, they all got a pass with the shareholders they supposedly represent paying some token fines. Not even any clawbacks and or seriously reforming the system. Now that is some real corruption.
And now the (in)famous Jim Cramer is saying that Petrobrás dollar debt ($ 111 billion) is the number one problem in the world because of its size, the unsustainability of its 10.5% yield and the fact that Brazil is the world's eighth largest economy.
Expect further pressure on the Real after this statement.
Perhaps Brazil should really buyback the dollar debt of its government and public sector firms - at the present hugely discounted prices. Then one of the main reasons for speculation against its currency would likely disappear. And after that the state would be in an ideal position to force a reasonable restructuring of said firms.
China's richest are generally members of the NPC. They are party members and the goals of government and their enterprises are one and the same. Industry operates at the pleasure of government and promotes the goals of government. Wealth is tolerated so long as they help the state achieve the state's goals. In the US, the companies try to get the government to do their bidding. Entirely different dynamic, Government says they want service economy and everyone from Baidu Search to Jiangsu Jinsheng industrial machines go out and start offering services. In the US, the opposite happens, 3 or 4 government contractors figure out how to get the contract and bare-minimum needed to perform what is needed. While markets will ignore any thing that isn't a subsidy or regulatory monopoly or grant. Whole different world and types of corruption. But both are corrupt, through and through.
It's clear that Brazil doesn't have a solvency problem - at New Economic Perspectives they have done a great job in thoroughly debunking this S&P claim.
ReplyDeleteHowever it would be even more important to refute the analysis held by a large majority of Brazilian economists, pundits and politicians: that the country - quite apart from the "solvency" issue - needs austerity in order to:
1. Control and reverse inflation (currently running at an annual 9% rate) and
2. Prevent massive capital flight and thus an even greater pressure on the Real exchange rate, that has already plunged in value in the last few weeks (this will negatively impact inflation, though beneficial to aggregate demand).
Absent an alternative theory/model for diagnosing the causes of Brazil's macroeconomic problems and support non-austerity policies the country looks destined to a sort of repetition of the U.S. deep recession of the early 1980s - not to mention the more recent and infamous experiences of European countries that (unlike Brazil) lack monetary sovereignty.
"Because S&P are idiots."
ReplyDeleteOr worse.
"Absent an alternative theory/model for diagnosing the causes of Brazil's macroeconomic (MoronEconomic) problems and support non-austerity policies the country looks destined to a sort of repetition of the U.S. deep (MoronFest) recession of the early 1980s - not to mention the more recent and infamous (IMF policy) experiences of European countries that (unlike Brazil) lack monetary sovereignty (you won't have to fire any V2's this time, just come and take our stuff. Really.)."
ReplyDelete"Control and reverse inflation (currently running at an annual 9% rate) and"
ReplyDeleteYou control and reverse inflation by allowing things to go bust, allowing jobs to fail and investigating competition. But most of all you do it by making sure creditors take a hit.
If you know putting prices up is almost certainly going to lead to the destruction of your business, job, lifestyle, then you don't tend to do it, and the people lending you the money won't let your do it.
The problem, as always, is that nobody will take the hard decision that upsets other people, and if there is a hard decision to make it always favours making creditor whole.
I say again - capitalism without bankruptcy is like catholicism without hellfire. It doesn't work.
"Prevent massive capital flight and thus an even greater pressure on the Real exchange rate,"
ReplyDeleteThe problem is that they welcomed the sea when it came in, but are trying to stop it from leaving again.
Stability requires that you build sea wall defences so that the sea doesn't come in, in the first place.
Inward investment and exports will turn out to be amongst the silliest ideas every dreamt up.
It's no longer a matter of the exchange rate, Brazil now has expectational inflation rooted in the economy which must be addressed by means other than spending policy.
ReplyDeletePhase One is a national wage and price freeze. Can be popular if messaging is correct but pressure from growing inefficiencies and injustices will quickly reduce support for the program. Alongside the freeze the government should adopt an Instant Prosperity campaign of spending toward full employment by amending the legal code to permit direct purchases of government securities by the central bank. This will generate the necessary counterpressure giving government the time necessary to move into. . .
Phase Two: a flexible incomes policy that eliminates pressures entirely. Price and wage increases will be allowed in line with average productivity growth and concentrated in sectors with high employment and high demand, retaining the market mechanisms which signal where workers should move to and what goods consumers should direct their spending toward. An Office of Price Administration can be left permanently in place to bring inflation to zero.
