From Brazil

with Vincent Bevins and guests


Vincent Bevins √© colaborador do jornal brit√Ęnico 'Financial Times' e correspondente no Brasil do 'Los Angeles Times'. Escrito em ingl√™s, blog aborda principais acontecimentos do Brasil sob o olhar de um estrangeiro.



The Fed and Brazil – a real problem

Por Vincent Bevins

What’s going on with the Brazilian currency? Like many ’emerging market’ countries around the world, Brazil has recently been unpleasantly reminded just how linked its fortune is to the decisions of the United States, and the Federal Reserve. The¬†real has been all over the place since 2008, making things quite difficult here, and that has relatively little to do with what Brazilian politicians have done.

Take a look at the chart above to get an idea what a headache running a developing country has been since the 2008 financial crisis, and especially since the US Federal Reserve, which controls the global supply of dollars, began talk of ‘tapering’ earlier this year. ‘Tapering’ is Federal Reserve-speak for going back to the way the US Central Bank used to do things before 2008, which in practice means much less cheap money floating around the globe, since the Fed will slow down its direct asset purchase program (background here). The process of tapering is the first step towards stopping the Fed pumping extra money into the US economy, and (probably) the first step towards raising interest rates.

Just the possibility that the tapering might happen crushed the Brazilian¬†real down to 2.45 against the dollar, from a high of 1.55 just two years ago. How can you create economic policy in a country in which the cost of both your exports and imports swings so violently, and how do you explain to your citizens that yesterday they could traipse around Argentina (and Miami and New York) buying everything, but now, really won’t be able to afford that trip to Europe (or even to Paraguay)?

Since 2008, Brazil’s currency became much too strong for its own good, and then also lost value much too quickly. As if Brazil needed further proof of how dominant the influence of the Fed is here, when we got wind that the ‘tapering’ wasn’t actually going to happen as soon as had been thought, the real jumped back up to 2.2. Maybe it will stay around there. Some credibly think it will have to hit 2.65. We don’t know.

Brazil’s government has made some very real economic mistakes in the last few years. But the pseudo-tapering debacle has reinforced the uncomfortable fact that at least in terms of the currency, Brazil has been on a roller-coaster since 2008. And except for small interventions, it is not President Rousseff or Finance Minister Guido Mantega doing the driving. The real protagonists here are huge flows of international capital, swooshing around the world, guided by the noises coming from the central bank of the United States.

Have you seen these yet? 2009 and 2013

Recent history

In 2008, US-based financial capitalism exploded and took down the world’s economy with it. Ironically, this meant a flood of cash pouring into the US – considered safe, even though Wall Street caused the crisis – pushing up the value of the dollar and punishing currencies like the real, which hit 2.45 (see above). But then things changed. The fiscal stimulus in the US wasn’t enough to get the economy back on track, and Obama was never going to convince Congressional Republicans to approve more public spending, so the onus fell on the US Federal Reserve to get things up and running. This consisted of keeping interest rates at zero and buying bonds directly. In practice, this meant pumping billions of dollars into the US economy, and giving it to banks instead of spending it on physical projects.

But of course banks aren’t required to invest in the US, and many quickly caught on that they could make a killing getting free money in the US, and then investing in growing emerging market countries where they could earn easy returns. This was especially true in Brazil, where interest rates have long been punishingly high for borrowers and a free meal ticket for investors. Brazil was also riding high on a decade-long Chinese commodity boom, and the government had a card up its sleeve to pump up the economy further in response to the crisis (basically, pump credit into the economy so that¬†new middle class Brazilians could buy consumer items and pay the super-high interest rates), and so dollars poured into the economy.

By 2010 the economy was growing by 7.5% annually and was a darling of international investors (and those of us in the international economic press), and by 2011 the currency hit a high of 1.55 reais to the dollar. This meant it was extremely, extremely overvalued and virtually guaranteed to kill off Brazilian manufacturers that now found their goods too expensive to sell abroad – Mantega had railed against the US dumping so many dollars into his country and started the largely ineffective¬†‘currency war’ as a response in 2010. Nevertheless, the super-strong real generated a lot of positive press and confidence here in Brazil. Travelers felt rich. The Brazilian stock exchange had some spectacular years ‘in dollar terms.’ Brazil’s economy got larger than the UK’s. Eike Batista got far too rich as excited and cash-flush foreigners bet on his slightly exaggerated dream.

Since then, the realities of the Brazilian economy (not actually so dynamic outside of agricultural exports and credit growth) combined with some major mistakes in the Dilma administration (which of course got much more attention than they would have had they happened during the upswing) and growth inevitably slowed back to previously normal levels, and then almost ground to a halt last year. In the background, the US began to feel confident in its own recovery, and it became increasingly clear that a whole bunch of shale gas in the ground could power an energy boom.

Despite the solid long-term foundations of the Brazilian economy, the chaos in Brazil’s currency in the last few months has been about the Fed switching its strategy back to normal. The money river is drying up and the money went pouring back the other way, to the US. Or at least ‘markets’ remembered that they will. The peaks in dollar strength in that chart correspond exactly to those two points.

Much to the chagrin of everyone down here, we’ve been reminded that Brazil’s place in the global economic system is often more important than the national headlines we’ve been chasing. Even worse, they’ve realized it’s all about Uncle Sam all over again.

Janet Yellen, the front-runner to take over the Federal Reserve from Ben Bernanke. She could be as important for the Brazilian economy as anyone in Brazil.

What can be done

Many thought Rousseff and Mantega were making excuses and picking fights by decrying the inflow of dollars into Brazil after 2008. They were, a little. But they were also right that Brazil was suffering due to the flood of foreign capital, and Brazil is now suffering at the way things have changed directions so rapidly.

Unfortunately, given the state of the international economic and monetary system, there’s little emerging market countries can easily do to avoid huge swings in the value of their currencies. The dollar is the international reserve currency, and the vast majority of Brazil’s trade is conducted in dollars, too. Some hope for a world in which neither of these things is true, and the US stops dominating global monetary conditions, but that is a long way off. In the mean time, one can only watch the Fed, or take comfort that the US may not be able to dominate forever if it keeps shutting down its own government.

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