I just finished readings the Sunday newspaper here in Brazil and the press it up in arms. The last first four months of 2013, the Brazilian economy grew at .6%, and the American economy grew at 2.5%. On top of that, in the last month, the Brazilian real has lost 15% of its value against the American dollar. Everyone is calling for quick action due to the poor economic results. They are all dead wrong.
The key issue is that they are trying to compare Brazil to the United States. In my view, the United States, and in particular Ben Bernanke, has done everything wrong in order to manage a strong and prosperous economy. At this point, the United States economy is based on cheap money that creates a bonanza in the financial sector which creates a lot of faux milllionaires but does nothing to create jobs or improve the overall economy. On top of that this strategy creates a very unstable banking sector requiring massive government bail outs. So if Brazil is to be successful, they need to avoid doing what the United has done.
Up to this point, they have been very successful, because the Central Bank has decided to increases interest rates .5% from 7.5% o 8.0%. Imagine that, a country raised their interest rates and this is perhaps the #1 reason why Brazilian is on the right path. They are one of the few countries in the world which still have the ability or strength to raise interest rates. Compare that with the United States, the banks so control the country, that even if the Fed hinted at raising interest rates, the banks and Wall Street would batter the stock market. As we know, the US and Japan are both stuck at 0% interest rates for the foreseeable future. I will Brazil will resist falling in this economic trap and therefore will become more productive than both Japan and the US.
On top of that, Brazil measure inflation correctly The inflation index includes key costs such as health care costs, energy and food costs. That’s right. About 40 years ago, in America, we measured inflation to include all of the key things that people purchase, but in order to avoid “inflation”, our wonderful government decided to exclude key things that people need to survive such as energy and food costs. Again, America is NOT the benchmark and Brazilian can and will be successful if they avoid the tragic error of excluding key costs from the inflation index.
Brazil’s infrastructure severely lags that of Europe, China, Japan and the United States. This is in all senses a good thing. First and foremost, Brazil can and will upgrade their infrastructure and it will create a stimulus to the economy. The Brazilian government is doing the upgrade slowly so as not to overheat the economy and create inflation. It is a huge upside that no other country has at its disposal. China has gone about the infrastructure issue in the exact opposite way. In the short space of 10 years, their infrastructure is now world class.
There is another huge upside which Brazil has yet to explore. Brazil’s key exports are still agricultural in nature. Brazil can and wiil make the transition to move the agricultural work force to production jobs in factories much the same as China. It is another huge upside and they are just in the beginning now that there is a small iPad factory just north of São Paulo.
I moved to Brazil 10 years ago, and believe it or not, interest rates were roughly 24% per year or roughly 2% per month. The dollar was also incredibly strong at 3 reais to the dollar. That’s when I bought my apartment it was the shrewdest investment I have made in my life. Since that time, interest rates have fallen from 24% to 8%, but by raising interest rates, Brazil has proven two things.
1. In the face of inflation, Brazilian did NOT change the way inflationn was measured.
2. Brazil has the ability to rasie interest rates which few nations in the world still have the capacity to do because the Brailian government still controls their banks as opposed to the other way around. If they can avoid the pundits, they can avoid the raise to zero and become of the strongest nations on earth.