8 ms·

How Fake Money Saved Brazil (2010)

261 points by snappieT 11y ago

josefresco 11y ago
How about "How Currency Abstraction Stopped Runaway Inflation in Brazil"?
- snappieT 11y ago
  Thanks for the suggestion, updated.
  - mkopinsky 11y ago
    What happened here? Why was the title changed back to NPR's more clickbaity version?
    - nosideeffects 11y ago
      To bait dem' clicks!
kozak 11y ago
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 11y ago
  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.
- rtpg 11y ago
  said elsewhere, but the essence seems to be that wages were tied to this URV, so people's wages weren't dropping in real value (no pun intended).
- marcosdumay 11y ago
  "Real" in Portuguese has two meanings, one is the same as in English, the other is "related to the king". Brazilian money had this name since we had a king, then, at the inflation time its name was changed, a dozen times or so, and came back to the original.
- mig39 11y ago
  Real means "Royal" in Portuguese as well.
meira 11y ago
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 11y ago
  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 11y ago
    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 11y ago
      So, temporarily decreasing the artificial "protections" that those inefficient and outdated industries enjoy? That is a good thing.
      - meira 11y ago
        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 11y ago
        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.
murbard2 11y ago
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.
jstalin 11y ago
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 11y ago
  https://en.wikipedia.org/wiki/1970s_energy_crisis https://en.wikipedia.org/wiki/1970s_energy_crisis <-- this caused the hyperinflation, not money printing.
  - deleted 11y ago
    [deleted]
  - Retric 11y ago
    Considering the terrible tax / spending policy and massive amounts of money being printed at the time I have my doubts the energy crisis was nearly as important as you suggest. Also of note the inflation rate in 1991 was very close to the 1970, and 1976 rate of six percent. So spiking to up another 6% to 12% percent briefly was clearly related, but 1/2 of that total was directly from failed policy. http://www.frbsf.org/education/publications/doctor-econ/2003/january/monetary-policy-1970s-1980s http://www.frbsf.org/education/publications/doctor-econ/2003... PS: Another way to look at it was the oil crisis created a price spike, which poor monetary policy turned into increased inflation.
    - crdoconnor 11y ago
      >Considering the terrible tax / spending policy and massive amounts of money being printed at the time I have my doubts the energy crisis was nearly as important as you suggest. The inflation spikes that happened all around the world at that time in other countries that also experienced the 1970s oil crisis should clue you in. That's not to say that the hyperinflation might have been avoided if the Brazilian military dictatorship spent a little less at the time. But this was still mainly cost push inflation, not demand pull inflation.
skylan_q 11y ago
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.
- bryanlarsen 11y ago
  According to the article, that had been tried and failed several times in the past. Slowing down the creation of money would have eventually stopped inflation, yes. But it would have taken a lot longer and created some really nasty side effects in the economy during the period when inflation exceeds monetary growth. Those side effects were nasty enough to topple several governments, and the government change stopped the slowdown before it had time to take effect.
- outworlder 11y ago
  Oh, they tried that before. Also tried to index prices. Which caused massive shortages of the most basic products. People were not happy about it.
- Symmetry 11y ago
  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.
  - Alleluja 11y ago
    Fed's level of independence: Ever heard of Greenspan Put? Even much more so for Bernanke and Yellen. You can't call FED indpendent. They are not about inflation. They are not about full employment. They have been all about keeping asset bubbles afloat since 1990s: from nasdaq, through housing, ending on treasuries. All "indpendent" FED creation. And then obviously central bank is a failed idea. Market should determine price of credit. Not a bureaucrat. A bureaucrat setting the most important price in the economy - price of credit. As if he knew better from the market what the prices should be. The central banker will always set the price of credit wrong. Too low - bubble. Too high - burst. Let the market set prices. Especially the price of credit.
deleted 11y ago
[deleted]
nahiluhmot 11y ago
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 11y ago
  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 11y ago
    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 11y ago
