While currency temptations run high in countries with more active central banks, there has been, as I noted yesterday, growing illegitimacy in trying to create academic conditions in the real world. The primary manifestation of the instability created by believing currencies can and should be actively managed has been an outbreak of “inflation”. I use quotes here because rising general prices is actually one of the primary goals of currency management in this context, but it is not general price levels that are rising; it has been limited to the less “beneficial” commodity inflation.
Recently, instability in Japan has captured most attention as it relates to dramatic currency experiments, but Joe Calhoun has been talking about Brazil for some time as a system in crisis and in need of more study. When the Banco Central do Brasil interfered with the real last year to arrest the steady increase (up some 27% at the time since 2008 against the dollar), Joe made an offhand comment that has proved quite durable, noting that they should be careful what they wish for.
After growing 7.5% in 2010, Brazil GDP fell back to 2.7% in 2011 and the rising real was an easy target. Central banking figures took aim at the US Federal Reserve and QE, singling out very publicly Bernanke’s programs for the scorn of “currency wars”.
Starting in August 2011, the Banco began trimming its benchmark SELIC rate of 12.5% in increasing “doses”. By October 2012, SELIC was a record low 7.25%. During 2012, the real really responded by depreciating 24% against the dollar. Be careful not what you wish for, but what you actively seek to engineer.
The results are downright ugly (Google translation):
“This has pushed up the price of imported products and therefore inflation in a country where 40 million people have joined the middle class over the last twelve years. As a result, food prices soar. In May, the value of the tomato rose 96% year on year, onions, 70%, rice 20% and chicken 23%. Side, rents have increased by 118% since 2008. Same in hotels where the room rate exploded by nearly 80% to $ 246.71 on average, which makes Rio the third most expensive city in the world.”
While the proximate cause of recent unrest was bus fare, bringing hundreds of thousands into the streets to protest, that was just the latest outrage in the age of economic management. Brazilians are uncomfortable not only because of currency instability itself, but largely due to their very close experience with “inflation”. Despite the modern economic concept of inflation as a variable to manipulate toward positive economic momentum and eventual growth, so many other areas of the world have firsthand experience to such folly in thinking and in practice.
The criticism here is not directed at the Banco Central do Brasil itself, but the entire system of central bank control. In this case there is actually some sympathy for the Banco, but that only goes so far. When every central bank is actively manipulating interest rates, currencies and even asset markets there is no end to potential measures and countermeasures. Since 2008, every central bank has been in overdrive. These are the results – no sustained or sustainable growth anywhere. Instead, they all resort to those “currency wars”, everyone trying to goose their export markets at the same time in the same space. The global economy has sunk to a zero sum game.
There is a world of difference between Japan and Brazil, but in this case currency manipulation joins them potentially in a cohort of dissatisfaction and disaffection, bonded by monetary science’ embrace of intentional instability.
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