Phase Three will reduce the central bank's interest rate and abandon any policy seeking to limit the movement of the national currency on international markets. From hereon the government would pay no mind whatsoever to the relative value of its currency. If investors wish to send their money out of the country, let them on the condition their financial wealth can never return. The central government can provide all the financing necessary for productive investment.
The Real did an epic reversal as the Brazil investment boom collapsed. From a decades high it did a swan dive while food, commodities and fuel are priced in USD. Germany, Japan and China like to get paid in US Dollars or Euros for consumer goods. If the USD is a problem, the simplest solutions is, don't use it. Use the Real instead.
ReplyDeleteThe government can not make the change right now while they are in crisis, a weak position, as it would causes panic and an even weaker Real, but they could have made the change a few years ago when the Real was strong, too strong, and the the government was implementing capital controls to weaken the Real. I haven't seen the data, but the capital controls implemented during the go-go years probably forced industry and banks to use USD debt and investment.
This is something that MMT needs to deal with, how to better design currency markets, best practices, without resorting to ad-hominem about traders, ideological slogans about capitalism and the evils of banking, and try to focus on reality because the entire premise of MMT is that the currency can buffer the economy and keep prices stable. If so, describe how to maximize the benefit, in detail, in reality.
In Brazil something isn't working, or more precisely, lots of people aren't working and there appears to be negative fiscal space -- the currency is no help at all it actually makes things worse.
The high interest rates are contributing to the ability for sellers to raise prices...
ReplyDeleteNeil,
ReplyDeleteWhat does a seawall look like in finance and currency terms?
also
Who would fall into bankruptcy? What companies does Brazil protect from bankruptcy? The most vulnerable look like the poor people that need to buy food and energy.
Positive feedback loops everywhere...
ReplyDeleteWhy have high rates, contributing to raising prices due to increased incomes from the IR channel? Don't provide forex liquidity, force reduced leverage through regulation, don't let the banks provide liquidity for trades, then corporations will be forced to balance their Real/USD balances and liquidate USD assets/reserves (which they got plenty of).
'Starve' them of Real through regulatory changes and that will stabilize the exchange rate and inflation. That will trigger deflation and failing business sure, but then the govt must be ready to steep in and provide labor market stability so the most poor don't end up starving. As long as they don't have increasing inflation the government has policy space, and they won't.
In the end is very simple: don't always let the private sector financial sector do what they want to do, because is not always the best thing. A simple rule some freaking politicians should learn.
before you can diagnose the exact cause and thereby provide some meaningful analysis and policy suggestions, you need to know what the hell is really happening.
ReplyDeleteinflation indices use dozens or hundreds of product markers and without the data you dont know anything. I dont have the time to get into it but here's a good example:
"Consumer prices in Brazil increased 9.53 percent year-on-year in August of 2015, slowing slightly from a 9.56 percent rise in July. The monthly inflation rate eased for the second straight month to 0.22 percent, the lowest since July of 2014.
On a monthly basis, the highest upward pressure came from prices of personal expenses (up 0.75 percent), followed by health and personal care (up 0.62 percent), education (up0.82 percent) and housing (up 0.29 percent).
In contrast, transport prices fell 0.27 percent, mainly driven by a 24.9 percent drop in cost of air fare while cost of food and non-alcoholic beverages was marginally unchanged."
http://www.tradingeconomics.com/brazil/inflation-cpi
So what is included in "personal expenses"? Are there monopoly and oligopoly conditions in a relatively large % of this component that prevent competition from doing its thing and keeping prices in check? what about the suppliers to the companies that provide the goods and services in the "personal expenses" category?
Health care sector prices are way up. Its a single payer system, so why the hell is the govt raising its spending so much thereby driving inflation? If inflation is running at 9%, maybe only increase your spending by 5% pulling back on inflation.
Education is another Govt run sector, same thing. You need to anchor spending and inflation with exogenous Govt decision making when inflation is a problem, not drive it onward.
Again with housing, as Matt likes to point about how the Govt is directly responsible for home prices due to their bank regulations. If you relax the down payment standard from 20% down to only 3% down payment, then no fucking shit your going to get home price increases. Clamp down on income to debt load rules.
Transportation gave a deflationary contribution, great. What helped with that? Is there anything specific that happened that can be duplicated and expanded in that industry or potentially others?
