
How Fake Money Saved Brazil - nl
http://www.npr.org/blogs/money/2010/10/04/130329523/how-fake-money-saved-brazil
======
diego_moita
The article doesn't tell lies, but it certainly spices up a lot the story.
Some points to clarify:

* The "finance minister who knew nothing about economics" was actually a very respected sociologist, a senator and a very intelligent and skilled politician. He later became known as president Fernando Henrique Cardoso. I.M.O. one of the best 3 presidents this country had.

* What Edmar Bacha, Pedro Malan and others did was to break inflation's inertia/momentum. A lot of people already knew it was necessary; but no one else knew how to do it.

* The article doesn't comment on the strict and cautious monetary policy implemented by Fernando Cardoso. It was as much important as the "fake money" trick.

* Big inflation was a huge tax on the poorest people. Because they were poor, they didn't have the knowledge and means to protect against rising prices. It is because inflation ended that they began consuming more and the country increased their internal markets.

[Edit]Wikipedia has a more comprehensive explanation about what we call here
Plano Real : <http://en.wikipedia.org/wiki/Plano_real> [/Edit]

~~~
cbernini
It's also valid to mention that the impeached president also ended up helping
out in one way: he froze the saving accounts, since one way to stop inflation
is to cut down the buying power of the population.

~~~
diego_moita
That is what classic theory says and, in truth, for a brief period of time,
inflation receded when Collor (the impeached) froze savings.

However the fact is that it recovered back again to high levels during
Collor's mandate.

The cut down in buying power was achieved mostly through fiscal policy, not
consumption restriction.

~~~
cbernini
Well, I was 7 back then, so I really said what someone else explained to me.
That was my bad.

------
frossie
_"He said, 'Well, I've just been named the finance minister. You know I don’t
know economics, so please come to meet me in Brasilia tomorrow,' " Bacha
recalls._

So, three things had to happen:

1\. A politician had to admit his ignorance

2\. Some bright spark technocrat somewhere had the right solution to a
seemingly impossible problem.

3\. The right politician asked for help from the right technocrat

They're not kidding. It _is_ a miracle.

~~~
rlander
And it definitely felt like one. You have no idea how much the country changed
(for the better) because of this improbable miracle.

Nobody believed it would work because the whole country had lost faith in
"magical" economic reforms like the one before it, the Collor Plan.

Imagine you wake up one day and all of your bank accounts are frozen - that's
what happened to my parents (and most of the population) on March 16, 1990
when the Collor Plan was announced. It's your money, but you can't spend it -
sorry. My father had been saving money in order to buy a new house. Years
later he recovered less than 1/10 of the original sum. Lots of small
businesses (including family and friends) went broke.

When I talk to my parents about pre-real days it feels like they were born in
a different country than I was.

~~~
yardie
Wow, I guess that explains the uptick in the brazilian population in South
Florida during that time. One year of school I only knew one brazilian kid on
the bus. The next year over half the bus was brazilian. Big migrations like
that usually happen because of economic reasons or war. I just never put 2 and
2 together until now.

------
anodari
It's a 100% real story. I lived in these days. I had to put a feature called
"currency change" in my softwares because every year we had to divide by 1000
all values in databases. One major work was to adjust fields sizes because
currency values are allways causing data overflow.

~~~
rbanffy
> we had to divide by 1000 all values in databases

Those were the days!

It's absolutely impossible for me to say how much I paid for my first car. I
know it were 4000 monetary units, but I cannot recall its name nor how much it
cost. That's weird.

------
meric
Wow. Last night I was thinking... if I was a supermarket manager in an
inflation-ridden country, how would I save money by not changing price tags
everyday? And my answer was to set one of my products as "1 Unit" and just
price every other product in multiples of that "Unit". That way I only had to
change the price of a single product!

And then today I read this! What a coincidence! I never would've thought you
could scale up this technique up to do it to the whole country!

~~~
ataggart
During the hyperinflation in the Weimar Republic, grocers dealt with this by
changing the organization of their stores. Instead of grouping like-kind items
together, they grouped like-priced items, then they would just bump the prices
for each aisle.

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noonespecial
So they used the real, which was fake, to make the money that was real fake,
so they could make real money out of the fake real.

Dr. Seuss would be proud.

~~~
michael_dorfman
_Dr. Seuss would be proud._

Or Baudrillard.

------
brc
It's an interesting story but the frightening thing is the comments of people
wondering out loud what's wrong with inflation, or asking for more inflation
in the USA.

Out of control inflation is a terrifying, society-destroying phenomenon.
Stable and prosperous societies rely on stable money values.

~~~
sethg
The people who are asking for more inflation in the USA are asking for
something in the 2% range, or (for those who are truly bold) asking for prices
to rise to the level they would be at if inflation had remained in the 2%
range for the past five years or so.

Stable money is good, but so is providing people with an incentive to spend
and invest, rather than incentives to hoard cash and default on their debts.

~~~
diego_moita
Sorry, but this is playing with fire.

What scientists, technocrats and economists forget is that public policy is
rarely driven by rationality. It is driven mostly by private interests,
demagoguery, blind ideology, prejudice and the public misconceptions.

