By Adolfo Sachsida.

Global interest rates are at their lowest historic levels. One day, they will rise. The price of commodities is at its highest levels in history. One day, it will fall. To complicate matters, these two phenomena are correlated. That is, an increase in international interest rate has the effect of lowering the price of commodities. One day interest rates will rise and commodity prices will drop, and when it happens, Brazil will be thrown into a recession.

The international scene is excellent for Brazil to make the big macroeconomic reforms, but instead we are enjoying this moment towards increasing consumption. The correct would be to take this time off to make the adjustments that our economy so desperately needs: fiscal adjustment, tax reform, reform of labor laws, welfare reform, economic liberalization, reduction of bureaucratic obstacles, etc..

Internally the government is doing everything possible to complicate its situation, mainly by increasing public spending. Brazil was probably the first country to announce fiscal adjustments by increasing yoy spending rather than reducing it. On the monetary side, it became clear that an inflation rate of 6% does not concern the government.

There is clearly a housing bubble in the making here, thanks again to the expansionary fiscal and monetary policies of our government. And there is a very serious demographic problem that the government insists on ignoring. In 2013, public spending related to the World Cup will further worsen Brazil’s public accounts. In 2014, as always happens in an election year, public spending will spike. To make things worse, include the flood of provisional measures and government interventions in the economy (including BNDES’ activities), which increase public spending and encourage elected government sectors at the expense of the rest of society.

In 2015, the first year of the new elected government, it will be the time to pay the bill for the irresponsible fiscal and monetary policies of the past. Brazilians better save money because when the crisis hit, those who are liquid (cash on hand) will make great investment deals. From 2015 and on, Brazil may experience the same kind of scenario that it has faced in the early 1980s. Unfortunately, it seems that the Brazilian “bureaucrats” learned nothing from the economic lessons of the late 1970s.

Source: Adolfo Sachsida

Tagged with:  
Share →