CPI is just a moving average, if you want to bring the average down you need to look at the components and try to move some specific things around (reduce an increase here, accelerate a decrease there). Promote productivity and competition, invest heavily in domestic over-production like the Chinese do. Thinking inflation is just some simple thing that can be controlled by changing interest rates is an idiotic and ignorant mythology.
Zimbabwe had 900% interest rates during their crises period and still had hyperinflation. If only they had raised interest rates to 1200% then the central bank would have licked that inflation good.....HAHAHA so dumb.
Well, positive feedback loops everywhere Auburn, coming from the government itself first.
ReplyDeleteAs long as commodity demand was high and that drove Real exchange rate up and capital in it was obfuscated, when the whole edifice blows up then you can see all the problems. I'm pretty sure in half the cases it can be traced back to corruption of some sort with government artificially inflating prices because it benefits some people.
Someone has to give, and it usually can be summarized into either the elites have to give some privileges (and let competition and capitalism happen), or the majority of the population gets crushed through diminished real incomes. Someone has to give.
If people need more healthcare and are demanding more at any price, then inflation in the sector can help allocate more resources to it. But if it is like the USA where intermediaries, labor groups and government collude to swindle consumers, well, then. No way to know without digging in. And in a single payer system, people can demand more than they need because there is no cost to themselves, free appendix removals, get 'em while they are hot! I'm no familiarity with Brazil micro, no idea at all.
ReplyDeleteTheir inflation rate is just about the same as their policy rate...
ReplyDeleteIf they went to ZIRP they would probably get the result they were looking for as far as prices..... or it would at least help considerably...
Yes Auburn, and then they raise the conforming loan amount to $417k and then homes go to $417k and they act all surprised... have their DoD paying $50 for a sheet of 1/2" plywood and wipe out all the yards of inventory then scratch their heads when housing goes to $175 psf... then remove the bid and prices collapse down to $125 creating a banking crisis and they cant figure it out....
The left's answer is to trot out the Joe Stiglitz of the world who all they can say is "things are all screwed up!" .... well no shit sherlock....
Again we are witnessing UNQUALIFIED/INCOMPETENT people at work in this.... have to get them out of there...
Here are the latest figures for Brazil:
ReplyDeleteInflation rate - 9%
Policy rate - 14.25%
Real interest rates are very high - and they've been high for decades.
Yet inflation - after the hyperinflation phase ended with the Plano Real, in the early 90s - has never been low.
The usual economic theories seem unable to explain the main features of the Brazilian economy.
This comment has been removed by the author.
ReplyDeleteRyan
ReplyDeletePeople can demand more services but that doesn't mean govt has to raise their price of procedures. Remember that cpi measures price changes and not quantity changes. And there is no strong evidence to support the belief that single payer systems result in major increases in unnecessary services. People don't get operations because they are fun. An increase in services is good and to be expected, its unethical to ration health care on account of low incomes.
"The usual economic theories seem unable to explain the main features of the Brazilian economy."
ReplyDeleteThis sounds very much like Argentina or other S.A. economies tbh. My first suspicion would be a dysfunctional corrupt system where the government controls the currency (ie. not like Greece, where the only options are deflationary due to the system being controlled by other government or institutions) and is not acting competently regarding regulations, instead is being pro-cyclical and bidding up due to private interests and government officials being in the game.
High interest rates help to increase inflation, not the other way around, unless the system is already has very high levels of private debt and low savings. It's pro-cyclical.
"The most vulnerable look like the poor people that need to buy food and energy."
ReplyDeleteIt always does. But that's what rationing and job guarantees are for to catch people as they fall, put them back on their feet and get them going again.
But prior to that policy should ensure that you have diversity of supply and the other *real* structures in place that ensure you have a robust economy.
There is a trade off between resilience and efficiency in any complex flow system. The problem is that neo-liberalism pushes for efficiency over everything else - to allow maximum extraction. That makes the structure highly coupled and brittle.
Business bankruptcies still favour the creditors too much - here in the UK if you have a lease on a property for a business you remain liable for it regardless of whether the business survives or not. Unsurprisingly the inability to 'bankrupt' the lease puts people off setting up businesses. Great for landlords. Great for big businesses. Bad for diversity and renewal.
Without a job guarantee it is very difficult for the government to start collapsing businesses that charge too much.
