by Felipe Rezende

Part IV

This last part of the series (see Part I, II, and III here, here, and here) will focus on the Brazilian response to the crisis.

1. What Should Brazil Do?

The current Brazilian crisis fits with Minsky’s theory of instability (see here, here, and here). The traditional response to a Minsky crisis involves government deficits to allow the non-government sector to net save. That is, if the private sector desire to net save increases, then fiscal deficits increase to allow it to accumulate net financial assets. The sharp increase in budget deficits in 2015 comes as no surprise. Rezende (2015a) simulated

a scenario in which we have rising government deficits to offset current account deficits, to allow the domestic private sector balance to generate financial surpluses. In this case, in the presence of current account deficits equal to 4% of GDP, to allow the private sector to net save 2% of GDP, it would require government deficits equal to 6% of GDP.  If the private sector is going to save 5% of GDP (equal to the 2002-2007 average pre-crisis) and a current account deficit equal to 4% of GDP then we must have an overall government budget in deficit equal to 9% of GDP. Given the current state of affairs, government deficits of this magnitude might be politically unfeasible right now. (Rezende 2015a)

In 2015, Brazil’s budget deficit increased from 2% of GDP in 2008 to 10.38% of GDP in 2015. Though government deficits support incomes (cash flow and portfolio effects) and stabilizes profits, the bad composition of the government budget, that is, virtually the entire deficit is due to interest payments, did little to sustain employment. Brazil’s primary budget balance swung from a surplus of 3% of GDP over a decade to a deficit. As this happened, credit rating agencies’ decision to downgrade Brazil’s sovereign debt to junk status put Ms. Rousseff under growing pressure to cut public spending. In this regard, with the implementation of austerity policies in 2015 automatic stabilizers were switched off, that is, the real growth (deflated by IPCA) of expenses by the central government sharply declined (figure 1) aggravating the recession. continue reading…

by Felipe Rezende

Part III

This part of the series (see Parts I and II, here and here) will focus on macroeconomic and microeconomic aspects of financial fragility and the provision of liquidity. Minsky’s framework not only sheds light on how to detect unsustainable financial practices, but the position adopted in this paper is that the current Brazilian crisis does fit with Minsky’s instability theory. This is a Minsky crisis in which during economic expansions market participants show greater tolerance for risk and forget the lessons of past crises so economic units gradually move from safe financial positions to riskier positions and declining cushions of safety. continue reading…

Jim Vrettos, a sociologist at John Jay College and host of “The Radical Imagination”, interviewed the Levy Institute’s Randy Wray on how the discipline of economics has gone astray. Wray’s story begins in the late 1960s, with what he describes as a reaction against “New Deal economics.”

The interview ends with a discussion of the ongoing US presidential election.