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On the Edge of Hyperinflation in Brazil

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Monetary expansion and the price inflation that it brings in its wake always eat away at the social and economic fabric of a society. The value of money constantly diminishes. The ability of people to plan their financial future is made more difficult. Money begins to lose its usefulness as a common denominator through which the value of goods and services may be compared and evaluated. The erratic and uneven manner in which different prices rise in relation to each other during an inflation — some going up sooner and others going up later in the process — brings about a redistribution of income and wealth. A misallocation of labor and capital occurs throughout the economy.

A hyperinflation merely takes the same consequences to a more destructive extreme. Money approaches worthlessness. People spend with a frenzy just to get rid of the cash in their pockets. Life-long savings lose their value in a matter of days. Individuals desperately try to juggle their assets just to maintain their savings. Long-term investment — the basis for rising standards of living — grinds to a halt. Trade becomes more difficult or even impossible, through normal channels of exchange. Finally, the social division of labor itself is threatened with collapse as monetary transactions become the avenue for economic losses rather than profits. Hyperinflatiom continued to the bitter end, means the end of the social and economic order.

Brazil is on the edge of hyperinflation. Last October, I had the opportunity to lecture in five Brazilian cities, including Rio de Janeiro and Sao Paulo. My invitation to deliver these lectures came from the Instituto Liberal, a non-profit, educational organization devoted to the principles of limited, constitutional government economic freedom, and civil liberties. The Institute has branches in all of the major cities of the country. It is supported by a small but dedicated group of Brazilian intellectuals and businessmen who strongly believe in the principles of a free society.

The environment in which these people advance the principles of freedom can only be described as economic and political chaos. Through nationalized industries and subsidization of private firms, the Brazilian government controls 70 percent of the economy. During the last four years, over 54,000 new employees were added to the government payroll. During that same period, almost all government employees were repeatedly given major pay increases.

There is also a pervasive and unbreakable system of political corruption in Brazil. Outside the city of Belo Horizonte, I was shown an expansion bridge over a deep ravine. The bridge stood half completed. A large portion of the money which had been allocated for its construction had simply “disappeared.” I was also told about a major official in the Ministry of Public Welfare in Rio de Janeiro who had been caught using public monies to build private apartment buildings. Although the official himself had received high rental incomes from these apartment buildings, he received no jail sentence. It is also virtually impossible to do business in Brazil without the payment of bribes. The bribes are paid either to have government regulations ignored or to have no “trouble” in obtaining the necessary labor and resources to conduct daily business activities.

To finance its expenditures, the Brazilian government resorts unendingly to the printing press. In October price inflation was running at approximately 40 percent a month, or well over 1,200 percent a year. When I arrived in Rio de Janeiro on October 14, the official government rate of exchange was five Brazilian cruzados to one United States dollar. But on the black market (which means everywhere except at the Brazilian Central Bank), the rate was 9.5 cruzados to the dollar. By the time I left Brazil at the end of the month, the black market rate had gone down to 12.7 cruzados to the dollar, a 33 percent depreciation of the currency in just over two weeks! (For comparison, near the beginning of 1989, the black market rate was 1.5 cruzados to the dollar.) With money losing its value at the rate of one percent a day, restaurants in Brazil do not list prices. Instead, next to each item is a code number which the patron uses to refer to a pull-out sheet at the back of the menu. The prices on the sheet are changed every few days — if not sooner.

Though widely held, credit cards are infrequently used. Due to the long time delay in credit card charges clearing through the banking system, sellers normally add on a 20 to 30 percent surcharge to the price of the purchased item. In this way, vendors can protect themselves from the depreciation of money during the time the vendors are waiting to be paid by the credit card companies. Therefore, rather than pay this surcharge, people usually pay their bills with cash or check. Checks are accepted everywhere because everyone can be tracked down through his personalized national identity card The card contains the person’s name, address, occupation, and identification number.

In an attempt to protect themselves from future currency depreciation, individuals have their contracts, as well as their bank accounts, denominated in terms of BTN, the Brazilian national treasury bonds. The value of the bonds is adjusted daily in accordance with movements in the bond price index. To further escape the inflation, incomes are either denominated or paid in U.S. dollars. One Brazilian employer told me that one of his employees even threatened to resign his employment if his salary was not paid in U.S. dollars.

The Brazilian inflation has brought almost all long-term private investment in the country to a halt. With pervasive uncertainty about what anything will be worth in the future, most planning horizons by the business community extend to only a few months.

On November 15, an inclusive presidential election was held in Brazil, the first presidential election in 29 years (Brazil had a military dictatorship for most of that time). A run-off election was held on December 14 between a socialist named “Lula” and a moderate-conservative candidate named Fernando Collar de Mello. When the votes were counted, Collar had won.

The only economic policies that can save Brazil are dramatic cuts in government spending, elimination of State regulations that not only hamper the private sector but also breed the pervasive corruption in the public sector, and the shutting down of the political printing presses that pour forth the tidal waves of inflationary money, the kind of policies that, in fact, Collar promised during the presidential campaign. But promises and delivery are two different things. Collar is not to take office until March. Congressional elections will not be held until October, and it is unlikely that the majority elected will be free market in its orientation. And the stranglehold of special interests is strong.

In the meantime, Brazil’s inflation has gotten worse. In December the cost of living rose 54 per cent For all of 1989, the rate of price inflation was 1,765 per cent the highest in the country’s history. And the expectation was that 1990 would only see inflation go higher.

Brazil is a vast country, larger than the continental United States. It is rich in resources and human talent (like America, Brazil is a land of immigrants of various backgrounds and nationalities). If left free and unshackled from government intrusion it could easily become an economic giant in the span of one generation. One can only hope that the supporters of the Instituto Liberal will succeed in persuading their fellow citizens of the ideals of limited government free markets, and sound money before their nation falls over the abyss of hyperinflation and into the resulting social devastation.

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    Richard M. Ebeling is a professor of economics at Northwood University. He was formerly president of The Foundation for Economic Education (2003–2008), was the Ludwig von Mises Professor of Economics at Hillsdale College (1988–2003) in Hillsdale, Michigan, and served as vice president of academic affairs for The Future of Freedom Foundation (1989–2003).