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Is printing money the solution for the Brazilian crisis?

Is printing money the solution for the Brazilian crisis Still via Globo

Preparing a country to battle the Covid-19 pandemic requires resources. Simultaneously, governments have to organize their national health systems — if they have them — avoid letting companies go bankrupt, and provide support to the unemployed and most vulnerable strata of the population. Around the world, these mounting duties led to the quasi-consensus that governments would have to increase public spending. In Brazil, however, with the public debt reaching 75 percent of GDP before the pandemic hit, the country has very little wiggle room to ramp up spending. The solution, according to some economists, is an unorthodox tool called quantitative easing, which is an indirect method of printing money.

</p> <p>The idea — initially tested by the U.S. Federal Reserve in 2008 — is typically used as a last resort, when interest is so low that monetary stimulus packages become ineffective. Therefore, by increasing the monetary base — i.e., printing more money — the Central Bank would be able to purchase bonds, avoiding permanent deflation caused by the constant fall in prices, as people hold off on spending when they know prices may go down in future. </p> <p>Now, with the new “<a href="https://brazilian.report/newsletters/brazil-weekly/2020/05/11/breaking-down-brazil-coronavirus-war-budget/">War Budget</a>” approved by Congress allowing the Central Bank to purchase public and corporate bonds, and with benchmark interest rates at a historical low of 3 percent and potentially falling further, some economists believe we have reached the conditions for quantitative easing (QE) to be employed in Brazil. Even Economy Minister Paulo Guedes has floated the possibility. “If we fall into a liquidity trap, in a zero-inflation scenario, the Central Bank may, indeed, <a href="https://www.infomoney.com.br/economia/questionado-guedes-admite-imprimir-dinheiro-para-combater-a-crise/">issue lots of currency</a> and purchase internal debt,” said Mr. Guedes, speaking before the Senate.&nbsp;</p> <p>Central Bank Chairman Roberto Campos Neto, however, <a href="https://economia.uol.com.br/noticias/reuters/2020/04/09/nao-sou-favoravel-a-bc-imprimir-dinheiro-diz-campos-neto.htm">considers the strategy dangerous</a> and believes the country’s economic recovery will not come through quantitative easing. So, what makes QE so attractive and, yet, so controversial?</p> <h2>When the medicine becomes poison</h2> <p>Part of the fear lies in the fact that printing money raises inflation —&nbsp;and, not so long ago, Brazil experienced a period of hyperinflation comparable to post-war Germany or modern-day Venezuela. That process was only controlled in 1994, with the <a href="https://brazilian.report/newsletters/brazil-daily/2019/07/01/brazilian-currency-25-years-sergio-moro/">creation of the Brazilian Real</a> — which was anchored by fiscal responsibility rules and the end of transactions between currency issuers and the government.</p> <p>Such a dramatic scenario seems distant from the current situation, as Brazil’s benchmark inflation index fell to its <a href="https://agenciadenoticias.ibge.gov.br/agencia-noticias/2012-agencia-de-noticias/noticias/27616-combustiveis-pressionam-deflacao-de-0-31-em-abril-menor-indice-em-22-anos">lowest level in 22 years</a> in April. Looking back over the past 12 months, the index is up by 2.4 percent — below the Central Bank’s lowest target of 2.5 percent. The goal for 2020 would be an inflation rate of 4 percent.</p> <iframe class="wp-embedded-content" sandbox="allow-scripts" security="restricted" src="https://public.flourish.studio/visualisation/1872786/embed#?secret=QKNzA61ji8" data-secret="QKNzA61ji8" frameborder="0" scrolling="no" height="575" width="700"></iframe> <p>“The Central Bank has room to expand the monetary base — printing money, in the popular vernacular — and reorganize the economy. There’s no risk of inflation,” said São Paulo Finance Secretary Henrique Meirelles — who chaired the Central Bank during the 2008-2009 financial crisis — in an <a href="http://bbc.com/portuguese/brasil-52212033">interview</a> with the <em>BBC</em>.</p> <p>But Mr. Meirelles, who was also known for pushing for austerity when he served as Finance Minister between 2016 and 2018, defends a limit for the money-printing solution. “It is an expenditure that has a beginning, a middle, and an end. After the pandemic, we return to normality, to fiscal austerity.”</p> <p>In an article published by newspaper <em>Folha de S.Paulo</em>, a group of eight economists led by Monica De Bolle, a senior fellow at the Peterson Institute for International Economics, argued that quantitative easing would provide social benefits for the population, as it would inject liquidity in the economy.&nbsp;</p> <p>“By issuing currency, the state creates purchasing power. When taking on debt, the state borrows from who has money in excess and sends it to those who don’t. Printing money or incurring debts, the government puts money into the economy. And this is what we need urgently,” <a href="https://www1.folha.uol.com.br/mercado/2020/04/emitindo-moeda-o-estado-cria-poder-de-compra-que-antes-nao-existia.shtml">they wrote</a>.