ReplyDeleteYou need to take a Thatcher approach to the economy and initiate a controlled explosion in the economy to break apart the vested interests.
But it depends how much real power the state has. Argentina for example can never get on top of the powerful agribusiness, and I'd be surprised if the UK could now control its oversized financial industry.
Yes, maybe high interest rates, on balance, help to increase aggregate demand and thus possibly inflation also - but if this is so, the effect is insufficient since the country is now undergoing a recession induced by insufficient demand.
ReplyDeleteThe government now spends over 300 billion reais a year on interest payments to mostly wealthy and domestic creditors (including individuals, domestic corporations and banks). Maybe their propensity to consume on these payments is relatively low. I'm not aware of any studies written here on this highly relevant topic.
Spending on social programs targeted to lower income groups, while increasing in recent years, is still a modest fraction of spending on interest on the Public debt.
"Spending on social programs targeted to lower income groups, while increasing in recent years, is still a modest fraction of spending on interest on the Public debt."
ReplyDeleteYou need to get under the Reals and find out how the price rises stick. Is it habit, a failure to invest, or lack of effective competition?
iirc their internal transportation fuel is alcohol produced domestically while the petroleum they produce for export...
ReplyDeleteso if the oil price falls they take a hit in terms of trade meanwhile no one benefits domestically from the lower oil prices as they are buying domestic alcohol the price of which probably hasnt changed other than up a bit...
Jose wasn't much of the previous activity driven by foreign investment and export-led growth? The decrease on external demand has "induced" the current recession. on top of that the exchange rate is has gone down due to the commodity prices, this is a driver of local inflation if certain goods are mostly imported.
ReplyDeleteHave no idea but could be the case for example for certain medicines or medical equipment, capital goods needed for production, and ofc some consumer goods. So you got on the one side disappearing demand because lower exports and higher inflationary pressure due to imports being more expensive in the local currency with new exchange rates.
If you add on top the government not doing anything to stop this, and even bidding up on certain markets due to social, political circumstances or private interests it will also help inducing higher inflation while demand is weakening on aggregate. Locals and corporations are also probably dis-investing and sending money overseas further pressuring the exchange rate down, and the financial system is providing liquidity without restrictions.
Lower interest rates, strict regulatory changes and crushing down liquidity/reducing leverage to reduce forex leakages, and some recession which cleans up the bad business while increasing spending on programs which benefit the low-income households and boost employment meanwhile to increase internal demand should help. This is what happening in China now.
The restructuring of the economy which was built on top of certain sectors will take a while, the inflation hit is probably unavoidable but is a singular event if the govt does its job to not provide liquidity where is not needed (basically stop the financial sector).
Unfortunately private interests and a weak state will stop this from happening though...
The basic position of neoliberalism about free markets, free trade, and free capital flows is advertised as being an economic panacea that delivers maximum prosperity in the short time and in the most efficient way. That assertion is a gross overstatement of the facts based on history.
ReplyDeleteThe reality is that all choice involve tradeoffs, which means winners and losers. Neoliberalism is rigged so that TPTB and their cronies and minions are the winners and the rest of the people, the vast majority, are the losers.
There is no fixing this. It must be changed to put the people first.
Neoliberal "capitalism" is putting capital first, and making the people and environment serve capital.
"Socialism" is putting the people and environment first and making capital serve them.
Let's not beat around bush, but rather go for the throat.
The left's answer is to trot out the Joe Stiglitz of the world who all they can say is "things are all screwed up!" .... well no shit sherlock....
ReplyDeleteTrundling out Noble winners to reinforce this is actually hugely important in a world in which perception is reality, and celebrity is a means of managing perception. All PR people and political strategists-operative know this and practice it assiduously — and get paid big bucks for it.
Overuse of medical services owing to prices being too low is a neoliberal myth. It is total nonsense, like all unemployment being voluntary. It just follows from the model so it is asserted as necessarily true wrt reality.
ReplyDeleteThat involves a logical fallacy.
Descriptions assert a possible state of affairs and asset that it is true or false semantically, that is, wrt to fact. But no descriptive proposition can show that the assertion or negation in actually true independently of fact-checking.
The medical claim is specious since medical treatment is a need and not a want, and it cannot be hoarded either. The only issue is hypochondria, and that is a medical condition that requires treatment.
Brazil's unemployment rate is high and accelerating which makes the current rate of inflation unlikely to be a problem of excess demand. If demand/spending/Inflation I were the problem we would not expect to see simultaneous depression.