      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?
    - rtpg 11y ago
      sure, but in the case of minimum wage, for example, it would still be rising by some (certainly imperfect) metric. Legislative deadlock would not stop these things from rising at least a little.
  - motoboi 11y ago
    IMHO, tying prices and wages to inflation is exactly what you should avoid as this will fuel inflation even more.
drcode 11y ago
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 11y ago
  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 11y ago
    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.
stashpro 11y ago
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.
deleted 11y ago
[deleted]
tinkerrr 11y ago
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.
aristus 11y ago
There are only two hard problems in economics: cash invalidation and naming things.
- baldfat 11y ago
  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 11y ago
    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.
- toothbrush 11y ago
  I LOLed. +1
nickbauman 11y ago
Old story now but still an amazing one.
joe_torres 11y ago
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.
soneca 11y ago
> "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.
- _lce0 11y ago
  I remember when the Argentine government took 4 zeros .. so 1,000,000 become 100 .. it was a completely mess!!
  - soneca 11y ago
    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 11y ago
      In the 2005 the Turkish currency lost 6 zeros: http://en.wikipedia.org/wiki/Turkish_lira#Second_Turkish_lira_.282005-present.29 http://en.wikipedia.org/wiki/Turkish_lira#Second_Turkish_lir...
pyabo 11y ago
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.
unemouette 11y ago
Printing money is justified only if the GDP increases. If it's not the case, people pay the price. All non-gold-backed currencies (directly backed like dollar before 1971 or indirectly backed like french franc before 1971) have failed. Dollar will collapse too, probably this year (september 2001 - september 2008 - september 2015). Or soon after this year. Be prepared.
gregpilling 11y ago
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 11y ago
  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 11y ago
    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".
  - schoen 11y ago
    A cute thing is how Portuguese "real" has two different etymologies, one from Latin regalis 'royal' (from rex 'king'), and one from Latin realis 'actual' (from res 'thing'). That can produce some funny jokes (like a title mentioned elsewhere in this thread by motobol, "A real história do Real").
- jerf 11y ago
  "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." Sounds like it's time to add Applied Psychology in the Academic Sector to the resume.
gusmd 11y ago
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
- Semiapies 11y ago
  It's more attention-getting to portray it as "this one weird trick to stop inflation", sadly.
  - qnaal 11y ago
    FOUR DRINKING BUDDIES came up with this CRAZY, UNLIKELY PLAN to STOP INFLATION INSTANTLY!
    - franciscogarcia 11y ago
      FOUR DRINKING BUDDIES CAME UP WITH THIS CRAZY, UNLIKELY PLAN TO STOP INFLATION, YOU WON'T BELIEVE WHAT HAPPENED NEXT! I can see that in some social media clickbait site.
- alberich 11y ago
  The current government is just so bad? Come on, just look at SELIC during the second FHC government... the interest rates went sky high, the Real had a monstrous devaluation overnight (from R$ 1.32 to U$1 to R$2.16 to U$ 1). FHC sure helped to stabilize inflation rate, but he almost destroyed brazilian economy. His second government was nothing short of a disaster. SELIC history: https://www.bcb.gov.br/?COPOMJUROS https://www.bcb.gov.br/?COPOMJUROS
pacofvf 11y ago
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 11y ago
  I guess Chile's UF (unidad de fomento, development units) is something alike too. Mortgages are usually done using UF.
  - vpeters25 11y ago
    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.
joeblau 11y ago
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.
nandemo 11y ago
> 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 11y ago
  It helps to remember that as hight as inflation was under the military dictatorship, we just got hyperinflation on Sarney's government.
jsprogrammer 11y ago
All money is fake.
ojosilva 11y ago
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-holding-pesetas-spain-bank-exchange-euro http://www.theguardian.com/world/2014/aug/31/spaniards-holdi... [3] http://ec.europa.eu/economy_finance/publications/publication15287_en.pdf http://ec.europa.eu/economy_finance/publications/publication...
koolkat 11y ago
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.
neves 11y ago
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/workingpaper-8.pdf http://object.cato.org/sites/cato.org/files/pubs/pdf/working...
atorralb 11y ago
what an oxymoron, isn't all money, fake?.

