The Crisis in Brazil and the “Narrow Path” for Economic Policy

Michael Stephens | April 22, 2016

The big political story in Brazil is the potential impeachment of President Dilma Rousseff (Brazil’s lower house of congress voted in favor of impeachment; the motion now moves to the senate for consideration). To get an idea of how messy this situation is, note that the man leading the impeachment attempt, Speaker of the House Eduardo Cunha, is facing 184 years in prison for his role in the Petrobras corruption scandal. (In the NYTimes‘ Room for Debate series, Laura Carvalho describes the impeachment process as a parliamentary coup. See also Felipe Rezende’s critical take on the charges for which Rousseff is ostensibly being impeached: violation of the Fiscal Responsibility Law.)

All of this is happening against the backdrop of a multi-faceted economic crisis. Here’s Fernando Cardim de Carvalho’s summary of the situation from his latest policy note:

Brazilian real GDP is estimated to have contracted 3.8 percent in 2015. Meanwhile, annual inflation reached 10.7 percent in 2015 … The overnight cost of bank reserves in the interbank market (SELIC) is currently 14.25 percent. The exchange rate to the US dollar is around R$4, a 50 percent increase over a year ago. Fiscal space for implementing recovery policies is practically nonexistent, with fiscal deficits reaching 10.3 percent of GDP … Unemployment has been growing rapidly and the outlook for 2016 is not promising, to say the least, with the International Monetary Fund (IMF 2016) projecting a further contraction in GDP of 3.5 percent. Concerns about the solvency of large firms that have sharply increased their foreign indebtedness in recent years intensified with the steep devaluation of the real in 2015.

Cardim de Carvalho recently presented his analysis of Brazil’s political and economic challenges at the 25th Minsky Conference. He observed that for once the balance of payments has not played a key role in this economic crisis; nor are there any easily identifiable “external villains” this time around: “this … is an entirely domestically generated crisis.” (Here are the slides from his presentation; video is embedded below the fold.)

As he points out in the policy note (pdf), even a fully functioning, stable government would have a hard time addressing this mix of economic problems, but as it stands, it isn’t even clear who will be running the country in the near future. Cardim de Carvalho pins Brazil’s hopes[1] partially on maintaining the devaluation of the Brazilian real and advocates a change up in fiscal policy. But even here, there’s not much room for policy maneuvering: “For all practical political purposes, Brazil is stuck with fiscal austerity,” he laments.

Under the circumstances, policymakers might be able to do less damage by turning to what Cardim de Carvalho calls “smarter austerity”:  “an increase in public investment paired with less damaging spending cuts and revenue increases, could limit the negative impact on aggregate demand.” The problem, as he explains, is that implementing this kind of budgetary shift would require managing some complicated political trade-offs. Reading the headlines this week, it’s hard to imagine the political system pulling this off, no matter who ends up running the country until the 2018 elections. He’s not optimistic:

Only skillful negotiation led by a trusted political leadership could obtain current sacrifices from participants with a view to achieving better results in the future. Unfortunately, there does not seem to be the slightest possibility that such a negotiation could happen in the near future. The government does not seem capable of doing it. All initiative was lost when avoiding or beating an impeachment process became its first and practically only priority. On the other hand, no legitimate organized opposition exists to present demands and lead a negotiation on behalf of the people. The country has no “elders” to appeal to, no statesmen of recognized stature who deserve the trust of the nation.

Under such circumstances, until Brazil gets closer to the presidential elections scheduled for 2018, there seems to be no plausible alternative to the continuation of the recession and political uncertainty.

You can read the policy note here. See also Cardim de Carvalho’s working paper for more detailed data on how the Brazilian economy got to this point.

[1] “Hope” being the operative word: “While the extent to which the recent devaluation will help to engineer a sustained recovery is unclear, there is little doubt that a return to the overvaluation characteristic of the post-1994 period would kill any such possibility.” He expresses concern that Brazil’s deindustrialization may limit any potential expansionary effect from devaluation.

continue reading…

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Listen in on the Minsky Conference

Michael Stephens | April 11, 2016

Audio from the 25th Annual Minsky Conference will be broadcast live. Listen here beginning tomorrow at 9am.

