Billy T, You stopped one step too short, Billy. The government 'selling bonds' is borrowing that money from the private sector. That removed it from circulation alright. But what did the Brazilian government do with that borrowed money? They placed it right back into circulation via "Bolsa Familia" spending and so forth. It is no different than the US selling treasuries and using the money to pay for government expenses.
No. That is not correct. You seem to be forgetting where YOUR 400 billion R$ number came from. It was the R$ equivalent of Brazil’s central bank reserves. Those reserves were expanded by more than a factor of four in less than two years and NOT used for “Bolas Familia.” – They were used to buy US Treasury bonds. Recall that was why I was angry / annoyed at the central bank. They borrowed locally by issue of bonds with 14+% interest rate to invest in bonds at ~5% interest rate!
In some sense, Brazil is like China - takes money from its people to lend to the USA!
The annoying part was the false reason the central bank told for this stupid action. Said it was to make Brazil “bullet proof” against a speculative attack. The truth was that Brazil already was with adequate reserves and the buying was political. (Also Brazil had paid off entirely its prior IMF loans and could easily get more IMF funds to stop any speculative attack on the Real. I am not sure, but think Brazil already has a pre-negotiated, large, "Line of Credit" with the IMF, just for this purpose.) The central bank tried to prop up the sagging dollar so that the high labor cost industries in Brazil, like makers of shoes, would not close. When a lot of voting workers are losing their jobs, the government does silly things to try to stop the closing of factories. (For example now in the US, the auto makers are getting tax payer dollars which will delay their bankruptcy for about 6 months.) Of course the effort failed (the shoe factories are now closed) but the government can now tell the angry unemployed voters: “We tried, but Brazil alone could not stop the dollar’s slide down.” Cost was at least 14-5 = 9% net interest loss on about 160 billion US dollars, which is still continuing. Brazil, should join S. Korean and dump it excessive US treasuries while the Treasury prices are high, IMHO.
By chance there is a great deal of information about Bolsa Familia in yesterday’s Folio de Sao Paulo (29Jan09) because Lula has just made it more generous. (Brazil's president can also make new laws, valid for 90 days, I think. If the congress does not pass the law, he can just issue essentially the same again, but each new version must be at least slightly different from the prior ones.)
Brazil has 12.3 million receiving Bolsa Family (Total population is about 180 million, I think, so that is less than 7% of the population getting this aid) Because getting your vaccinations and staying in school until 18 is required, the program pays very high returns in the long run (Just like the GI education grants after WWII did.) The saving in health care alone also probably pays for the program. (Health care is free in Brazil – I just had my cancerous prostate removed at a very good university hospital at zero cost to me. I was eligible to go to it despite not living in its service district as wife had worked for USP – best university in all of S. America.)
Even discounting these longer term benefits, Bolisa Familia, probably pays for its self short term in that the family getting these funds generally were previously outside of the cash economy but now are buying things and there is a big multiplier effect on adding new customers. ~5% more customers added to the cash economy.
For example, when I had my cattle ranch, I paid my honest hard-working manager the equivalent of $100/ month. (Others land owners though I was a rich American trouble maker by paying so generously that their workers were asking for more.) He got free 2nd hand clothes, grew all his own food, except sugar and flour and a little soy oil. (He used the lard from his pigs mainly for cooking. The oil was for his salads.) He grew his own tobacco, rolled his own smokes and even the “paper” was “palia” (the softer inner layers of the corn ear husk). His need for flour was small as he processed part of his corn in one of those hollowed out wood stumps with a wooden Pissa he pounded the corn to meal with. - Not an easy skill - I tried once.
Once we were in the town together and I offered to buy a pack of commercial cigarettes for him but he declined – he did not like their bland taste - they were not sweet like his.) I think he spent about $60/month, at least half on electricity, so he was not entirely outside the cash economy, but 5% or so in Brazil were prior to Balsa Familia. For people outside of the cash economy there is no crisis, (unless the rains fail to come).
For many Brazilains the dollar could lose 90% of its value and they would hardly notice.
Prior to the just announced expansion only11.0 million were receiving Bolsa Familia. With the increase in the school allowance and members, the program will cost R$549 million more each year and have a total cost of 11.95 billion Reais. The opposition parties are already saying this is an “election measure” – Lula has huge popularity (about 80% over all approval rating) but among the really poor it is nearly 100%. It is really ironic. The Real got very weak prior to his first election (more than 4 required to buy a dollar as the rich tried to get their wealth out of Brazil when it looked like Socialist Lula would win.) Now they are worried because the constitution will not let him have a third term. He is so popular some are suggesting the constitution be changed.
Even expanded, Bolsa Familia’s 12 billion is much less than the 200+ billion of reserves and a relatively minor expense in Brazil’s budget – AND one that at least “breaks even” if not more than pays for itself in immediate saving and increased taxes with more people in the cash economy buying plus giving huge long term benefits, like the GI bill did. - Prior to Bolas Familia, most of these very poor families now receiving it had their kids working in the fields as soon as they could read and write (poorly) and do some simple math. I.e. they typically quit school during fourth grade. Lula did not go to high school, speaks only Portuguese (and not correctly, so I am told – mine is much worse so I cannot directly tell.). He got his first shoes at age 12. – He knows the value of Bolas Familia better than anyone, but economist in some other poor countries are trying to get their governments to copy it.