261 points by snappieT 11y ago

josefresco 11y ago

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

snappieT 11y ago
Thanks for the suggestion, updated.
- mkopinsky 11y ago
  What happened here? Why was the title changed back to NPR's more clickbaity version?
  - nosideeffects 11y ago
    To bait dem' clicks!

kozak 11y ago

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 11y ago
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.
rtpg 11y ago
said elsewhere, but the essence seems to be that wages were tied to this URV, so people's wages weren't dropping in real value (no pun intended).
marcosdumay 11y ago
"Real" in Portuguese has two meanings, one is the same as in English, the other is "related to the king". Brazilian money had this name since we had a king, then, at the inflation time its name was changed, a dozen times or so, and came back to the original.
mig39 11y ago
Real means "Royal" in Portuguese as well.

meira 11y ago

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 11y ago
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 11y ago
  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 11y ago
    So, temporarily decreasing the artificial "protections" that those inefficient and outdated industries enjoy? That is a good thing.
    - meira 11y ago
      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 11y ago
        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.

murbard2 11y ago

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.

jstalin 11y ago

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 11y ago
https://en.wikipedia.org/wiki/1970s_energy_crisis https://en.wikipedia.org/wiki/1970s_energy_crisis <-- this caused the hyperinflation, not money printing.
- deleted 11y ago
  [deleted]
- Retric 11y ago
  Considering the terrible tax / spending policy and massive amounts of money being printed at the time I have my doubts the energy crisis was nearly as important as you suggest. Also of note the inflation rate in 1991 was very close to the 1970, and 1976 rate of six percent. So spiking to up another 6% to 12% percent briefly was clearly related, but 1/2 of that total was directly from failed policy. http://www.frbsf.org/education/publications/doctor-econ/2003/january/monetary-policy-1970s-1980s http://www.frbsf.org/education/publications/doctor-econ/2003... PS: Another way to look at it was the oil crisis created a price spike, which poor monetary policy turned into increased inflation.
  - crdoconnor 11y ago
    >Considering the terrible tax / spending policy and massive amounts of money being printed at the time I have my doubts the energy crisis was nearly as important as you suggest. The inflation spikes that happened all around the world at that time in other countries that also experienced the 1970s oil crisis should clue you in. That's not to say that the hyperinflation might have been avoided if the Brazilian military dictatorship spent a little less at the time. But this was still mainly cost push inflation, not demand pull inflation.

skylan_q 11y ago

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.

bryanlarsen 11y ago
According to the article, that had been tried and failed several times in the past. Slowing down the creation of money would have eventually stopped inflation, yes. But it would have taken a lot longer and created some really nasty side effects in the economy during the period when inflation exceeds monetary growth. Those side effects were nasty enough to topple several governments, and the government change stopped the slowdown before it had time to take effect.
outworlder 11y ago
Oh, they tried that before. Also tried to index prices. Which caused massive shortages of the most basic products. People were not happy about it.
Symmetry 11y ago
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.
- Alleluja 11y ago
  Fed's level of independence: Ever heard of Greenspan Put? Even much more so for Bernanke and Yellen. You can't call FED indpendent. They are not about inflation. They are not about full employment. They have been all about keeping asset bubbles afloat since 1990s: from nasdaq, through housing, ending on treasuries. All "indpendent" FED creation. And then obviously central bank is a failed idea. Market should determine price of credit. Not a bureaucrat. A bureaucrat setting the most important price in the economy - price of credit. As if he knew better from the market what the prices should be. The central banker will always set the price of credit wrong. Too low - bubble. Too high - burst. Let the market set prices. Especially the price of credit.

