Opinion: The Curmudgeon on Maxi-Devaluations

Opinion, by Michael Royster

RIO DE JANEIRO, BRAZIL – In early 1999, the Curmudgeon watched, aghast, as the dollar went from R$1.20 to R$2.10 in less than a week; in late 2002, the Curmudgeon watched, astonished, as the dollar went from just over R$2 to just below R$4; the Curmudgeon has now watched, approvingly, as the dollar rises from R$2.40 to R$ 3.25.

The Curmudgeon is not worried nowadays because he’s seen far worse before — between 1967 and 1994 he saw a total of twelve zeros fall off Brazilian banknotes. In all those cases, the maxi-devaluation had the effect of increasing inflation dramatically. Brazil’s basic underlying economic problems were only cured in 1994, when FHC abandoned price controls and indexation and allowed prices to adhere to market realities.

In the 1999 and 2002 devaluations, inflation initially surged, but then fell back. This was a function of market forces. Brazil’s economy, even after globalization, has a much larger domestic than international content, meaning it is not overly dependent on imported goods and services. So, in 1999, when fishmongers tried to charge double for imported sea food, consumers said “no” and bought domestic sea food.

This stability is due to the nature of the Plano Real, which relies wholeheartedly upon market forces. Much of Dilma’s economic program did exactly the contrary — it sought to protect and foster uncompetitive local businesses without weakening the currency.

Dilma’s new economic team knows that doesn’t work, and so has refused to continue those expensive and inefficient measures (customs duties, tax breaks, subsidized government loans) to support local content. Local production is naturally favored by a lesser “real” because customers think twice about buying imports, and look closer to home.

Sooner or later, assuming markets are allowed to prevail, both prices and currency will reach equilibrium. It happened after 1994, it happened after 1999, it happened after 2002 — it will happen in 2015 as well.

Unless, of course, Dilma and Congress are unable to resist the blandishments of the Brazilian industrial complex, and continue to shower benefits upon them. Congress will be sorely tempted, and not just because these behemoths contribute to political campaigns, under and over the table — they employ millions of workers, and workers vote.

The workers are not happy, partly because they feel they’ve been betrayed. It’s not their fault their employers now have to shut down, because the company officers and directors got caught with their hands in the cookie jar. A recent poll among pro-government protesters on Friday the 13th found that almost two out of every three protesters believe that Dilma knew about the skulduggery in the Petrolão. A more general public opinion poll shows Dilma’s support at only 27 percent of the populace, down from over sixty percent just before the elections; the necessary conclusion is that Dilma would be soundly trounced in a “third round”.

But, maxi-devaluation or no, there will not be any third round. FHC’s popularity plummeted to 19 percent right after his maxi-devaluation, but climbed back up during the next three years. Dilma’s popularity likewise has almost nowhere to go but up.

The above “almost” hangs upon whether someone can prove Dilma knew about the Petrolão. If they can, she will surely be impeached or resign.

The Curmudgeon first fetched up on these shores twelve currency zeros ago, still loves it here, where his favorite spectator sport is politics, from a waspish point of view.