The idea of taking a little bit of a very dangerous medicine is something that
no one should take lightheartedly.

~~~
jacobolus
It’s also “playing with fire” to, in the name of keeping inflation down,
depress demand so much that it plunges the whole country into a massive
recession. In other words, any economic policy can be taken too far, and the
dangers of any approach can be caricatured and exaggerated. It’s not like the
policy of inflation fighting isn’t equally driven by “private interests,
demagoguery, blind ideology,” &c.

~~~
Experimentalist
Demand _should_ be depressed because it was artificially stimulated before.

ie. if demand for homes was normal and not stimulated by easy money then there
would not have been a housing bubble. a dotcom bubble. etc.

Government stimulated demand is the problem not the solution. (see my other
post a few msgs above)

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pavlov
Heh. I always assumed that the name of the currency, real, has the meaning
"royal". Instead, it's literally the same as the English word. What an
interesting story.

Have any other governments suffering from high inflation tried this?

Instead of calling it a fictional unit, they could also just use an existing
currency like the euro for the transitional period, then switch to a new
national currency that has an initial exchange rate of 1:1 against the euro.
(I'm picking the euro because it has a fairly neutral image, with over 20
countries using it already.)

~~~
wmf
I would assume that the Brazilian real is named after the Portuguese real
which does mean "royal". It is an odd name in a democratic country, though.

~~~
sportsTAKES
You are correct that 'real' means royal but it also means true or authentic
(similarly in English).

I think that probably more accurately describes their intention behind the
meaning of the name.

When I lived in Brazil in the 1990's, shortly after the currency changed from
Cruzeiros to reais, the exchange rate was around 1.5. Today, it's 1.69 - there
have been some relatively mild fluctuations since then but it has stayed
remarkably stable.

~~~
brc
You're right when you think about it - royal does have a double meaning of
'real' - as in 'what a royal pain in the ass'.

------
varjag
Anyone here who experienced post-Soviet currency collapses would instantly
remember prices in У.Е. ("convention unit", in reality a legal way to put U.S.
dollar price tag), monthly re-indexed МРОТ ("salary unit"), and so on. Alone
they did not help anything, until economy and fiscal policies fundamentally
changed.

~~~
raquo
Until oil prices skyrocketed, I'd say.

~~~
varjag
Inflation receded by 1996, well before oil prices went up.

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barmstrong
I don't understand something about this story.

Hyperinflation is primary caused by government printing money right? So if
switching to another currency helped stop this...I get how it could help
people changing their perceptions, but wouldn't the root cause be that the
government stopped printing money with the new currency?

It seems like it would have been almost as effective if they had simply
stopped printing more of the original currency until things stabilized?

Maybe I'm missing something. But the article seems to put too much weight on
this clever idea of shifting to a new currency. While if monetary policy had
stayed the same with the new currency I don't think it would have made any
difference. The monetary policy here was the important part, not the new
currency.

~~~
quadhome
I had the same question. The Wikipedia article on the URV lead me to "Inertial
inflation."

 _In the medium-to-long term, economic agents begin to forecast inflation and
to use those forecasts as de facto price indexes that can trigger price
adjustments before the actual price indices are made known to the public. This
cycle of forecast-price adjustment-forecast closes itself in the form of a
feedback loop and inflation indices get beyond control since current inflation
becomes the basis for future inflation (more formally, economic agents start
to adjust prices solely based on their expectations of future inflation). At
worst, inflation tends to grow exponentially (leading to hyperinflation)._

<http://en.wikipedia.org/wiki/Inertial_inflation>

~~~
barmstrong
Interesting, thanks for posting that (it is probably what the author is basing
it on)...although it's probably more accurate to call this one theory of how
it could happen.

The reasoning behind it doesn't fully make sense to me.

Simple reason: people spending money as fast as they can (the shot in the arm
that can accelerate hyperinflation) has a natural limit: when people have no
more savings! So I don't think it's correct to call this a positive feedback
loop. It has a natural limit that could be reached quite quickly under
hyperinflation.

Indexes can only takes things so far too - if you (as a business owner) follow
them and nobody can afford your products, you'll quickly figure it out and
drop prices. So it seems weird to say indexes could cause hyperinflation over
any medium-long time frame.

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dzorz
80% per month sounds crazy, but it is not even close to top 6:
[http://en.wikipedia.org/wiki/Hyperinflation#Worst_Hyperinfla...](http://en.wikipedia.org/wiki/Hyperinflation#Worst_Hyperinflations_in_World_History)

------
swah
An extra level of indirection?

Reminded me of the quote: "All problems in computer science can be solved by
another level of indirection"

~~~
anthonyb
...except too many levels of indirection.

~~~
barrkel
I think you can solve that, to some degree, with a cache (if it's performance
that's troubling you) or a simplified facade (if it's the complexity of the
deep stack).

Yes, those are indirections.

~~~
anthonyb
Then you have cache invalidation problems (one of the two known hard problems
in CS), as well as impedance mismatch issues with your facade.