Tuesday, April 12

9:00−9:15 a.m. Welcome and Introduction
Dimitri B. Papadimitriou, President, Levy Institute
9:15−10:30 a.m. Session 1. GLOBAL FRAGILITY AND EMERGING MARKETS OUTLOOK
MODERATOR: Theo Francis, Special Writer, The Wall Street Journal
SPEAKER: Jan Kregel, Director of Research, Levy Institute; Professor, Tallinn University of Technology
Fernando J. Cardim de Carvalho, Senior Scholar, Levy Institute; Emeritus Professor of Economics, Federal University of Rio de Janeiro
10:30 a.m. − 12:30 p.m. Session 2. COMMODITIES AND DERIVATIVES REGULATION
MODERATOR: Izabella Kaminska, Journalist, Financial Times
SPEAKERS: Robert A. Johnson, President, Institute for New Economic Thinking; Senior Fellow and Director, Franklin and Eleanor Roosevelt Institute
Michael Masters, Founder and Chairman of the Board, Better Markets
12:30−2:15 p.m. Lunch
SPEAKER: Robert J. Barbera, Codirector, Center for Financial Economics, The Johns Hopkins University
“Six Degrees of Separation: Why the Fed’s Strategy of Precautionary Unemployment Is Nutty”
2:15−4:45 p.m. Session 3. IS THE CURRENT CREDIT STRUCTURE CONDUCIVE TO FINANCIALLY STABLE RECOVERY?
MODERATOR: Jesse Eisinger, Senior Reporter, ProPublica
SPEAKERS: Henry Kaufman, President, Henry Kaufman & Company, Inc.
Richard Berner, Director, Office of Financial Research, US Department of the Treasury
Martin L. Leibowitz, Managing Director, Morgan Stanley
Albert M. Wojnilower, Economic Consultant, Craig Drill Capital
4:45−6:45 p.m. Session 4. MINSKY, INEQUALITY, AND THE MONETARY/FISCAL POLICY OUTLOOK
MODERATOR: Jan Kregel, Director of Research, Levy Institute; Professor, Tallinn University of Technology
SPEAKERS: Viral V. Acharya, C. V. Starr Professor of Economics, New York University Stern School of Business
Scott Fullwiler, Professor of Economics and James A. Leach Chair in Banking and Monetary Economics, Wartburg College
Stephanie A. Kelton, Research Associate, Levy Institute; Chief Economist, US Senate Budget Committee; Professor, University of Missouri—Kansas City

Wednesday, April 13

continue reading…

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Is There a Solution to Brazil’s Crises?

Michael Stephens | April 5, 2016

This is the first of a series of blog posts on the Brazilian crisis by Felipe Rezende.

 

There are two major crises Brazil’s President Dilma Rousseff is facing: one is a political crisis and the other is Brazil’s sharpest recession in 25 years.

Brazil’s Political Crisis

The political crisis has two main pillars: a) a vast corruption scandal (with evidence of a kickback scheme funneling billions of dollars from state-run firms and, more recently, in a massive data leak over possible tax evasion, Brazilian politicians linked to offshore companies in the Panama Papers); and b) impeachment proceedings to move forward against President Dilma Rousseff.

The Federal Court of Accounts (TCU) announced in 2015 that it had rejected the accounts of Rousseff’s administration for the year 2014. In a unanimous vote, the TCU ruled Dilma Rousseff’s government manipulated its accounts in 2014 to “disguise fiscal deficits” as she campaigned for re-election. The allegation is that Ms. Rousseff manipulated Brazil’s account books to hide a growing fiscal deficit.

The argument is that the federal government borrowed money from public banks (which is forbidden by the Fiscal Responsibility Law) to pay for social programs. So, they argued she allegedly committed an administrative crime.

Once we understand how the government spends and what bonds are for, then we can analyze TCU’s decision. The Treasury has an account—known as Treasury Single Account—with the central bank. When the Treasury spends, its account with the central bank is debited and the bank’s account with the central bank is credited. This is followed by a credit to the beneficiary’s bank account. That is, the public bank then makes payments to the social program beneficiary by issuing deposits (Case 1).