</p> <p>Moreover, they argue, 95 percent of <a href="http://www.tesouro.fazenda.gov.br/a-divida-em-grandes-numeros">Brazil’s gross public debt</a> is recorded in Brazilian Reais, which would give the country the ability to fund itself. However, they do emphasize the necessity for moving on from the strategy once the pandemic is over.</p> <div class="flourish-embed flourish-chart" data-src="visualisation/2349746" data-url="https://flo.uri.sh/visualisation/2349746/embed"><script src="https://public.flourish.studio/resources/embed.js"></script></div> <h2>No free lunch</h2> <p>The main concern among economists opposed to the measure is not the current situation, but the day after. That is, when inflation will eventually pick up again, demanding higher interest rates, and the country will be left with an astonishing debt to pay, <a href="https://brazilian.report/newsletters/brazil-daily/2020/05/06/brazilian-industry-numbers-slide-the-only-question-is-how-bad-it-will-get/">incurring in fiscal problems once more</a>. As former Central Bank Chairman Ilan Goldfajn points out, there is no magical solution.</p> <p>“Why doesn’t the government simply pay for everything with its currency? The point is issuing currency is not just to print money; they are transfers, deposits. This money has a cost. The Central Bank is issuing a liability, it pays interest for it. In the end, it is the same as issuing debt,” said Mr. Goldfajn, in a broadcast to clients of private bank Credit Suisse, late in April.&nbsp;</p> <p>National Treasury data points out that, while the benchmark interest rate was slashed to 3.75 percent in March, the cost of Brazil’s debt reached 9.53 percent in the past 12 months — evidence of how much an increase in debt may cost to the already-embattled public accounts.&nbsp;</p> <p>For Josilmar Cordenonssi, an economics professor at Mackenzie University in São Paulo, the data shows that Brazil has not yet reached the conditions for deploying QE. In his view, printing money should not be an option while there is still room to lower interest rates and there are other options to release liquidity in the economy, such as reducing the reserve requirements. Moreover, he adds, the success of such a strategy lies in reputation and trust.&nbsp;&nbsp;</p> <p>“The fundamental difference is credibility. It is not only about the current deficit, about this year, but over the years. The U.S. has credibility; even with a momentary deficit, they will be able to reverse it in the future. Brazil has budget problems, budget strictness. The government cannot spend on points that would be essential because of this strictness,” he told <strong>The Brazilian Report</strong>.</p> <p>If carried out, however, the strategy might be a good chance to reshape the profile of Brazilian debt. Bonds that are adjusted according to floating taxes cause an increase in government expenditures, as they demand higher premiums once interest rates go up. Right now, they make up 37.7 percent of Brazil’s public debt, but the Economy Ministry <a href="https://agenciabrasil.ebc.com.br/economia/noticia/2020-01/divida-publica-pode-alcancar-ate-r-475-trilhoes-em-2020">projected</a> they could reach up to 44 percent by the end of 2020. For Mr. Cordenonssi, QE could offer an opportunity to acquire those bonds, eventually slashing them.&nbsp;</p> <h2>The financial crisis’s inheritance</h2> <p>One could argue that the Fed&#8217;s 2008 strategy to print money actually worked, as the U.S. economy recovered from the crisis and stock markets rose for nine years in a row. However, it has consequences. A QE policy could, according to Mr. Cordenonssi, make Brazil&#8217;s currency <a href="https://brazilian.report/coronavirus-brazil-live-blog/2020/03/12/coronavirus-fall-brazilian-real-currency/">lose even more value</a>. It happened with the U.S. Dollar in 2008 and could happen with the Brazilian Real as well, in a year where it has already lost 43 percent of its value.&nbsp;</p> <p>“Would it be possible to let the dollar soar against the Real and enforce impoverishment? I’m not sure it is politically feasible,” he said.&nbsp;</p> <p>For financial markets — which many consider to be addicted to monetary stimulus at this point — such a weak currency doesn’t necessarily help. While it is true that it boosts profits of exporting companies, such a currency devaluation makes it harder for foreigners to recover their investments in dollars, which could be a potential deal-breaker.

 
José Roberto Castro

José Roberto covers politics and economics and is finishing a Master's Degree in Media and Globalization. Previously, he worked at Nexo Jornal and O Estado de S. Paulo.

Natália Scalzaretto

Natália Scalzaretto has worked for companies such as Santander Brasil and Reuters, where she covered news ranging from commodities to technology. Most recently, she worked as an Editor for Trading News, the information division from the TradersClub investor community.

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