
How Fake Money Saved Brazil (2010) - snappieT
http://www.npr.org/sections/money/2010/10/04/130329523/how-fake-money-saved-brazil
======
soneca
> _" We didn't understand what it was," says Maria Leopoldina Bierrenbach, a
> housewife from Sao Paulo. "I used to say it was a fantasy, because it was
> not real."_

I was 14 during the URV period. It was like that, nobody really understand
what URV was, nor could explain to other what it was.

But, it was simple to use. Prices are in URV now, not in the old currency
name, not a new currency, it is URV. URV acted as a good parameter, was simple
to understand and use in practice, even if hard to understand in theory.

It is not that brazilian had lost faith in the currency, but we lost faith in
currency _changes_ and readjustment. Brazilian money had changed names several
times in the 80s. And several times government had cut zeros from the currency
("Hey, everybody, now 1,000,000 is actualy 1,000 ok?). So there were no point
in just creating a new currency. It HAD to be a virtual one, something
different, something that people could not say "yeah, just another name change
like all the others...". So they created URV, and it worked.

~~~
eridal
I remember when the Argentine government took 4 zeros .. so 1,000,000 become
100 .. it was a completely mess!!

~~~
soneca
in Brazil there were a little bit more rationality in our caos: we always cut
3 zeros. That should be insane indeed to keep adjusting your perception at
every purchase.

~~~
ido
In the 2005 the Turkish currency lost _6_ zeros:
[http://en.wikipedia.org/wiki/Turkish_lira#Second_Turkish_lir...](http://en.wikipedia.org/wiki/Turkish_lira#Second_Turkish_lira_.282005-present.29)

------
gregpilling
Applied Psychology, in the Financial Transactions Sector. *

I find it amusing that they named it 'real' once it was done.

*- a little inside joke. While I was dating my wife 15 years ago, I was very self conscious of the fact that I had barely graduated high school, and here I was dating a professor and going to many professor parties. Many, many parties. I would be asked by almost everyone "What do you study?" as a little ice-breaker conversation starter. Since I had no PhD and was not even a college graduate, this made me a little uncomfortable and so I developed the above line to describe my business of buying and selling used capital equipment (which I did out of my pickup).

It went like this: They would ask what I studied, and I would respond with
"Applied Psychology in Financial Transactions" and then steer the conversation
to their work. I also learned quickly that I should have no opinions on THEIR
work, or my night would be bad. It was a rare event to have to explain
further, most people were delighted to talk at length about themselves.

~~~
mixmastamyk
Real (pronounced rey-al, as in royal) is a common historical currency name
from the Iberian peninsula, which has spread to other areas.

[http://en.wikipedia.org/wiki/Real](http://en.wikipedia.org/wiki/Real)

~~~
soneca
But was also a natural name from "URV", which means Real Unity of Value -
using 'real' as something real.

Maybe the irony is more that URV was a virtual/fake currency named "real".

------
gusmd
Brazilian here too. Although the URV maneuver did help psychologically, a lot
of controlling the inflation had to do with the so-called "economic tripod"
implemented with the Real plan, which basically involved:

\- Negative primary deficit on the government budget balance;

\- Floating exchange rate;

\- Inflation targeting.

Addendum: the current government is just so bad at that (fiscal maneuvers to
create an artificial negative primary deficit, interfering in the exchange
rate by buying/selling dollars at below-market prices, etc) that our inflating
is going up again. We just reached 8.17% in the last 12-month period. Compare
that to 0.8% in the US for 2014, or even Brazil's 3% some 8 years ago... With
the expectation of the Fed raising interests in the US with the improving
economy, dollars are going to FLY out of Brazil and the already ridiculous
exchange rate (1 USD = 3.15 BRL) is going to explode. Brace yourselves,
inflation is coming.

edit: typo

~~~
PhantomGremlin
_Compare that to 0.8% in the US for 2014_

Many of the things I buy in a grocery store in the USA go up 5% or 10% at a
time, perhaps every year or two. Same situation with services.

The official inflation numbers for the US are very tricky. There's a lot of
"adjustment" going on. I suspect that the rapidly falling prices for household
electronic goods plays a big role.

