Forget China, The New Buzz Will Be All About The Collapse Of Brazil

Brazil Cheerleader

Photo: Gnews Pics via Flickr

Those waiting for a China collapse may experience something of a “watched-pot-never-boils” phenomenon, while ultimately missing the real real BRICs bustup.Expect to hear more and more about Brazil in the coming months. The election and the recent sale of Petrobras — which was used to help the government meet its budget goals — may be just what it took to get this country on the radar.

Martin Hutchinson at PrudentBear.som lays out the case:

Brazil is the most straightforward case. Its finance minister Guido Mantega this week denounced the “currency war” he saw developing among the world’s major economies, by which each country attempts to devalue its currency to reflate its economy. Such a war was a minor but contributing factor in the Great Depression but at present, since all the major economies seem likely to succeed in their devaluations, it will merely cause a nasty burst of global inflation. In any case, Mantega’s true motivation in proclaiming a currency war was to protest the Brazilian real’s rise above Rs.1.70=$1, and divert the Brazilian electorate from the country’s true economic situation ahead of Sunday’s election.
The real is rising because of the mass of hot money flowing into Brazil, attracted by its apparent rapid growth and commodities wealth. In a well-run economy like that of Chile, currency inflows of this kind are sterilized by the government creating a rainy-day fund, which can be used when commodity prices drop back. However that requires the government to keep public spending under control. As Mantega perfectly well knows, being finance minister, Brazil has done nothing of the sort. While official public spending has been kept nominally under control, lending by the state development bank BNDES and investment by Brazil’s 118 public sector companies, financed by borrowing, have been allowed to explode ahead of Sunday’s election – both are up 30-40% on the previous year.
The Brazilian public lulled by the popularity of outgoing President Luis Inacio Lula da Silva and apparent prosperity, are giving their votes to Dilma Roussef, Lula’s former development minister, an avowed Marxist who believes in the rapid expansion of state control. You can already see the result in the Petrobras share sale, in which $42.5 billion of the nominal $70 billion of proceeds was paid to the government in return for overpriced oil rights which Petrobras had thought it already owned. This kind of seizure, accompanied by meddling, can be expected to affect Brazil’s other resource behemoths going forward, even those nominally in the private sector such as the iron ore giant Vale and the forest products titan Fibria.
With Roussef in charge, far from being an emerging world superpower, Brazil will relapse fairly quickly into its habitual third world chaos. The respected central bank governor Henrique Meirelles, whose monetary policy of double-digit interest rates has kept the Brazilian economy stable throughout Lula’s reign, is unlikely to last long. Once he goes interest rates will drop and the inflationary forces will become overwhelming.
If natural resource endowments per capita are overwhelming as in Argentina and Venezuela, bad governments can combine with a resource boom to produce a semblance of normality, albeit with gradually worsening living standards, violation of property rights and soaring inflation rates (suppressed in official statistics.) A country with successful private sector companies and perhaps a private pension system can provide loot for the socialists and mafiosi for several years, as Argentina has shown. However Brazil’s economy is less dominated by natural resources because of its immense population; hence the descent into chaos is likely to occur more quickly. As for the country’s fate if and when the current resource bubble bursts, it does not bear thinking about.

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