This blog contains posts and comments written by students in Dr. Tufte's economics classes at Southern Utah University.
2/27/2006
Brazil Senators Propose Weakening Currency
When I hear about a weakening currency, at first it sounds like a bad thing. Brazil's senators are proposing a bill that would weaken the real. Brazil's real has experienced 47% inflation since 2004, which is hurting their economy. The proposal will let exporters keep money earned internationally in foreign currency. This will help exporters keep profits that would eventually be lost by the strengthening of the real. This allows them to pay off debts, imports, and investments, saving money in transfer costs. A more balanced currency will help stabilize Brazils economy.
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I was able to see what happens when a currency weakens rapidly (which I think is the case in Brazil) when I lived in Argentina in December of 2001. I saw Argentina's peso drop from a 1:1 ratio with the US dollar to a 4:1 ratio in about one week. The impact was so detrimental to the economy that the citizens began making up currencies that were unique to the region. They then used those currencies to buy goods from each other in empty warehouses. Because the citizens had virtually zero purchasing power, they had to trade homemade goods in order to acquire the daily necessities. The unemployment rate surpassed 10%, and PHD's were forced to make pizzas to trade for shoes for their children. It was not pretty. I hope that Brazil does not find itself in that same situation.
This is a band-aid solution, and it is typical of the control freaks that haunt bureaucracies around the world.
Inflation is a monetary phenomenon. It is caused by putting too much money in circulation. This is a policy the bureaucracy could stop if it wanted to (they probably don't want to because their is a form of easy to hide tax revenue called seigneurage that the government earns from inflation). Instead, they have chosen to bend the rules to benefit a chosen few (the exporters). This is just another case of two wrongs don't make a right.
Dr. Tufte said that putting too much money in circulation is a band-aid solution. So what should be done to help the economy but not cause inflation? When people get scared, they stop spending and start saving, which if everyone does at once can hurt the economy. Ups and downs are normal but the media upsets everyone and then the downs become even worse – a self-fulfilled prophecy if you will. So to fix inflation, should the government do the opposite and take money out of circulation? I think a lot of people would be upset with that.
I don't want to seem flippant, but maybe that senator ought to just let Brazil "grow up".
Brazil is actually doing quite well currently and historically. But, in terms of economic growth it is younger than many older, richer countries. Patience will solve a lot of their problems.
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