The price of a 55" flat screen declining from (made up numbers) $1,500 to $500
in the last five years is small consolation if the price of meat and milk and
cookies has gone up 25% over those five years.

~~~
tsotha
The "basket" they use for CPI calculation is a genuinely difficult problem,
since what people buy changes over time. Electronics is a great illustration -
if I included 40" televisions last year, should I compare the price of this
year's 40" television to last year's, or should I compare the price of this
year's 50" television to last year's 40" because that's what people are
buying? Both ways are right and both ways are wrong, depending on what you
want the number to mean.

But even allowing for these difficulties, I still think the government keeps
changing how inflation is calculated in an effort to make itself look better.

When real estate increases dramatically they measure rents, which are (in a
hot real estate market) subsidized by people trying to cash in on capital
appreciation. In a declining real estate market with rising rents they switch
to "rent equivalents" based in some part on the cost of real estate.

You can hide pretty big increases by switching what you measure mid-stream,
particularly if you just graph the YoY official inflation rate (including
changes) without going back and recalculating every year using the same
methodology.

And then there's the reporting. The number you hear on the news may or may not
include "the volatile food and energy sectors" depending on which is lower.

There's a reason it seems prices are rising faster than the CPI reported on
your drive home. They _are_ rising faster.

------
nandemo
> _It went something like this: 1. New President comes in with a new plan. 2\.
> President freezes prices and /or bank accounts. 3\. President fails. 4\.
> President gets voted out or impeached. 5\. Repeat._

Yeah... no. Between '64 and '85 we were living under a military dictatorship.
No president during that period got voted out let alone impeached.

~~~
marcosdumay
It helps to remember that as hight as inflation was under the military
dictatorship, we just got hyperinflation on Sarney's government.

------
drcode
I'm a fan of Planet Money, but this particular episode made a lot of
extraordinary claims (by the standards of the usual formulation of
macroeconomics) and did not present a any extraordinary evidence to back up
these claims.

As others in this thread are pointing out, the episode was very hand-wavy
about previous attempts at limiting the money supply in the country and how
effective those attempts were.

~~~
motoboi
TL;DR: Brazil switched to dollar for a moment (to get out of inflation) and
then to a new (stable) currency. The theoretical basis for this is the
previous works from Persio Arida, André Lara Resende and Edmar Bacha.

Two important books about this subject:

* A real história do Real;

* A saga brasileira.

Inflation in Brazil was indeed rampant at this moment, but the cause (when URV
entered the scene), wasn't public spending anymore.

It was a so-called inertial inflation (a theory, of course. See "Inertial
inflation and monetary reform in Brazil"[1]), caused by public (merchants,
industry etc) perception (or fear) that prices were always going up.

Before that, government made a great job reorganizing the budget, untying
public prices from inflation, renegotiating debts with Wall Street and making
new debts with the FMI.

After the roots of inflation where addressed, it's "inertial psychological"
component (as they called it) was shut down with URV.

URV, of course, was no virtual or fake currency. It was an index based on (or
simply copied from) US dollar price.

The real deal here is: how a lean team with a very strong leadership solved
this big mess. Those guys were no amateurs and at least on of them were a
inflation specialist Phd from MIT (Persio Arida, a Brazilian).

The first book was written from a member of staff of this team and it's
description of the team gatherings is awesome.

1 -
[https://ideas.repec.org/p/rio/texdis/85.html](https://ideas.repec.org/p/rio/texdis/85.html)

~~~
drcode
Right, that all sounds very sensible and something virtually every economist
would agree with, the only question is if the concept of the URV really made
any difference (which was the main claim of the "Planet Money" story).

The fact is that the value of currency is impacted by controlling demand
(which the URV was attempting to do with a psychological hack) or by
controlling supply (which was being accomplished by the many other very
sensible changes)

In the PM story at least, it was unconvincing to me that using a "traditional"
currency instead of the URV wouldn't have led to the same result.

~~~
apalmer
The psychological part of it was really not 100% the cause of its
effectiveness a part of the reality of why it worked is the government
couldn't print more URV.

This is why it was a great trick, it was a trick to the people but also a
trick to the government.

Basically it was a double jedi mind trick.