deleted 11y ago

[deleted]

nahiluhmot 11y ago

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 11y ago
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 11y ago
  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 11y ago
    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?
  - rtpg 11y ago
    sure, but in the case of minimum wage, for example, it would still be rising by some (certainly imperfect) metric. Legislative deadlock would not stop these things from rising at least a little.
- motoboi 11y ago
  IMHO, tying prices and wages to inflation is exactly what you should avoid as this will fuel inflation even more.

drcode 11y ago

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 11y ago
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 11y ago
  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.

stashpro 11y ago

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.

deleted 11y ago

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tinkerrr 11y ago

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.

aristus 11y ago

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

baldfat 11y ago
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 11y ago
  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.
toothbrush 11y ago
I LOLed. +1

nickbauman 11y ago

Old story now but still an amazing one.

joe_torres 11y ago

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.

soneca 11y ago

> "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.

_lce0 11y ago
I remember when the Argentine government took 4 zeros .. so 1,000,000 become 100 .. it was a completely mess!!
- soneca 11y ago
  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 11y ago
    In the 2005 the Turkish currency lost 6 zeros: http://en.wikipedia.org/wiki/Turkish_lira#Second_Turkish_lira_.282005-present.29 http://en.wikipedia.org/wiki/Turkish_lira#Second_Turkish_lir...

pyabo 11y ago

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.

unemouette 11y ago

Printing money is justified only if the GDP increases. If it's not the case, people pay the price. All non-gold-backed currencies (directly backed like dollar before 1971 or indirectly backed like french franc before 1971) have failed. Dollar will collapse too, probably this year (september 2001 - september 2008 - september 2015). Or soon after this year. Be prepared.

gregpilling 11y ago

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 11y ago
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 11y ago
  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".
- schoen 11y ago
  A cute thing is how Portuguese "real" has two different etymologies, one from Latin regalis 'royal' (from rex 'king'), and one from Latin realis 'actual' (from res 'thing'). That can produce some funny jokes (like a title mentioned elsewhere in this thread by motobol, "A real história do Real").
jerf 11y ago
"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." Sounds like it's time to add Applied Psychology in the Academic Sector to the resume.

gusmd 11y ago

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

Semiapies 11y ago
It's more attention-getting to portray it as "this one weird trick to stop inflation", sadly.
- qnaal 11y ago
  FOUR DRINKING BUDDIES came up with this CRAZY, UNLIKELY PLAN to STOP INFLATION INSTANTLY!
  - franciscogarcia 11y ago
    FOUR DRINKING BUDDIES CAME UP WITH THIS CRAZY, UNLIKELY PLAN TO STOP INFLATION, YOU WON'T BELIEVE WHAT HAPPENED NEXT! I can see that in some social media clickbait site.
alberich 11y ago
The current government is just so bad? Come on, just look at SELIC during the second FHC government... the interest rates went sky high, the Real had a monstrous devaluation overnight (from R$ 1.32 to U$1 to R$2.16 to U$ 1). FHC sure helped to stabilize inflation rate, but he almost destroyed brazilian economy. His second government was nothing short of a disaster. SELIC history: https://www.bcb.gov.br/?COPOMJUROS https://www.bcb.gov.br/?COPOMJUROS

pacofvf 11y ago

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 11y ago
I guess Chile's UF (unidad de fomento, development units) is something alike too. Mortgages are usually done using UF.
- vpeters25 11y ago
  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.

joeblau 11y ago

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.

nandemo 11y ago

> 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 11y ago
It helps to remember that as hight as inflation was under the military dictatorship, we just got hyperinflation on Sarney's government.

jsprogrammer 11y ago

All money is fake.

ojosilva 11y ago

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-holding-pesetas-spain-bank-exchange-euro http://www.theguardian.com/world/2014/aug/31/spaniards-holdi... [3] http://ec.europa.eu/economy_finance/publications/publication15287_en.pdf http://ec.europa.eu/economy_finance/publications/publication...

koolkat 11y ago

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.

neves 11y ago

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/workingpaper-8.pdf http://object.cato.org/sites/cato.org/files/pubs/pdf/working...

atorralb 11y ago

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