Case 1. The Treasury spends using its account with the central bank

Case 1_Rezende_Brazil

The issue at hand is that the federal government made payments for social programs using its public banks but it delayed payment to the same banks. That is, the federal government did not use its account at the central bank to credit the public banks’ account with the central bank while public banks made those social benefits payments. So, public banks made the payment (by creating demand deposits) and on the asset side there was an increase in credits (“loans”) to the Treasury (Case 2), which is forbidden by the fiscal responsibility law. In a “normal” transaction banks’ reserve balances (that is, government IOUs) with the central bank would go up, but because the Treasury delayed payments to banks there was in increase in balances owed by the Treasury to the public banks. This led the TCU to conclude that this was a “financing” operation. continue reading…

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Tcherneva on the “Growth Lobby” and the Sanders Plan

Michael Stephens | April 4, 2016

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Preliminary Program for the 25th Minsky Conference

Michael Stephens | March 24, 2016

The preliminary program has been posted for the 25th Annual Hyman Minsky Conference, being held April 12-13 here at Blithewood on the Bard College campus.

The deadline for registration is April 1st.

Tuesday, April 12

8:30−9:00 a.m. Registration
9:00−9:15 a.m. Welcome and Introduction
Dimitri B. Papadimitriou, President, Levy Institute
9:15−10:30 a.m. Session 1. GLOBAL FRAGILITY AND EMERGING MARKETS OUTLOOK
MODERATOR: Theo Francis, Special Writer, The Wall Street Journal
SPEAKER: Jan Kregel, Senior Scholar, Levy Institute; Professor, Tallinn University of Technology
Fernando J. Cardim de Carvalho, Senior Scholar, Levy Institute; Emeritus Professor of Economics, Federal University of Rio de Janeiro
10:30 a.m. − 12:30 p.m. Session 2. COMMODITIES AND DERIVATIVES REGULATION
MODERATOR: Izabella Kaminska, Journalist, Financial Times
SPEAKERS: Michael Greenberger, Professor, School of Law, and Director, Center for Health and Homeland Security, The University of Maryland
Robert A. Johnson, President, Institute for New Economic Thinking; Senior Fellow and Director, Franklin and Eleanor Roosevelt Institute
Michael Masters, Founder and Chairman of the Board, Better Markets
12:30−2:15 p.m. Lunch
SPEAKER: Robert J. Barbera, Codirector, Center for Financial Economics, The Johns Hopkins University
“Six Degrees of Separation: Why the Fed’s Strategy of Precautionary Unemployment Is Nutty”
2:15−4:45 p.m. Session 3. IS THE CURRENT CREDIT STRUCTURE CONDUCIVE TO FINANCIALLY STABLE RECOVERY?
MODERATOR: TBD
SPEAKERS: Henry Kaufman, President, Henry Kaufman & Company, Inc.
Richard Berner, Director, Office of Financial Research, US Department of the Treasury
Martin L. Leibowitz, Managing Director, Morgan Stanley
Albert M. Wojnilower, Economic Consultant, Craig Drill Capital
4:45−6:45 p.m. Session 4. MINSKY, INEQUALITY, AND THE MONETARY/FISCAL POLICY OUTLOOK
MODERATOR: TBD
SPEAKERS: Viral V. Acharya, C. V. Starr Professor of Economics, New York University Stern School of Business
Scott Fullwiler, Professor of Economics and James A. Leach Chair in Banking and Monetary Economics, Wartburg College
Stephanie A. Kelton, Research Associate, Levy Institute; Chief Economist, US Senate Budget Committee; Professor, University of Missouri—Kansas City
6:45−7:15 p.m. Reception
7:15 p.m. Dinner