~~~
drcode
I like that interpretation, that sounds more plausible to me.

------
ojosilva
It's also worth noting a counteracting event: the inflation caused by the
switch to the euro in many European countries like Italy [1], Spain [2] and
Finland [3]. These were sometimes actual inflation and sometimes more a matter
of perception -- a price hike in a few products and goods may not show up
significantly in the official price index radar, but it does wonders to skew
public perception.

"In common with other countries with low-value currencies, where people are
accustomed to paying in units of hundreds and thousands, the introduction of
the euro, which was valued at 166 pesetas, led to stealthy but rapid
inflation. Within in year a cup of coffee that in most bars cost 100 pesetas
was priced at €1 while the cost of a 1,000-peseta three-course lunch leapt to
€10 – a 66% increase." [2]

[1]
[http://news.bbc.co.uk/2/hi/business/2098033.stm](http://news.bbc.co.uk/2/hi/business/2098033.stm)
[2] [http://www.theguardian.com/world/2014/aug/31/spaniards-
holdi...](http://www.theguardian.com/world/2014/aug/31/spaniards-holding-
pesetas-spain-bank-exchange-euro) [3]
[http://ec.europa.eu/economy_finance/publications/publication...](http://ec.europa.eu/economy_finance/publications/publication15287_en.pdf)

------
jstalin
Of course, there were two components: the physical (stopping the runaway
printing of money) and the psychological (changing people's expectations). So
the title should more properly be something like "How Current Abstraction
_Helped_ Stop Runaway Inflation in Brazil."

\----

"You have to slow down the creation of money, they explained. But, just as
important, you have to stabilize people's faith in money itself."

~~~
crdoconnor
[https://en.wikipedia.org/wiki/1970s_energy_crisis](https://en.wikipedia.org/wiki/1970s_energy_crisis)
<\-- this caused the hyperinflation, not money printing.

~~~
marcosdumay
You simply can not have hyperinflation without the government printing money.
In normal situations, there's not enough money to keep an economy running
after a 1000 times increase on the prices level.

Now, if you are arguing that the government started printing money because the
energy crisis destroyed its budget, then yes, the energy crisis caused the
printing of money, that caused the hyperinflation. Thus, in some indirect
sense, the energy crisis caused the hyperinflation.

~~~
crdoconnor
This idea of Milton Friedman's that "inflation is always and everywhere a
monetary phenomenon" needs to die already. It's wrong in every possible sense.

~~~
AnimalMuppet
You want to present some evidence for that claim? Some alternate ideas? Some
argument on why Friedman's claim is wrong? _Something_ besides just a
contemptuous dismissal?

~~~
crdoconnor
The evidence is staring you in the face. Brazil's hyperinflation in the 70s
was triggered by a supply shock that had nothing to do with their money
supply.

Zimbabwe was similar, in that they destroyed their agricultural sector but
continued to buy food.

If you keep the level of money printing and spending the same but your ability
to produce goods and services is suddenly hit, you will experience inflation.

If that inflation reaches a trigger point, it will start to feed upon itself
in a positive feedback loop, causing what we know of as hyperinflation.

------
tinkerrr
A somewhat similar pricing mechanism seems to be developing today for payments
in Bitcoin. Very few things you can buy in Bitcoin are actually price
denominated in Bitcoin. You'll see things selling for $25 worth of Bitcoin,
rather than 0.1 BTC, considering the historic volatility. Almost all merchants
accepting Bitcoin use the USD as a base pricing denomination.

------
neves
URV was a nice hack, but people overestimate these economists brilliance. Here
are the dates when the latin america hyperinflation ended in each country:

Mar. 1990 Brazil Aug. 1990 Peru Mar. 1991 Nicaragua Mar. 1990 Argentina

You can see a compiled hyperinflation rates in a table in this paper:
[http://object.cato.org/sites/cato.org/files/pubs/pdf/working...](http://object.cato.org/sites/cato.org/files/pubs/pdf/workingpaper-8.pdf)

------
kozak
So what's was the essence of the trick: did Brazil have some special case of
inflation where country was in fact economically healthy, but the people
massively underestimated its economical health? Sounds so unreal (maybe that's
why the currency was named so :) ).

