Economy & Energy
No 41: December 2003 - Jannuary 2004
ISSN 1518-2932

seta.gif (5908 bytes)No 41 Em Português

 

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Opinion:

Inflation

Text for Discussion:

What affects the Brazilian Exports?

Article:

Energy Emissions – Brazil 1973/2003

Definitions and  Data:

Some Indexes of the Brazilian Inflation

Indexes of the American Inflation

 

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Opinion:

Inflation 

Genserico Encarnação Júnior
eeegense@terra.com.br

 

            At the peak of the recent exchange rate crisis and in expectation of price increase, that is, during the last days of the previous Administration, a friend asked me why we could not manage to have a stable currency? Why inflation (or its specter) is always present in our lives?

            The crisis was over when the winners of the election took office and with the measures taken by the new Administration. Besides the natural fear of an Opposition Government, the crisis was also artfully insufflated by those who were loosing the power.

            Is this doldrums definitive or temporary? Is there the danger of a new inflation wave? What should be done for this not to happen?

In what follows a tentative explanation, according to my view.

            The currency, generally reflects the real side of the economy. Therefore, long term monetary policies actions that do not hit the core of the problem – how society structures itself in order to satisfy its needs – is like treating the patient with palliative without attacking the cause of the fever. The monetary policy can hold the price increase for a short term. But in the long run there is no way to avoid reality. 

         Inflation is not a phenomenon but the symptom of another one.

            When I was a student, a young Portuguese waiter explained why he came here: “Over there in motherland the Escudo is very valued but I don’t earn it; I prefer Brazil were the currency is unstable but here I have a job and money”. It was the time of the Cruzeiro and of inflation. Overseas, it was Salazar’s time and a time of stabilization through harsh measures.

            We are not preaching inflation as a condition for development; incidentally, holding inflation is one of the basic presuppositions for reactivating the economy. However, holding inflation for a long time in order to maintain the currency stability is like the Portuguese joke about teaching the donkey not to eat (after learning it, the donkey dies).

           In reality what really exists is Supply and Demand of goods and services. The 180-million-inhabitants nation has not yet the structure to satisfy the basic needs of its population. Food, education, housing, energy, transport, clothing, health, sanitation are items that are not suitably supplied at all.

            Generally, Demand exceeds Supply in almost all items. Consequently, prices increase and when this happens in a sustainable form we have inflation which is the effect of unbalance between the two sides of the equation.

            Budget deficits and currency issue are tentative ways of spending more than one has available, of pushing or motivating Demand that, due to its nature, responds immediately to it. The Supply reaction depends on investments, organization, logistics, a series of preliminary and intermediary actions that need a more prolonged maturation.

            Inflation is basically the product of a dissatisfied demand. Sometimes it is defined as cost inflation. However, cost increase is a result of demand not totally satisfied in the production process, competition for input, intermediate goods and production factors.

            This was much so in the Cruzado Plan period, when prices were frozen and therefore there were no inflation in monetary terms. Inflation manifested itself, for example, like ox-in-the-pasture (meat did not reach the butcher) and by the empty supermarket shelves. Briefly, a severe supply crisis.

           One can add to the Brazilian problem the large social and regional income inequality that, by demanding a more qualified consumption, inhibits the offer of basic items, contributing to the general price increase.

           Other aspects, namely the habit of living along with prices increase (the passivity of the consumer), the Gregorian inflation (annual price updating) the inflation inertia (motivated by indexing, when it exists), the downward inflexibility of prices (when they rise it is hard to get them down) contribute to aggravate the problem. However, they do not cause inflation. They are driving causes that support it.

         Planning, economic measures, routine reforms, rescue loans, IMF and the like are of no use if the structure of society is not changed. However, changing is knowingly a Herculean task.

            We have witnessed the short success of the Cruzado Plan and the exacerbation of inflation that followed the elections. More recently we experienced the long term success of the Real Plan until the Real devaluation soon after the 1998 elections. Then, at the end of 2002 we had the above mentioned crisis controlled through economic recession and unemployment as we can observe. Nowadays, we perceive containment of inflation in the bad services of public health and in the insufficient sectorial budgets (armed forces, diplomacy, federal police etc.)

            In comparison with the developed countries and with the United States in particular one observes that they have a different situation. In the “first world” generally Offer exceeds Demand while in the other countries the inverse is true. Therefore, a war once in a while is cynically beneficial in order to spawn stocks from the military-industrial complex of the rich countries. In the American case, it should be remembered that its deficits and debts are financed by dollars issued by the country itself, universally accepted without necessarily demanding the compensation in goods and services. Then they play the role of reserve values and not of means of payment.

Trying to stabilize the currency in our country by containing basic expenditures, high interest rates, taxes increase, sale of foreign currency in order to maintain the exchange rate and other measures (there are other more vile ones such as manipulating price indexes) briefly, with circumstantial financial measures, is trying to retouch the image on the mirror surface without considering the real image itself.

            The present reflux of inflationary expectations, after the exchange rate crisis, is a product of recession, of unemployment, that is, of containing Demand for goods and services that satisfy the population’s needs.

            Considering our reality, inflation is not to be extinguished, it is to be contained. It will be tamed only by cutting deep into our reality. It is for this purpose that the new government was elected.

            I hope that the new government does not join the obstinate miracle-workers! I watch with concern these initial months of Lula’s government. Considering the successes of the external policy and the administrative mistakes I think that it could not be otherwise. In order to change the country the real economy must change, jobs must be generated and the basic needs of the population must be properly satisfied. Inflation is not contained  by monetary measures. If deep changes are not made sooner or later the currency will reflect the real image of the country.

            Getting down to earth, I wonder : what if the reality we will face from now on is different from that we are used to?

This is a subject for the next article.

 

Genserico Encarnação Júnior

Itapoã, Vila Velha (ES).

 

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Revised/Revisado:
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