Tuesday, December 22, 2015

Matias Vernengo — The strange and misunderstood reasons for the Brazilian crisis

Matias catches us up  on Brazil.

Naked Keynesianism
The strange and misunderstood reasons for the Brazilian crisis
Matias Vernengo | Associate Professor of Economics, Bucknell University


Dan Lynch said...

"The reasons for austerity are not connected really to fear of domestic default. Austerity ... might be a way of leading to a recession, increasing unemployment and reducing the bargaining power of workers, as Kalecki noted long ago. It is a way to discipline the labor class. And that is what is going on in Brazil."

Matias gets it. Excellent article, thanks for sharing.

Matt Franko said...

"Exports have tanked ..."


Brazil's Petrobras expects to export 50 pct more oil in 2015:

"May 13 Brazil's state-run oil company Petrobras on Wednesday estimated nearly 50 percent growth in oil exports in 2015, thanks to new offshore output and as its refineries lack capacity to process more crude.

Petroleo Brasileiro SA, as the company is formally known, expects to export 350,000 barrels of petroleum per day in 2015, up from 231,500 bpd in 2014, crude oil manager Fernando Colares Nogueira said at an event on Wednesday."

Apparently oil exports have not collapsed (at least as of May...)

So what has collapsed????

Dan Lynch said...

@Matt, the price of oil has collapsed ?

I'm not up to speed on whether Brazil lets its currency float ?

Matt Franko said...

Dan yes the oil price has gone down in USD terms but what exports have collapsed down there?

Maybe Ag products or Iron Ore? Some other commodities? or perhaps some finished goods?

Dan Lynch said...

Some googling says Brazil's largest export is iron ore, followed by oil, soybeans, sugar, and poultry.

Soybeans have fallen from $622 per ton in 2012 to $319 today.

Sugar has fallen from 29 cents per pound in 2011 to 14 cents today.

Poultry is their only export that has gone up in price.

Matt Franko said...

Yes the prices have been lowered in USD terms but what exports have collapsed?

Matt Franko said...

Looks like oil exports are way up.....

Matt Franko said...

Iron Ore looked solid thru June:


Maybe the bottom really fell out over the last 6 months of 2015....

Jose Guilherme said...

It's the dollar value (not the volume) of Brazilian exports that has "collapsed". At the same time the real exchange rate also went on a nosedive (especially after ratings agencies downgraded the country's public debt). Thus, the (many) Brazilian companies that issued debt in dollars are now reeling.

According to recent studies most of the current (and brutal) recession can be explained by the precipitous drop in investments, especially from the large firms that are being investigated under "car wash" and other probes.

The remaining responsibility for the recession presumably lies with the austerity measures being announced (and often implemented) since last year's presidential election. Today, everybody seems to believe that the country can run out of Reais and that achieving a primary budget surplus is a national priority. The media and the pundits lecture the public on the dangers of runaway debt on an almost daily basis.

The economy will likely shrink some 4% in 2015 and may well fall another 3 or 4% in 2016.

Meanwhile, new mosquito borne epidemics like the Zika virus (causing microcephaly in newborns) may hit the country this summer. In order to fight it a large increase in public health spending would be welcome - but, alas, not likely to happen when most decision makers hold religious-like beliefs concerning the need to rein in "out of control public spending".

In spite of the recession the price level is rising at an annual 10.5% rate. The central bank is thus expected to hike the policy rate by at least 50 basis points next month (it is 14.25% now). How a deep recession can can coexist with such high inflation and how economic policy can address and solve such problems are no doubt pressing issues - sadly absent from the media debates.

Dan Lynch said...

@Jose, Brazil's inflation may be due to the exchange rate and the rising price of imports. Dutch disease.

Matt Franko said...

Jose they should go to ZIRP immediately imo

Jose Guilherme said...

Some administered prices (electricity, oil, etc) had been kept under control during Dilma´s first mandate and have recently been allowed to rise, so this may also be an input for the inflation figure.

As for the high interest rates the official explanation is that they are needed to fight inflation and prevent further currency depreciation (that also fuels inflation). Of course, they are also a bonus for banks, pension funds and High Net Work Individuals who invest in the country's public debt.

However, Brazil's imports are less than 15% of GDP so the real depreciation can be only be a relatively minor part of the explanation for the high inflation numbers. Maybe automatic adjustaments of many wages and prices (indexation, a holdover from the hyperinflation era) also play a role. Anyway, hypotheses and fresh research on the reasons for the recent coexistence of recession and inflation are urgently needed.

Ignacio said...

High IR are creating asset inflation probably. If investments drop dramatically and income is high they will end up speculating.

Positive feeback loops. Raise taxes on the transactions creating inflation and drop IR to zero and it will go away presto.