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Lessons About Inflation from Brazil

When government goes on massive spending sprees financed by printing money, level-headed reform is necessary.

American President Bill Clinton meets Brazilian President Fernando Henrique Cardoso. (Photo by Ira Wyman/Sygma via Getty Images)

Inflation is the word on everyone’s lips. The problem is so pervasive it can no longer be ignored. Federal Reserve Chair Jerome H. Powell admitted late last year that the term “transitory” no longer applies. Inflation is going to be with us for the foreseeable future.

Everyone has a take. In the Washington Post, Jennifer Rubin recently wrote, “Looking at the big picture, Biden’s economic record is extraordinary, but it is marred by inflation.” She seems to be saying: Everything would be awesome, if only everything wasn’t terrible. An op-ed by Teresa Ghilarducci in Bloomberg was ridiculed for advising people to deal with inflation by eating lentils instead of meat and refusing pet chemotherapy.

Where can we turn for solid guidance? Americans tend to think of our country as exceptional and unlike anywhere else. We have good reasons to. But the truth is that inflation is a common problem the world over and other countries have much to teach us.

Brazil is a good example. The country suffered extremely high levels of inflation from the 1960s until 1994, when the government defeated it swiftly and decisively. Brazil has never exactly been a model of financial stability. Its modern wave of inflation, however, started in much the same way as America’s current bout: the government went on a massive spending spree financed by printing money.

In the late 1950s, Brazilian President Juscelino Kubitschek splurged on a public works program. The centerpiece of this was the construction of a brand new capital city, Brasilia. Inflation followed fast and furious. Estimates vary, but Brazil’s inflation rate may have been around 3,000 percent a year.

The Brazilian economy adapted by indexing things like rent, loans, and utility bills to inflation. This allowed Brazil to escape the kind of economic collapse that Germany suffered during the Weimar Republic, but it also helped perpetuate the inflationary conditions. In Brazil, just like in America, there were people who claimed inflation was actually a good thing because—somehow or other—it made economic growth easier.

My husband Lucas Freire was born in Brazil in 1984 and vividly recalls the effects of high inflation. “We
would go to the supermarket on the day my dad got paid to stock up for the month and I would run ahead to get things before the clerk put on the labels with the higher prices,” he says. On another occasion, one of his relatives won a modest lottery prize but didn’t collect his winnings until three days later. By that time, the money had lost so much value all he could buy was a pack of candy. Any Brazilian who is old enough to remember life before 1994 will have similar stories.

The people who suffered the most from inflation were the poor. Their incomes never kept up with rising prices. “Inflation acted like a regressive tax that made poor people poorer,” writes Fernando Henrique Cardoso in his autobiography The Accidental President of Brazil: A Memoir. Cardoso was the minister of finance who implemented the Plano Real (the Real Plan) that finally ended inflation after 40 years. The Real Plan involved deep cuts to public spending and the introduction of a new currency, the Real. Cardoso’s popularity in the wake of the plan’s success allowed him to win the presidency in 1995.

In his book, Cardoso offers some keen insights on inflation in Brazil that are also relevant to America’s situation.

Follow the money: In Brazil, many parties actively profited from the high levels of inflation. Naturally, the biggest winners were the politicians. “As long as there was inflation, they never had to say no to anybody,” Cardoso writes. But it goes much further than that. Cardoso says inflation enabled corruption. “Nobody paid much attention to balance sheets back then, since they were so unreliable. So a little missing cash was hardly ever noticed. This was true in both the public and private sectors.”

Moreover, banks made huge profits off inflation through a practice known as “floating.” Many ordinary Brazilians paid their utility bills at the bank, which then had three days to transfer the money. “In a stable country such a delay would be insignificant,” writes Cardoso. “But in Brazil, with inflation running as high as 80 percent per month, it was an absolute scandal. At that rate, a bank could pocket an easy 8 percent profit in real terms by waiting just 3 days to make the transfer, since the money was losing its value at such a rapid pace.” Cardoso writes that up to 25 percent of Brazilian banks’ profits derived from floating.

In America, our discussion of inflation tends to emphasize how the rich feel the pain less than the poor. Ghilarducci’s op-ed was titled “Inflation Stings Most If You Earn Less Than $300K.” That is certainly true. But we would be naïve if we didn’t acknowledge that there are people out there who are figuring out ways to make money off inflation. They may already be doing so. It won’t be long before those parties have a vested interest in the continuation of inflation, which will make beating it a lot harder.

Your friends may not be true friends: When Cardoso introduced the Real Plan, he was opposed not only by the banks but also by those who were supposed to represent the poor. Luiz Inácio “Lula” da Silva was running for president in 1994. (He subsequently won the presidency in 2002 and is currently running again.) Born into poverty, Lula rose to fame as a trade union leader and champion of the working class. Yet he refused to support the Real Plan. He realized that outrage over inflation was critical to his presidential campaign, and if it went away so would many of his votes. “What was good for Lula was not necessarily good for Brazil,” writes Cardoso.

Sadly, this is a phenomenon we see in many areas of life. People who claim to be dedicated to solving a certain problem may, in fact, have a major stake in its continuation.

In America, we need to keep an eye on the people who say they are working to end inflation. What is good for them may not necessarily be good for America.

Honesty is the key: The Brazilian government had tried to solve inflation many times over the years. Their plans often involved some version of price controls; they were doomed to failure. One of the primary reasons the Real Plan was successful is that the government was finally ready to acknowledge what was causing the problem.

“The root cause of inflation in Brazil was really very simple: The government spent more than it earned. When the budget turned up a big deficit every year, as it inevitably did, the government printed more money to cover the difference. Any grade-school student knows, however, that you can’t just print endless amounts of cash without having something tangible to back it up. Otherwise, the money loses its value,” writes Cardoso.

This statement is remarkable for its honesty and clarity. It’s even more remarkable when you realize that Cardoso was hardly a student of Milton Friedman. He was a member of a center-left political party. He spent his career outside politics working as a sociologist at the University of Sao Paulo, which is widely regarded as a hub of left-wing thinking. But after 40 years of inflation, there was no more beating around the bush.

America’s solution to inflation will obviously be different than the Real Plan due to our vastly different situation. We also need to start, however, by confronting the problem with total honestly. Let’s hope it doesn’t take us 40 years to get there.

Emma Freire is a 2021-22 Robert Novak Journalism fellow and freelance writer who has been published in the Federalist, Human Events, and others. Over the past decade, she has lived with her husband and three children in Brazil, South Africa, and Europe, but she identifies as American.

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