------
motters
All money is of course "fake" in that it only has value if people believe that
it does. Economics could be thought of as a branch of psychology, with "real
value" being connected to the transient and sometimes hard to quantify needs,
wants and desires of people.

------
tkeller
"Brazil's inflation rate hit 80 percent per month. At that rate, if eggs cost
$1 one day, they'll cost $2 a month later."

Really.

~~~
wallflower
Rule of 72

Divide 72 by the periodic interest rate to find the number of periods to
double the money.

<http://en.wikipedia.org/wiki/Rule_of_72>

~~~
SkyMarshal
Great rule, should be the very first thing taught in high school when you get
to exponents.

Dr. Albert Bartlet of University of Colorado has an excellent lecture on its
implications for population growth, environmental degradation, and other big
picture problems:

<http://www.youtube.com/watch?v=F-QA2rkpBSY>

------
sethg
...and now that Brazilians are no longer so spooked by inflation that they
spend money as soon as they receive it, three Brazilian banks are among the
world’s top ten credit issuers.
([http://www.npr.org/blogs/money/2010/10/04/130329294/life-
on-...](http://www.npr.org/blogs/money/2010/10/04/130329294/life-on-the-
installment-plan?ft=1&f=93559255))

One liberal wonk wonders if this is a sign that the country is facing a
consumer debt bubble. ([http://yglesias.thinkprogress.org/2010/10/tomorrows-
credit-b...](http://yglesias.thinkprogress.org/2010/10/tomorrows-credit-
bust/))

------
chrismealy
The article never mentioned it, but it's a called a _wage-price spiral_.

------
devmonk
Hopefully the U.S. won't ever have to deal with this type of issue (out of
control inflation). I'm very surprised that inflation hasn't hit the U.S. yet
in a big way, but from what I hear that is because China and the U.S. are
buying U.S. treasury bonds in a big way.

~~~
cbernini
but the big problem for you guys is: it's expected that China holds something
around 1 trillion of the US GDP in treasury bonds. So whenever they feel the
US economy isn't trustworthy anymore, selling these will hit like a train.

their growth rate is really high right now, so it's a delicate situation.

~~~
gamble
The Chinese can't stop buying bonds if they want to keep their currency
depressed relative to the dollar. Moreover, they have no intention of stopping
the gravy train - tanking the US economy (further) would only hurt their own
largest market, and no other large market is as willing to accept one-sided
trade and currency policies as the US.

------
winter_blue
There's no such thing are fake money, only false promises. Money is debt on
the side of the government. Fake money therefore, is debt that the government
defaults on.

------
butu5
wonderful article.. I really love it :) it raises lots of question how this is
possible, how many people get impacted.. Anybody did any significant financial
loss?? or few people know about this able to take any benefit?? but this is
definitely a bold decision and executed well towards result..

------
noahc
What are the implications of this for startups?

Has a startup ever benefited from using a fake currency? In what ways?

~~~
dstein
Inflation is a useful tactic to make RPG style games addictive.

I worked with someone who built a popular facebook RPG game, and part of what
made it popular was that as you became an established player the amount earned
per day rose exponentially. As the game became more and more popular the
virtual economy started to hyperinflate almost out of control, and the
established players started hitting the MySQL integer limits. The author never
expected that would ever be possible, but the exponential rate of inflation
plus the exponential rate of new players joining created a giant pyramid
scheme.

~~~
limist
Good story, reminds me of a favorite quotation: _The greatest shortcoming of
the human race is our inability to understand the exponential function. —
Albert Bartlett_

~~~
Natsu
From what I've seen, I think that we don't understand S-curves, either. No
matter which side of it we're on.

They can look exponential... until they hit the limit.

------
patrickgzill
It is coming to the USA. It is called the SDR.

------
known
Will this trick work in America?

------
csomar
It's a matter of governement control (assuming your are not connected to the
outside world/Internet and don't have, therefore, a real-time currency
update).

Let's assume gov. X, printed an additional $3bn. Will prices increase? No,
they won't. The gov. can use this money, to do things, like building roads,
schools... These expenses has to be considered as investments; if roads are
built, industry will benefit and exports will increase lowering the inflation
that the gov. had already made.

So the gov. can print as much papers as they want. It's paper in the end. But
the ROI of the money they spent/printed, is going to decide if inflation will
happen or not (in the future).

If inflation is spiking, it means the gov. lost control over the banking
sector and a new currency needs to be made to return confidence to people and
companies.

~~~
bd_at_rivenhill
The government could do things like building roads, but they are usually just
using that extra paper to pay off their debts, which makes investors demand a
higher interest rate to hold the debt, which leads to a vicious cycle.
Inflation is caused by the speed of money creation exceeding the speed of
creation of real value, and the banking sector is not the only actor in the
money creation process.

~~~
coliveira
That was the problem in Brazil, money was created not to invest but to pay
existing debt.

~~~
forinti
Not really. Brazil's inflation had an extra factor helping it: lots of prices
(as well as salaries) were automatically revalued by "triggers". The plan
wouldn't have worked if the government hadn't also dropped all these
mechanisms.

