Monday, April 23, 2012

Bubble bursting Brazilian style

There is a lot of discussion of Latin America being the economy of the future, and Peurtogueze speaking Brazil becoming the new giant in the Western Hempishere.

But as the following piece notes, "Brazil is the country of the future, and always will be."

Ambrose Evans-Pritchard, The Telegraph (U.K.), 15 April 2012 (hat tip: NC)

"Prices are crazy," said Eduardo Paes, Rio’s mayor. Even 'favelas' are frothy as developers close in. A good slum is worth a four-bedroom house in Arizona - if you can prove ownership.

"Brazil is experiencing a typical housing bubble," said Samy Davy from the Getulio Vargas Foundation. "It risks widespread damage to the Brazilian financial system and economy as occurred in the US."

"We estimate that the market is overvalued by as much as 50%," said Neil Shearing from Capital Economics. With luck, the bubble will "deflate slowly" as the economy motors at 3pc to 4pc and inflation erodes real debt.

The fear is that a Chinese hard-landing/credit contraction will intrude...

Labour productivity has not remotely kept pace with China or the Asian tigers, which is why industrial output has almost halved to 14.6pc of GDP, a level last seen before the great industrialization drive of the of late 1950s. The country is becoming 'post-industrial' before it is rich.

The Brazilian response is protectionism.

President Dilma Rousseff - an urban guerrilla during the military dictatorship of the early 1970s - has blamed the real’s strength on a "monetary tsunami" of funds fleeing Anglo-Saxon QE in search of yield.

Her response is to throw up a screen of 40 protectionist barriers, with import surcharges and a Buy Brazil edict for procurement even where local products are 25pc more expensive. "We have to take measures to defend ourselves. We cannot let our manufacturing sector be cannibalized."

Ex-central bank chief Gustavo Franco said the policies are retrograde, damning the government’s "currency war" mantra as escapism. "They don’t seem to understand the real issues."


Note that the new sources, which get much of their adverstising revenues from financial sources are predisposed to dislike protectionist measures.  And many will point out that the United States during its growth period in the 19th century was highly protectionist, and even that Britain during its growth phase was more of a mercantile state than the supposedly tightly controlled French economy.

Unfortunately, on the domestic front there are differences in how the countries are run.  The United States, for all its enormous economic power, usually had a miniscule regular army, and an almost as miniscule navy.  Federal budgets were generally small.  Our economic system of the 19th century could look a little like a banana republic at times, but it was a bannana republic run cheap.

Brazil: not so much (source as above):

It is true that hot money has flooded the country, but this is because the central bank has kept rates at nose-bleed levels to offset the inflationary effects of government spending....

Brazil has wasted much of its commodity bonanza subsidizing a bloated state, with "Greek" retirement at 54 and ruinous pension costs. A Santander study said Brazil has still "Cambodian-style" infrastructure.

Brazil, Australia, and Canada are three countries that come to my mind when I think of current commodity booms.  But at least in theory that would be the time to pay off debt.  To squeeze the market so that it does not overextend itself on the flood of money coming in.  If you act in a protectionist fashion when you are growing, you can also to some degree protect your local economy from the Dutch Desease.  Spending like there is no tomorrow is not the way to go:  not that we citizens of the United States are in much of position to criticize.

-Note:  I am sorry about the paragraph gaps.  Blogger was being strange and I couldn't find any easy fixes.

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