Tuesday, June 19, 2018

Michael Roberts — Brazil: austerity, debt and trade

Michael Roberts reports from Brazil. The emerging economies are under the gun (of the the US).

Michael Roberts Blog
Brazil: austerity, debt and trade
Michael Roberts


Konrad said...


“At the same time, the US Federal Reserve has raised its policy interest rate yet further. That will eventually increase the cost of servicing dollar debt owed by these emerging economies. So the emerging market debt crisis is getting closer.

This is confusing. The effect of the Fed interest rate on foreign debt depends on who is lending to a foreign nation. If a commercial bank is lending, then yes, Fed rates can affect the rates on loans offered by a commercial bank. However if the IMF or World Bank are the lenders, then their policies and interest rates are independent of the Fed. In both cases the emerging market debt crisis is not “getting closer.” It is already here.

“Argentina has already had to go to the IMF for a $50bn loan and its stock market dropped nearly 10% in one day this week.”

I predicted this a couple of months ago, and I wrote about it here. Argentina had a trade surplus until late 2010, and since then has had a steadily worsening trade deficit. If your nation has a trade deficit, and if your nation's currency is not widely accepted outside your nation's borders, then in order to keep buying imports, your nation must start borrowing in foreign currency (e.g. dollars). The IMF creates loan dollars out of thin air, and lends those dollars on the condition that the debtor nation undertakes mass austerity, mass privatization, labor law “reform,” and so on. Since Argentina’s trade deficit is getting worse all the time, Argentina will continue to go further and further into debt. Unless something changes, Argentina will (literally) become Greece within one year.

“Brazil is part of this new trade and currency crisis. The Brazilian real has taken a hit too, halving in value against the US dollar since 2014 and heading back to a record low since the Great Recession of R$4 to the US$.”

In 2004 at the height of the commodities boom, Brazil enjoyed so much wealth that Brazil actually started lending to foreign nations in Brazilian reals. By 2008, China’s demand for Brazilian commodities began to cool, and Brazil slipped into having a trade deficit that worsened every year after that. The Brazilian economy became worse and worse, causing racial friction between whites on one hand, and blacks and “pardos” (mixed race people) on the other. Today Brazil is in severe economic trouble. This affects all of South America, since Brazil alone accounts for 60% of all of South America’s GDP. Brazil’s GDP is 3½ times bigger than Argentina’s, and 21 times bigger than Venezuela’s GDP.

Continued below…

Konrad said...

PART 2 of 2:


“From the start, Temer aimed to impose the classic ‘neoliberal’ policies of ‘austerity’ in the form of drastic cuts in public services, reductions in public sector jobs and government investment. Above all, Temer aimed to massacre state pensions. The slump and the high level of public debt were to be paid for by Brazilian households. No wonder Temer’s popularity ratings have slumped to a record low of just 4%. But public sector deficits (now around 8% of GDP) and debt must be brought under control to re-establish business and foreign investor ‘confidence’, so the argument goes.”

WHY IS THIS AN ERROR? When we talk about “public sector debt,” our statement is meaningless unless we specify whether we are talking about debt in domestic currency or in foreign currency. I see this error constantly.

Also, when we talk about a nation's "debt crisis," our statement is meaningless unless we specify whether we are talking about government debt (i.e. the "national debt") or private debt (e.g. mortgages, student loans, car loans, etc).

If by “public sector debt” we mean Brazilian government debt (i.e. public debt) denominated in reals, then this is trivial, since the Brazilian government can create infinite reals out of thin air. Brazilian households do not need to pay on this debt.

If by “public sector debt” we mean government debt in foreign currency (sometimes called “foreign debt”) then yes, there can be a crisis. Brazilian households are not able to pay on this debt, since Brazilian households are not exporters.

Brazil’s ultra-corrupt President Temer instituted mass austerity in order to widen the gap between the rich and the rest. He even had permanent austerity written into Brazil’s constitution. However there is an additional reason for austerity: it makes average Brazilians consume less, so they don’t buy as many imports, so Brazil’s foreign debt doesn’t rise as fast. Of course, the pain of austerity only hits the middle and lower classes.

“As I showed in a previous post, Brazil has the highest public debt ratio among emerging economies (IMF data).”

This statement is meaningless, for reasons I just described. Japan has the world’s highest “public debt” in ratio to GDP. So what? As long as the Japanese “public debt” is denominated in Japanese yen, this simply means that investors have deposited a lot of money in Bank of Japan savings accounts.

