I was 14 during the URV period. It was like that, nobody really understand what URV was, nor could explain to other what it was.
But, it was simple to use. Prices are in URV now, not in the old currency name, not a new currency, it is URV. URV acted as a good parameter, was simple to understand and use in practice, even if hard to understand in theory.
It is not that brazilian had lost faith in the currency, but we lost faith in currency changes and readjustment. Brazilian money had changed names several times in the 80s. And several times government had cut zeros from the currency ("Hey, everybody, now 1,000,000 is actualy 1,000 ok?). So there were no point in just creating a new currency. It HAD to be a virtual one, something different, something that people could not say "yeah, just another name change like all the others...". So they created URV, and it worked.
I find it amusing that they named it 'real' once it was done.
*- a little inside joke. While I was dating my wife 15 years ago, I was very self conscious of the fact that I had barely graduated high school, and here I was dating a professor and going to many professor parties. Many, many parties. I would be asked by almost everyone "What do you study?" as a little ice-breaker conversation starter. Since I had no PhD and was not even a college graduate, this made me a little uncomfortable and so I developed the above line to describe my business of buying and selling used capital equipment (which I did out of my pickup).
It went like this: They would ask what I studied, and I would respond with "Applied Psychology in Financial Transactions" and then steer the conversation to their work. I also learned quickly that I should have no opinions on THEIR work, or my night would be bad. It was a rare event to have to explain further, most people were delighted to talk at length about themselves.
Sounds like it's time to add Applied Psychology in the Academic Sector to the resume.
Maybe the irony is more that URV was a virtual/fake currency named "real".
- Negative primary deficit on the government budget balance;
- Floating exchange rate;
- Inflation targeting.
Addendum: the current government is just so bad at that (fiscal maneuvers to create an artificial negative primary deficit, interfering in the exchange rate by buying/selling dollars at below-market prices, etc) that our inflating is going up again. We just reached 8.17% in the last 12-month period. Compare that to 0.8% in the US for 2014, or even Brazil's 3% some 8 years ago... With the expectation of the Fed raising interests in the US with the improving economy, dollars are going to FLY out of Brazil and the already ridiculous exchange rate (1 USD = 3.15 BRL) is going to explode. Brace yourselves, inflation is coming.
edit: typo
Many of the things I buy in a grocery store in the USA go up 5% or 10% at a time, perhaps every year or two. Same situation with services.
The official inflation numbers for the US are very tricky. There's a lot of "adjustment" going on. I suspect that the rapidly falling prices for household electronic goods plays a big role.
The price of a 55" flat screen declining from (made up numbers) $1,500 to $500 in the last five years is small consolation if the price of meat and milk and cookies has gone up 25% over those five years.
But even allowing for these difficulties, I still think the government keeps changing how inflation is calculated in an effort to make itself look better.
When real estate increases dramatically they measure rents, which are (in a hot real estate market) subsidized by people trying to cash in on capital appreciation. In a declining real estate market with rising rents they switch to "rent equivalents" based in some part on the cost of real estate.
You can hide pretty big increases by switching what you measure mid-stream, particularly if you just graph the YoY official inflation rate (including changes) without going back and recalculating every year using the same methodology.
And then there's the reporting. The number you hear on the news may or may not include "the volatile food and energy sectors" depending on which is lower.
There's a reason it seems prices are rising faster than the CPI reported on your drive home. They are rising faster.
The tricky thing is in finding the correct weights of each item in the basket as to be representative. As you can imagine, different people shop differently, so won't experience the same inflation.
[0] http://en.wikipedia.org/wiki/United_States_Consumer_Price_In... [1] http://en.wikipedia.org/wiki/Market_basket
Everything in it is based on averages, and there are lots of differences between individuals that affect your realization of price changes.
Examples: I drive 5 minutes to work, my officemate drives 90 minutes -- gas prices mean nothing to me. If you have 4 kids, meat and dairy escalations hit you harder than average. If you're a vegan, seasonal price swings of produce are more meaningful, and factored out of CPI.
CPI also only looks at consumption. We've had 2-3% price growth with low wage growth. Less buying power magnifies price changes.
I was once wandering through the swampy Mekong delta, and there were huts there that didn't close fully against the weather, with dirt floors, surrounded by mosquito-laden stagnant pods... and they had big screen TVs. They weren't this year's models, and more than a few of them were CRTs, but they were still in these dirt-poor houses.
Back here in Australia, the retail market is so tight for 'big screen TVs' that it's pretty common for retailers to give four-year interest free terms. That's only $10/week for a $2k screen over 4 years, less than one hour's minimum wage, after tax. And, as you say, a big screen TV is a pretty small part of the cost of living, overall.
The sooner we abandon 'big screen tv' as a proxy for measuring wealth, the better.
my monthly cost on that alone jumped from $300ish to well into the $500.
it's mostly organic produce, a few meats, lots of seafood (which i grant that it has a very volatile market price but still)
So i'd say for quality quasi-essential products, it is even higher than that. probably because premium shops were keeping their profits a little lower because of the 2008-2010 crisis.