BTW, Lula did not go to Davos -he is at the socialist's alternate economic forum in the Amazon. He is a very smart politician - does not want to be photographed with those who caused the coming depression. Today's newspaper's front page has large photo of Hugo Chavez, Rafael Correa, Evo Morales, Fernando Lugogith (Parauai) and Aleinda (Che's daughter) all giving a Karoke song performance to entertain the 1000s that have come for the "socialist forum" and its tent city. This year there are socialist forums in several countries, India being one -The wave of the future? after capitalism collapses, they hope. Lula is NOT however in the photo - too smart / clever for that (keeping his options open).
…The US is in an economic recession, but there is essentially no inflation. The IMF forecast that you love to quote projects US inflation at .25% during 2009 and 2% in 2010.
Yes, most of the world is now worried about deflation – I am picking up a few more TIPs now as I plan long term and no one seems worried about the run-a-way inflation that is coming, so they are a real long term bargain now, IMHO. (Most of my retirement 403b US dollar assets, that I could not get out of US for tax reasons went into TIPs about 1.5 years ago (as I posted at the time) so I missed the ~50% decline of the stock index funds they were invested in – it really helps to think about condition coming a few years from now as few invest with more than a year or two time horizon.)
Brazil is barely an exception to the current deflation trend. For several years the “inflation targeting” goal the central bank has used (and always met) was 4.5% + or – 2%, but lowering it is being discussed now. Currently the inflation is thought to be on the negative side of the goal. Thus, even with the recent reduction of the “basic interest rate" to 12.75% the real earnings on government guaranteed bank deposits is more than 8%. Actually, because the banks in Brazil charge outrageous interests rates for loan (>30% annually) and they compete for deposits, I get about 1.3% nominal gain EACH MONTH, but you need more than R$50,000 in the account to get this rate. Lula is constantly complaining about the high “spread” in bank loans vs. what they pay in interest. Brazil’s banks are extremely profitable, except for a few one-branch tiny ones that the crisis has scared their depositors to move their deposits to a bigger bank. Very different from even the biggest US banks that all need bailouts.
What is the IMF saying is Brazil’s inflation rate now? Surely it is more than the US’s as the internal demand (in part due to Bolas Family) is so strong it is hard to control inflation even with double digit basic interest rates. Unlike the US, there is lots of room for monetary stimulus in Brazil, if that should ever be needed; currently, however, the government is using mainly fiscal stimulus (tax relief / cheap loans) especially for the exporters.
…Did you know that that Brazil had a $645 million trade deficit for the first four weeks of January? The global economy is not looking good for anyone.
Yes I knew. Posted that earlier and noted it was the first negative month for the trade balance in years. I suggested part of it might be related to the fact that there were strikes in the car industry in December, with essentially no export of flex-fuel cars, and also the price of the soy was 11 dollars a sack then, not the current 18 dollars a sack.
I have never said that Brazil will not be hurt by the collapse of the dollar and exports to US and EU. What I have said is that unlike US and EU, thanks mainly to the growing exports to Asia, that Brazil will not even go into recession even as US and EU sink into depression. Recall the quote from my last short post:
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People forget that China has two things that ALMOST no other country does--money, and a very strong political will to get the economy going. In fact, China may have a better chance of lifting the economy out of the doldrums more than anyone else.”
Brazil is why they needed to say “ALMOST no other country.” To give a few more examples of the “strong political will” (in addition to the expansion of Bolsa Familia):
(1) Brazil’s internal development bank BRNDs last week made 100 billion R$ MORE available to local industry in loans, especially for the exporters.
(2) Today paper tell tells that the government will buy a million new simple houses directly from major contractors to rent to the poor (They are very small and simple (one story, one bath, two rooms plus small kitchen/ laudary area and two windows and a door only usually) but Brazil is not repeating the US’s mistakes of high rise slum public housing that is often closed by concrete blocks or torn down in less than a decade. These are private separated homes, each on it small lot that march over the hillside as far as one can see. (Not very pretty as all are identical but cheap to build).
(3) A few days ago Brazil's "FED" cut the basic interest rate by 1% and government suspended many taxes on industry.
(4) Is, in response to the auto worker’s demands, making a “soft link” between new government loans and not firing workers. Also encouraging “work sharing” by cancelling some laws so that the work week hours and the associated pay can be reduced. (It has been illegal to cut a worker’s pay. Brazil has a “rights acquired cannot be cut” complex, often written into the law. Thus new workers often get less now and new collectors of Brazil’s Social Security get less than those already in the system.*)
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*Like everyone else with a population that is aging and birth rates falling Brazils SS is unstable long term. They have broken the “rights acquired” slightly, by offering more pay out for later retirement. There is a complex “age factor” table and “years of contribution” table now. It is so complex that the poorly educated who are collecting have no hope of understanding the system. – I think that is part of the point – will permit them to collect less than their “rights acquired” would to make the system more stable. The US did sort of the same some years ago – I got “full benefit” at age 65 but now you must be older to get “full benefit.” Brazil’s tables change each year so their “full benefit” age is also silently creeping up. I.e. “rights acquired” is subtitly being cancelled, as it must be due to demographic changes.
Since when do you get to exclude interest payments on your national debt to claim a "surplus"? Fact. Brazil increased its national debt last year.