I think now I can take a break from the American political crisis to talk about events in other countries. So, what happened to Brazil?
Actually I am not talking about the recent elections, where voters in Brazil chose someone who appeared to be truly fascist. I was horrified like everyone else. However, I have no knowledge of Brazilian politics.
On the other hand, the background to the election was the extraordinary economic crisis in Brazil from 2015-16: a country that has an upward trajectory, which seems to have eliminated the legacy of instability, is experiencing a terrible recession and is experiencing very slow Macroeconomics is a subject that must I know.
So what happened? The international debate about Brazil's experience is surprisingly limited, although what is happening is very serious and Brazil is a fairly large economy (GDP at the value of purchasing power parity is about ten times greater than Greece).
Maybe we are all distracted by the political crisis in the West: Trump, Brexit, and others. However, I have tried to compile the story of the crisis in Brazil, quite aware that it can seriously ignore important aspects.
This is what I think happened: Brazil seems to have received a great attack from bad luck and bad policies, with three main aspects.
First, the global environment deteriorated sharply, because the fall in prices of raw material exports continued to be important for the Brazilian economy.
Second, domestic personal spending also falls, perhaps because of excessive debt accumulation.
Third, policy, rather than fighting depression, exacerbates fiscal austerity and monetary tightening even when the economy is sinking.
Perhaps the first thing that is said about the Brazilian crisis is what is not. Over the past decade, those who have followed the international macro economy have more or less become accustomed to the "sudden cessation" crisis in which investors suddenly turn their backs on a country that (as Otelo said) they love. With sanity but too good.
That was what happened in the Mexico 1994-5 crisis, the 1997-9 Asian crisis, and, importantly, the crisis in southern Europe after 2009. This is also what we seem to see in Turkey and Argentina at this moment
We know this story: the state is in disgrace to see its currency depreciate (or, in the case of the euro countries, how their interest rates soar). Currency depreciation usually drives the economy, because it makes its products more competitive in the world market. However, countries where stops suddenly have large debts in foreign currencies, so that the devaluation of the currency breaks the balance sheet, causing a serious decline in domestic demand. MPs have some good choices: raising interest rates to shore up the currency will only hit demand from another direction.
However, although they can assume that Brazil is a similar case – a 9 percent decline in real GDP per capita is comparable to a sudden high crisis – it is not. It happens that Brazil does not have too much debt in foreign currencies and that the effect of currencies on the balance sheet does not seem to be an important part of history. What happened?
First, the global economic environment takes an important turn that makes matters worse. Brazil, to a certain extent, has diversified into the manufacturing sector, but is still heavily dependent on raw material exports, whose prices have dropped.
Brazil's commercial conditions – coefficients on export and import prices – have a strong impact.
It will be unpleasant in any case; however, it occurs in combination with a significant reduction in domestic consumer spending. Atif Mian and his co-authors tell us that this is related to the increase in family debt over the past few years, that Brazil experienced something more like deflation of developed countries' debt in 2008 than the traditional crisis on emerging markets
However, what really plunged the Brazilian economy was the way the country responded to this impact: with fiscal and monetary policies that made things worse.
On the fiscal side: Brazil has a very large solvency problem in the long run, which requires a long-term solution. What happened instead was that the Rousseff government decided to impose large spending cuts in the midst of depression. what do you think? Amazingly, they seem to accept as a valid doctrine of expansive savings.
As if that wasn't enough, monetary policy also became very contracted, with a very large increase in interest rates. What was that?
My best interpretation is that real has depreciated mainly because of its impact on commercial conditions, which has caused a temporary increase in inflation. Central banks panic, concentrating on the problem of inflation at the expense of the real economy. Now that the sudden increase caused by the currency has ended, inflation is low according to historical norms, but damage has already occurred.
This is an amazing and sad story; In addition, this combination of bad luck and bad policy must have something to do with the next political disaster.