~~~
crdoconnor
The essence of the trick was convincing people that the money that they
received _wasn 't_ going to suddenly become worthless, so they wouldn't go out
and spend it immediately, perpetuating the inflation - killing off the vicious
cycle.

i.e. it was a hack to reduce the velocity of money in Brazil.

In all likelihood inflation would have come down anyway at some point around
that time. Energy prices had stopped rising. Perhaps this made it happen a few
months or even a year earlier, though.

If they'd tried this trick in the beginning, while energy prices were still
rising it would have done fuck all.

------
josefresco
How about "How Currency Abstraction Stopped Runaway Inflation in Brazil"?

~~~
snappieT
Thanks for the suggestion, updated.

~~~
mkopinsky
What happened here? Why was the title changed back to NPR's more clickbaity
version?

~~~
nosideeffects
To bait dem' clicks!

------
stashpro
I lived through it. The URV was the turning point for inflation in Brazil, and
a huge part was in fact the impression people had the the price was not going
to change in the next day.

------
nahiluhmot
In addition to slowing the production of money, the URV program essentially
tied wages to the inflation rate. To me, that seems like a fundamentally
important step in both restoring the people's faith in the currency and
maintaining the standard of living for them. By only printing less money, they
could easily fall into a period of widespread poverty while inflation rates
continued to rise -- albeit at a slower rate.

Of course, I'm just an armchair economist, so perhaps there's part of the
picture that I'm not seeing.

~~~
rtpg
Mandating that salaries are tied to inflation is an interesting concept
indeed.

I'm still majorly confused as to why not all legislation uses "inflated
dollars" or some metric that keeps things in line with inflation. Well not
confused, per say, more like disappointed.

~~~
jjaredsimpson
Then instead of arguing about increases in spending you are just arguing about
metrics of inflation. I'd rather legislators argue about the former.

~~~
alasarmas
I think legislators are already arguing about both increases of spending and
metrics of inflation. Remember the whole "chained CPI" debate about the metric
to use to calculate cost-of-living increases for Social Security benefits?

------
joeblau
I lived in Brazil for 3 years during the early 90's and I distinctly remember
two currency changes: Cruzeiro to Cruzados and then Cruzados to Cruzados
Novos. While living there, our strategy was to keep our money in US Dollars
until the last second when we decided that we wanted to buy something because
inflation was so crazy. Then I remember hearing this story on NPR almost 2
decades later and I was blown away about the psychological game that was used
to stabilize Brazilian currency.

------
koolkat
Lets not forget that economics is a social science like psychology or history.
Also lets not forget that there is no such thing as "fake" and "real" money
and that the economy is a social construct. The concept of fake dollars pesos
or reales its a valid one but fake money is just nonsense.

------
pacofvf
Mexico has an interesting similar concept, it's called UDI: (Unidades de
Inversión, Investment Units), it's a currency tied to inflation, its a
currency tied to inflation and it's used by financial entities to hedge
against inflation.

~~~
bizarref00l
I guess Chile's UF (unidad de fomento, development units) is something alike
too. Mortgages are usually done using UF.

~~~
vpeters25
According to wikipedia
([https://en.wikipedia.org/wiki/Unidad_de_Fomento](https://en.wikipedia.org/wiki/Unidad_de_Fomento)),
Chile's UF was created in 1968.

I think the Pinochet dictatorship expanded the UF to be used in financial
transactions like mortgages. Large loans such as for cars or college are also
in UF.

It would be interesting to know whether Chile's UF served as inspiration to
these brazilians.

------
joe_torres
I remenber this years.

Everything have long lines, because your money would be worth nothing in the
next day, so everybody went in the markets in the 10th day of the month, when
they received their paychecks.

------
pyabo
I'm from Argentina and a similar plan was implemented there. The REAL plan was
to subscribe free market principles, sell state owned companies and reduce the
fiscal deficit. This fake currency was attached to USD price in Brazil. In
Argentina was created from the beginning and it was also attached to USD.
Sorry to bother with the reality, I'd prefer the Big Fish style story that was
told in this article, but it was a fake.