Come on, just look at SELIC during the second FHC government... the interest rates went sky high, the Real had a monstrous devaluation overnight (from R$ 1.32 to U$1 to R$2.16 to U$ 1).
FHC sure helped to stabilize inflation rate, but he almost destroyed brazilian economy. His second government was nothing short of a disaster.
SELIC history: https://www.bcb.gov.br/?COPOMJUROS
Also sold all state owned companies, which mostly dealt with infrastructure, creating huge foreign owned monopolies. For a while, mobile and internet was worse than it is in the USA now, but the last two governments made improvements there (for example, now for US$0.30 a day --US$9/mo!-- you have a prepaid phone with unlimited calls, text and data ...well data was pulled out of that law last months. it is now 200mb instead of unlimited)
But it was also one that most spent in advertisement. So the public loved it. And even attributes the Real to that president.
The last goverment managed to pay out all the international funds FHC borrowed from.
Now replying your specific question: "The current government is just so bad?"
Yes.
Many of our numbers are the worst in 20+ years, without a solid external economy justification, our troubles are not because lack of exports or other serious effects caused by other countries that were unavoidable, but purely incompetence (or malice...)
Brazil consumers have the lowest confidence in 22 years, our GDP will have the biggest decrease in 24 years, inflation is the highest since FHC fixed it 20 years ago, the income of people, even if you ignore the exchange rate and count only in absolute BRL numbers, is decreasing, and although unemployment is "low" according to the government, the actual number of employed people is low too*
Also the president batantly lied at her campaign (she said she would not do lots of things she immediately did as soon she was re-"elected"), and lied about the energy situation.
The energy situation lie: Because the lack of rains in Brazil (that seemly is linked to the lack of rains in California), we can't rely on Hidroelectric powerplants, but the distribution lines are not all done, meaning that brownouts in some areas are likely (and we even had a country-wide blackout this year, when in the hottest day for some time, the extra power draw from air conditioners made the power lines overload), the president made several discourses with lies about this, trying to hide the situation for her upcoming campaign, she ended forcing the government as whole to give lots of conflicting information about the power situation, as result lots of important business that rely on great amounts of electricity (for example several types of metallurgy, manufacturing, cement industry) to stop investments, this started to cause unemployment and other issues long before Petrobras problems came to light.
Who in their right mind would invest in a country where you can't find reliable information about the infrastructure situation?
And of course, we have Petrobras issues by itself (for example for some problems caused while the president was working for Petrobras and even signed documents that caused the issues, she just stated she didn't read the documents... so she is grossly incoptent, or a malicious liar)
Of course, I might be biased, since my family has a personal bone to pick with the president (the president approved some stunts in 2013 and 2014 that led to several companies that work for the government get defaulted, my family in turn sold stuff for those companies, that defaulted us, saying they would pay us when the government paid them...)
* Brazil copied US bullshit unemployment number: you are only "unemployed" if you have zero income, government handouts included, and is looking for work, if you gave up, or get money from the government, or has income, even if it is tiny and from an illegal source, you are not unemployed
Disaster is what we are living through now. Can you get any example of hight inflation happening at the same time as hight interest rates on Brazil since the Real Plan? Or, can you get any other example of hight inflation at the same time as a decreasing GDP? Or can you get any failed coup from FHC times?
FHC surely didn't do everything right. I have plenty of complaints. But to even compare his government to any of PT's is absurd.
So, when the main source of USD suffers in some sense (export prices, or some kind of supply shock) the Government (unable to get funds) must retort to fiscal policy to meet its commitments. And fiscal policy is the number #1 recipe to get (hyper-)inflation
huh?
If you primary deficit is positive, you need to borrow money even if all your creditors decided to pardon your old debts.
Fernando Henrique Cardoso made a law that mayors, governors and president are criminably liable for reaching the end of their term with primary deficit (thus putting the next person in charge in trouble).
Dilma Rouseff in 2014 had a primary deficit of positive 10 billion (meaning the government would need to borrow 10 billion more than usual).
She circunvented this by pulling a ugly stunt on the congress (she sent a law to the congress, where the law said that some of government spenditure "don't count" toward the balance, then she threatened to not sign the bill that allow congressmen to spend some federal money to help their homebase unless the congress approved her law)
Yeah... no. Between '64 and '85 we were living under a military dictatorship. No president during that period got voted out let alone impeached.
As others in this thread are pointing out, the episode was very hand-wavy about previous attempts at limiting the money supply in the country and how effective those attempts were.
Two important books about this subject:
* A real história do Real;
* A saga brasileira.
Inflation in Brazil was indeed rampant at this moment, but the cause (when URV entered the scene), wasn't public spending anymore.
It was a so-called inertial inflation (a theory, of course. See "Inertial inflation and monetary reform in Brazil"[1]), caused by public (merchants, industry etc) perception (or fear) that prices were always going up.
Before that, government made a great job reorganizing the budget, untying public prices from inflation, renegotiating debts with Wall Street and making new debts with the FMI.