ReplyDeleteFrom my limited POV, the situation is Brazil seems to be to be caused by endemic corruption that difficult to root out, and years of control by an elite that got used to getting its neoliberal way.
ReplyDeleteLeft to itself and with adequate power, the leftist government could likely reverse this as it had been doing before the crisis. But powerful forces now seem to be digging in to make use of disaster capitalism to reverse previous losses from their POV.
Again, this appears to be chiefly a social and political issue involving class status and class power rather than primarily an economic one, as it would appear, so that economic means alone will likely not suffice.
There is a trade off between resilience and efficiency in any complex flow system. The problem is that neo-liberalism pushes for efficiency over everything else - to allow maximum extraction. That makes the structure highly coupled and brittle.
ReplyDeletePerfect and neoliberals consider that a feature than a bug. In fact, it's built into the design of the system for extraction, which what neoliberalism is about behind the façade of propaganda, including conventional economic and financial theory
"Socialism is putting the environment first" I don't think political system is about the environment.
ReplyDeleteCapitalism has a mixed record.
Got any big successes you can think of among socialist nations?
I'm dubious, so I'm of course thinking about the failures, Lake Maracaibo, Russian Energy and Nuclear pollution and waste, China's unprecedented pollution.
Capitalism has had failures, Fukushima comes to mind in recent times, though electricity and nuclear in particular in Japan is mostly socialized and centrally planned. Apple and their pollution evasion in China with the cancer plumes was the worst of capitalism/socialism until they got caught and cleaned up their act. Neoliberal Capitalism has done a better job of ensuring companies pay for the costs of their pollution once it is discovered in recent decades than in the past. I don't know socialist records on pollution as well.
a failure to invest
ReplyDeleteWith the real rate of interest running so high, investment would have to be heavily rent-extractive to be competitive against that rate wrt risk/reward.
That's the standard answer to "socialism." Just like "Weimar and Zimbabwe" to MMT.
ReplyDeleteIt is a logical fallacy to claim that social can never work anywhere in the future because it either got hijacked by another elite that replace the previous elite, or the socialist government could not pull it off in a capitalistic global environment in which it was being opposed political, economically, financially, and even militarily.
Right, about the effectiveness of the various policies to deliver desired outcomes rather than ideological underpinnings.
ReplyDeleteChina is showing, for example, that it is possible to have a market economy under socialism rather than neoliberal capitalism.
ReplyDeleteThey are also dealing with the "endowment" of a political elite as an "inheritance" of the Revolution, which actually was a huge blessing for China considering its imperial past. The problem with it is that as the spirit of the revolution wanes, corruption creeps in. Now it is nearly as endemic as it was in imperial times under the feudal warlords.
Corruption is an ongoing issue in politics, which is about power, hence wealth also, in any political system. Frequently changing governments with democratic elections has not removed that or even reduced it greatly.
In sense, the US more corrupt that China. In China those at the top of the financial system would have been investigated, tried and some executed under the current rules there. In the US, they all got a pass with the shareholders they supposedly represent paying some token fines. Not even any clawbacks and or seriously reforming the system. Now that is some real corruption.
And now the (in)famous Jim Cramer is saying that Petrobrás dollar debt ($ 111 billion) is the number one problem in the world because of its size, the unsustainability of its 10.5% yield and the fact that Brazil is the world's eighth largest economy.
ReplyDeleteExpect further pressure on the Real after this statement.
Perhaps Brazil should really buyback the dollar debt of its government and public sector firms - at the present hugely discounted prices. Then one of the main reasons for speculation against its currency would likely disappear. And after that the state would be in an ideal position to force a reasonable restructuring of said firms.
China's richest are generally members of the NPC. They are party members and the goals of government and their enterprises are one and the same. Industry operates at the pleasure of government and promotes the goals of government. Wealth is tolerated so long as they help the state achieve the state's goals. In the US, the companies try to get the government to do their bidding. Entirely different dynamic, Government says they want service economy and everyone from Baidu Search to Jiangsu Jinsheng industrial machines go out and start offering services. In the US, the opposite happens, 3 or 4 government contractors figure out how to get the contract and bare-minimum needed to perform what is needed. While markets will ignore any thing that isn't a subsidy or regulatory monopoly or grant. Whole different world and types of corruption. But both are corrupt, through and through.
ReplyDelete