Wednesday, April 13

9:00−11:30 a.m. Session 5. US ECONOMIC OUTLOOK FORECAST
MODERATOR: Eduardo Porter, Columnist, The New York Times
SPEAKERS: Lakshman Achuthan, Cofounder and Chief Operations Officer, Economic Cycle Research Institute
Bruce C. N. Greenwald, Robert Heilbrunn Professor of Finance and Asset Management, Columbia University
Michalis Nikiforos, Research Scholar, Levy Institute
Frank Veneroso, President, Veneroso Associates, LLC
11:30 a.m. − 1:30 p.m. Session 6. BANK REGULATION, TOO BIG TO FAIL, AND LIQUIDITY
MODERATOR: Peter Eavis, Reporter, The New York Times
SPEAKERS: Edward Kane, Professor of Finance, Boston College
Walker F. Todd, Trustee, American Institute for Economic Research
L. Randall Wray, Senior Scholar, Levy Institute; Professor of Economics, Bard College
1:30−3:15 p.m. Lunch
SPEAKER: Barney Frank, Former US Representative (D-MA, 4)
3:15−5:15 p.m. Session 7. EUROPEAN PERFORMANCE AND REGULATORY OUTLOOK
MODERATOR: TBD
SPEAKERS: Emilios Avgouleas, Chair, International Banking Law and Finance, School of Law, University of Edinburgh
Mario Tonveronachi, Professor of the Economics of Financial Systems, University of Siena
Loukas Tsoukalis, Pierre Keller Visiting Professor, Harvard University
5:15−7:00 p.m. SPEAKER: Vítor Constâncio, Vice President, European Central Bank
“A Challenging International Economic Environment for Central Banks”

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Tcherneva: The Biggest Existential Threat to the Eurozone Is Its Design

Michael Stephens | March 18, 2016

 

Related: “Euroland’s Original Sin” (pdf)

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Bloomberg: Modern Money Theory Gaining Converts

Michael Stephens | March 14, 2016

Bloomberg just published an article focused on the rise of Modern Money Theory (MMT), featuring comments by Senior Scholar Randall Wray:

The 20-something-year-old doctrine, on the fringes of economic thought, is getting a hearing with an unconventional take on government spending in nations with their own currency.

Such countries, the MMTers argue, face no risk of fiscal crisis. They may owe debts in, say, dollars or yen — but they’re also the monopoly creators of dollars or yen, so can always meet their obligations. For the same reason, they don’t need to finance spending by collecting taxes, or even selling bonds. […]

No one’s saying there are no limits. Real resources can be a constraint — how much labor is available to build that road? Taxes are an essential tool, to ensure demand for the currency and cool the economy if it overheats. But the MMTers argue there’s plenty of room to spend without triggering inflation.

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As the Euro Time Bomb Ticks Away the ECB Turns Desperate

Jörg Bibow | March 9, 2016

These are not happy times for Europe. Ukraine, Russia, and rising anti-democratic influences in Hungary and Poland represent latent threats at the European Union’s eastern front. The prospect of Brexit is a more acute one at its western front.

After letting loose manifold conflicting forces that continue shaping internal politics in many EU countries and setting them on collision course with their partners, the refugee situation appears to be on the verge of bestowing another humanitarian crisis on the union’s most vulnerable and unfortunate member: Greece. Never mind the Catalan question: it almost appears minor by comparison, but actually represents yet another fundamental challenge to the European project. “Misfortune seldom comes alone,” a German saying goes; the nation that is increasingly pulling the strings in European affairs but appears at risk of alienating itself even more so than its partners while doing it.

Considering all this, the European political authorities may almost be forgiven for having lost sight of the smoldering crisis of the euro, the union’s flagship endeavor that was meant to foster prosperity and political union – but turned out to deliver quite the opposite. One key player, the European Central Bank (ECB), does not wish to partake in the peculiar mix of denial and delusion about the state of the euro. As the specter of deflation and lasting “Japanization” (or worse) is taking hold, again, the euro’s guardian of stability readies itself for unleashing a fresh round of unconventional policies to prop up the Eurozone’s feeble recovery.

So it’s Draghi showtime again. But how much good, if any, can the ECB really do at this point? I fear the ECB showman’s display of apparent power may be turning into a sad saga of hope and desperation. The ECB can no longer camouflage the fact that ample central bank liquidity alone will not heal the manifold and deep euro fault lines that are plaguing the currency and symbol of European unity. Make no mistake: Europe will very likely be facing crunch time this year – with nowhere to hide for anyone. continue reading…

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Tcherneva on the Jobs Numbers

Michael Stephens | March 7, 2016

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Why Minsky Matters and Boom Bust Boom

Michael Stephens | February 25, 2016

Screening and Book Signing_Minsky Matters_Boom Bust Boom

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