------
murbard2
Corrolary: solving price stickiness problems, or changes in the demand for
liquidity by changing the money supply itself is a horrible hack.

All of the (stated) goals of monetary policy can be achieved by using a price
index layered on top of money, whith none of the distortionary effect and
seignorage.

------
nickbauman
Old story now but still an amazing one.

------
aristus
There are only two hard problems in economics: cash invalidation and naming
things.

~~~
baldfat
naming things is difficult period. It is under valued but naming things is so
important in many areas of life. (This is the reason why there are so many
Jr.?)

There are only two hard things in Computer Science: cache invalidation and
naming things. -- Phil Karlton

~~~
mikeash
The CS quote thing is good but it's a little off. There are actually _two_
hard things in CS: cache invalidation, naming, and fencepost errors.

------
skylan_q
I like how you can easily miss this part:

 _You have to slow down the creation of money, they explained._

It's as if it wasn't instrumental when in actuality, it's the entire reason
why inflation stopped.

~~~
Symmetry
Yes and no. The quantity of money governs the price level in the long run but
people's expectations about inflation are very important in the short run.
Volker showed that you can simply slow down the creation of money to bring
inflation under control at the cost of a certain amount of short term economic
distress.

What was cool about the Real story is that they mostly managed to stop
inflation without the normal period of distress. This was super important
because I believe the Brazilian central bank doesn't have the Fed's level of
independence and probably wouldn't have been able to do it the hard way
without being stopped.

~~~
kaonashi
> The quantity of money governs the price level in the long run

The quantity of money is both nebulously defined, and also has absolutely
nothing to do w/ price level; it's all spending relative to output capacity.

~~~
sergiosgc
A reduction to the absurd reveals that the quantity of money is relevant to
the price level. Try to run the economy with one dollar changing hands and,
since it can't change hands fast enough, that single dollar is priceless. Try
having an absurd (approach infinity) number of dollars and, even if
circulation speed is near zero, dollars will have near zero value.

Naturally, it is monetary mass coupled with circulation speed. If you change
the monetary mass and no other economic variable, within the tolerance
envelope, circulation speed will adapt and price levels won't budge. Exceed
tolerance levels, and you will influence price levels.

You saw this applied in practice recently. Quantitative easing is a correction
using monetary mass to an abnormal reduction in circulation speed (via reduced
lending).

~~~
kaonashi
>Try having an absurd (approach infinity) number of dollars and, even if
circulation speed is near zero, dollars will have near zero value.

That only matters if those dollars are being spent and remain in the flow of
funds. Say the Treasury printed a few trillion dollar notes and buried them in
a hole, it's not going to affect the price level any (aside from the real
resources used).

------
meira
Not a real story. Hyperinflation in latin america was systemic and ended in
almost all countries around the same time, most of them didn't change their
currency. And with sucessive crashes (97, 99, 2002), we can't call it a
success.

~~~
outworlder
If not a real story, then it is a pretty good correlation!

Hyperinflation abruptly stopped the month after Real was introduced. All
previous governments tried and failed to control it.

The Real was a success. Mismanagement of the economy later on has nothing to
do with it.

~~~
meira
Of course, some of the measures were "effective" against inflation. The
Brazilian Central Bank fixed 1 BRL to worth 1 USD and lowered a lot of import
fees, flooding Brazil with US goods. This helped put prices down at cost of
our own industries.

~~~
outworlder
So, temporarily decreasing the artificial "protections" that those inefficient
and outdated industries enjoy? That is a good thing.

~~~
meira
Yeah, probably some of them (the economist and his buddies) thought the same
and didn't give a shit. What happened them? Most of Brazilian industries got
broke or were acquired under great circumstances by foreign companies. Long
live plutocrats.

~~~
rglullis
If you think that hyperinflation would solve itself without any of the
policies adopted - fiscal tightening, privatization of troubled state owned
companies, opening up the market, etc - I'd love to hear about your
explanation for the current state of Venezuela.

------
jsprogrammer
All money is fake.

------
atorralb
what an oxymoron, isn't all money, fake?.