After the roots of inflation where addressed, it's "inertial psychological" component (as they called it) was shut down with URV.
URV, of course, was no virtual or fake currency. It was an index based on (or simply copied from) US dollar price.
The real deal here is: how a lean team with a very strong leadership solved this big mess. Those guys were no amateurs and at least on of them were a inflation specialist Phd from MIT (Persio Arida, a Brazilian).
The first book was written from a member of staff of this team and it's description of the team gatherings is awesome.
The fact is that the value of currency is impacted by controlling demand (which the URV was attempting to do with a psychological hack) or by controlling supply (which was being accomplished by the many other very sensible changes)
In the PM story at least, it was unconvincing to me that using a "traditional" currency instead of the URV wouldn't have led to the same result.
"In common with other countries with low-value currencies, where people are accustomed to paying in units of hundreds and thousands, the introduction of the euro, which was valued at 166 pesetas, led to stealthy but rapid inflation. Within in year a cup of coffee that in most bars cost 100 pesetas was priced at €1 while the cost of a 1,000-peseta three-course lunch leapt to €10 – a 66% increase." [2]
[1] http://news.bbc.co.uk/2/hi/business/2098033.stm [2] http://www.theguardian.com/world/2014/aug/31/spaniards-holdi... [3] http://ec.europa.eu/economy_finance/publications/publication...
----
"You have to slow down the creation of money, they explained. But, just as important, you have to stabilize people's faith in money itself."
Now, if you are arguing that the government started printing money because the energy crisis destroyed its budget, then yes, the energy crisis caused the printing of money, that caused the hyperinflation. Thus, in some indirect sense, the energy crisis caused the hyperinflation.
Also of note the inflation rate in 1991 was very close to the 1970, and 1976 rate of six percent. So spiking to up another 6% to 12% percent briefly was clearly related, but 1/2 of that total was directly from failed policy.
http://www.frbsf.org/education/publications/doctor-econ/2003...
PS: Another way to look at it was the oil crisis created a price spike, which poor monetary policy turned into increased inflation.
Mar. 1990 Brazil Aug. 1990 Peru Mar. 1991 Nicaragua Mar. 1990 Argentina
You can see a compiled hyperinflation rates in a table in this paper: http://object.cato.org/sites/cato.org/files/pubs/pdf/working...
i.e. it was a hack to reduce the velocity of money in Brazil.
In all likelihood inflation would have come down anyway at some point around that time. Energy prices had stopped rising. Perhaps this made it happen a few months or even a year earlier, though.
If they'd tried this trick in the beginning, while energy prices were still rising it would have done fuck all.
Brazilian money had this name since we had a king, then, at the inflation time its name was changed, a dozen times or so, and came back to the original.
Of course, I'm just an armchair economist, so perhaps there's part of the picture that I'm not seeing.
I'm still majorly confused as to why not all legislation uses "inflated dollars" or some metric that keeps things in line with inflation. Well not confused, per say, more like disappointed.
See motoboi's comment for more details.
I think the Pinochet dictatorship expanded the UF to be used in financial transactions like mortgages. Large loans such as for cars or college are also in UF.
It would be interesting to know whether Chile's UF served as inspiration to these brazilians.
Everything have long lines, because your money would be worth nothing in the next day, so everybody went in the markets in the 10th day of the month, when they received their paychecks.
All of the (stated) goals of monetary policy can be achieved by using a price index layered on top of money, whith none of the distortionary effect and seignorage.
There are only two hard things in Computer Science: cache invalidation and naming things. -- Phil Karlton
You have to slow down the creation of money, they explained.
It's as if it wasn't instrumental when in actuality, it's the entire reason why inflation stopped.
What was cool about the Real story is that they mostly managed to stop inflation without the normal period of distress. This was super important because I believe the Brazilian central bank doesn't have the Fed's level of independence and probably wouldn't have been able to do it the hard way without being stopped.
The quantity of money is both nebulously defined, and also has absolutely nothing to do w/ price level; it's all spending relative to output capacity.
All of this only works if you have an economy that is otherwise relatively stable. Brazil happens to have an abundance of diverse natural resources (oil, timber, mining, etc.), which provides a lot of economic stability. Now if you tried the same tactics in, say, Argentina (which currently faces many of the same problems that Brazil did with regards to cyclic inflation/deflation) I would expect different results. Because Argentina has approx. 15% the population of Brazil, its economy is much less diverse.
The root of the inflationary problem both in ar & br is, and has always been, the printing of money to cover for the fiscal deficit. Government hikes taxes every year and every year it consumes a bigger % of the pib.
That seems like a claim that's hard to defend... If the government stopped printing money, it is true people would continue to adjust prices upwards for a while, but people would quickly realize that they were running out of actual money and stop doing this.
This isn't the kind of situation where borrowing & lending is indirectly increasing the money supply, if no money is printed people would simply run out of bills and the inflation would stop, regardless of "assumptions" and "psychology".
Hyperinflation abruptly stopped the month after Real was introduced. All previous governments tried and failed to control it.
The Real was a success. Mismanagement of the economy later on has nothing to do with it.
