The Brazilian crisis in 500 words

Economics deals with the exchange of workers’ outputs. The better the coordination between these interactions, the more they will occur, which can be considered a measure of prosperity. Coordination may be voluntary, having as its compass prices that are freely, granularly and diffusively set by each and every agent involved in the process. Or else, coordination may be coercive, when a chosen group, normally known as government, imposes the conditions it judges favourable on all or selected parts of the aforementioned economic agents.

In China, late in the last century, the increase in voluntary coordination was noteworthy. Price system! Entrepreneurship! It has almost been recognised as a market economy. Dazzling growth. Nevertheless, coercion has vastly remained: workers earn and spend less than they produce and the country saves more. At least they have been gifted with infrastructure superior to their current needs. Infrastructure that obviously required raw materials to be built, bringing happiness to whoever produced iron ore, fuels and even food.

Brazil started off the new millennium in a less turbulent economic state. As a result of decisions made by the end of last century, when the country decided to make the coordination among its agents less coercive. The key to stability is flexibility. Moreover, due to natural conditions, Brazil had a lot of products coveted by the Asian giant. Strong exports reduced the price of foreign currency, hence curbing inflation. And interest rates as well. This resulted in borrowers other than the government becoming attractive. A credit market blossomed. And so did a consumption market.

Storm followed the calm. So much affluence led the government to spend more – on consumption, of course. So much consumption made domestic savings plunge. If fewer people are saving, fewer will be able to invest, and if consumption outgrows investment, prices go north. Lehman went belly up, worldwide credit went scarce. Consumption fell in Brazil, taking inflation along. Notwithstanding, consensus (in the government, at least) was that only consumption saves. Coercion is back on the stage: public sector banks lent more at lower cost and the price that coordinates this market – interest rates – became distorted.

It all became a hot mess: whoever shouted louder got the most benefits – directional coercion. Some pay lower taxes. Others get more loans. Foreigners have to pay a new toll to invest in Brazil. Then they don’t have to anymore. Then they have to again. Prices are controlled to avoid an inflationary spike. Widespread dis-coordination. Higher interest rates. Less money to lend. The consumption bubble burst. The jobs it created disappeared. Less production meant less government revenues. The debt it accumulated threatened to be unplayable.

Bottom line, it became unfeasible. The command is ousted. The ones who take it over are the ones who someway somehow already commanded. They try to dismantle all that dis-coordinated coercion. However, no one actually believes the new commanders, discredited from the start, that have no moral credibility to coordinate. Once again, remaining as the coordinator becomes more important than the coordination itself.

Place your bets.

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