The rest of the article is full of errors, e.g. the author falsely believes that the Brazilian government needs tax revenue. Since the Brazilian government can create infinite reals out of thin air, the government does not need reals in tax revenue.

Brazil’s debt crisis is in Brazil’s foreign debt.

Ryan Harris said...

Aside from IMF Quotas, the IMF can borrow too, I don't know the terms of their credit lines: I tried looking up at the Fed but didn't find anything.

Good discussion for MMT since many have pretty expansive ideas on how much "fiscal space" a fiat currency allows a sovereign government. It almost certainly is no where near what people are imagining in the progressive-wet-dream policy discussions where elaborate JGs, full healthcare, free education, basic incomes, etc expand to 50-70% of GDP. Even developed economies with reserve currencies can't do what they talk about.

At a guess, in the US, I'd expect we could eek out 4 or 5% more from GDP without cratering the dollar given working age employs available but beyond there, I think additional spending simply increases current account deficits -similar to the problem the UK has been bumping up against.

André said...

"Brazil’s debt crisis is in Brazil’s foreign debt"

Brazil foreign public debt is small (5% of total public debt I guess). It actually could be repaid right now. I believe that such debt exists only because brazilian authorities want to be active in the international gov bonds market.

"causing racial friction between whites on one hand, and blacks and “pardos” (mixed race people) on the other."

What an odd thing to say. You put it in racial lines. I don't think any brazilian would agree with that. Brazilian prejudice is much more related to poverty than to racism. The crisis made inequality and poverty worse, but it did not caused or worsened "racial friction".

"If by “public sector debt” we mean Brazilian government debt (i.e. public debt) denominated in reals, then this is trivial, since the Brazilian government can create infinite reals out of thin air. Brazilian households do not need to pay on this debt."

Is it trivial? Then why every single person outside MMT community (including left-wingers) believe that the government works like a household and currency is like gold? Not so trivial, huh?

"Brazil’s ultra-corrupt President Temer instituted mass austerity in order to widen the gap between the rich and the rest."

No, it did not. Please do not help people spread the conspiracy theory fallacy. He did not elaborate an evil plan to create mass unemployment.

On the contrary - he was (and still is) desesperate to gain legitimacy and political prestige. He wants his government to be known as a better one than the previous - as the one that took Brazil out of the economic crisis. He wanted to keep his hold to power, and he knew that ending economic crisis was the way to go. He and his finance minister (and a lot of brazilians, even some left-wingers) legitimately thought that austerity would solve the crisis. They are still wondering why it did not work, and must be trying hard to find someone or something to blame.

It is very hard to explain to someone that Earth is round when their intuition tells them that Earth is flat, and when all their life they heard from everyone (scientists, politicians, authorities in general) that Earth is flat. There is no conspiracy into it, just ignorance.

Of course, Temer is ultra-corrupt, he clearly has his hidden agenda, and his place is in jail. But creating some bizarre disfunctional economy and mass unemployment was NOT one of his objectives, although that it is all he got with his austerity policy, to his surprise.

Tom Hickey said...

Brazil Ditched Its First Dark-Skinned Carnival Queen for Being Too Black

And she isn't even dark. If she were "white," folks would say "great tan, really even all over."

But maybe there was another reason for her rejection? Too poor?

André said...

Can't understand what you are trying to say, Tom.

Some television network did some racist stuff and then it means that brazilians are racist in general? Is that the message you are trying to convey?

And it is actually hard to tell whether it was racist at all.

That sort of bizarre thing happens in the model/fashion world. Those who work as models are judged professionaly exclusively by their image and beauty. That is what such profession is all about: image. The television network was probably trying to please a broader public, reaching a middle term between too dark skin and too white skin. It is not like they think black women are inferior or something like that - they are just trying to get the right model to reach a larger audience. (By broad public I mean, in that case, men who like to watch random sexualized women in television - it is very barbaric but that is how life goes)

It doesn't mean that just because you are black you will be unable to go to some restaurants or any apartheid stuff like that, or that you will never be able to get good jobs or good life opportunities or etc.

However, if you are poor, you are considered inferior and ignorant, you will never get good opportunities in life, and the poor will get poorer (and the rich will get richer). That's how things go in Brazil.

Tom Hickey said...

The way it was reported in the US, the woman won a contest and then the award was retracted, reportedly because he was "too black."

In the US, the majority of the population would view that as considered racism, if the actually is as reported. Maybe Americans in general have a different concept of racism than Brazilians. I don't know.

Actually, this would be considered pretty extreme in the US. There's a lot of other things that some considered racism while others don't, so the US in to homogenous on this issue.