Brazilian Waxed

It is 2016 and the cosmetic surgery capital of the world, Brazil, has a lot to worry about. Clocking in at 79th in the world for living standards, Brazil is numero uno in butt enhancements! This despite the fact that cosmetic surgeries are not covered by either government or private health plans. The most astounding thing about this little known fact is the economic backdrop against which it takes place. Brazil is the sick man of the BRICS (i.e., Brazil, Russia, India, China, and South Africa) and although the nation is gearing up for the 2016 Olympics with Carnival-like glee, the grim reality is that it is facing economic disaster.

By the end of 2015, Fitch, Moody’s, and Standard & Poor’s had all downgraded Brazil’s credit rating to “Junk” status. That hit brought a hard dose of reality to Brazil and all of a sudden things didn’t feel so festive. The nation is a financial basket case, another failed example of socialism run amok. Within a matter of months after Brazil’s downgrade, Joachim Levy, the newly-elected finance minister, had quit, frustrated by the impossibility of stabilizing Brazil’s faltering economy. Brazil’s economy is so bad that many economists estimate it has been shrinking by 2.5-3% annually. Yours truly, an economist of the simian kind, believes it has been shrinking at 1.5-2.7% per year. This year, however, The Guerrilla is forecasting a 4.2-4.5% contraction of the Brazilian economy, with a potential collapse of 7% being entirely possible!!!

A contraction of this magnitude will bring Brazil in line with projections and data that reflect the REAL cycles evident in the world’s larger economies. Like many governments today, Brazil tends to hide a great deal of vital economic data from main stream chart watchers. This REAL data is hidden beneath numbers spun positively by the government behind the socialist rhetoric of alleged “great societies.” The reality is that like most upside-down nations which are commodity rich, but which have bloated bureaucratic governments with huge social balance sheets, Brazil is keeling over like a ship taking on water.

Forget Recession...It's A Depression.

Brazil’s REAL debt-to-GDP ratio is currently at 100% and growing. It does not help matters that since having its credit rating dropped, Brazil’s debt servicing costs have become astronomical. Their central bank has zero ability to “stimulate” their economy as further “stimulus” and intervention further distort asset prices. Add to this a rising inflation rate reported to be 10.5% but which is really higher than 13%. Any Keynesian intervention will completely destabilize public finances, shoot inflation through the roof and, effectively, implode the system.

A Study in Stupid

The most incredible thing about Brazil’s socialist circus is the astounding fact that thanks to the structure of its currency the nation CANNOT EVEN DEFAULT!!!! Just the thought of this caused The Economic Ape to spew Caipirinha (a delicious Brazilian drink) all over his computer screen. You see, most of Brazil’s borrowing is in its local currency, which makes default impossible. The only remaining option is to go nuclear on their debt by borrowing even more, guaranteeing that Brazil will hyperinflate to oblivion.

In 2009, Luis Da Silva, also known as “Lula,” was the president of Brazil. He bragged constantly about how his nation had weathered the Global Financial Crisis. Talk about counting your chickens before they’ve hatched! By 2015, his hand-picked successor Dimwit, excuse me, Dilma Rousseff (a noted communist) had driven the country into the open sewers that line many of Rio’s ghettoes. As a side note, Brazil’s basic sanitary conditions are similar to London’s back in the 14th century. The Guerrilla will snort with laughter as Olympic athletes in 2016 compete in some of the most polluted, human waste infested waters on planet earth. It takes the term swimming in shit to whole other level.

But I digress! Today’s “vanguard of emerging markets” and the “B” in BRICS is presiding over the longest “recession” (Keynesian-speak for structured economic collapse) in one-hundred years, spearheaded by a leader whose incompetence is only rivaled by Venezuela’s Nicolas “The Bus Driver “Maduro. Brazil’s inability to slay its sacred cow (i.e., public spending) and a vast number of structural weaknesses ensure that it will continue to be listed among the socialist failures of the world.

Brazil is a catastrophic joke! In some years, public spending has rocketed as high as 90% of annual governmental spending. Read that again, dear followers. Nine-tenths of every Brazilian Real has gone to government spending! Take into account as well that pensions in Brazil make up over 12% of their GDP, a number much higher than in Japan, which has an older and wealthier population.

The economic term “Fiscal Dominance” applies here. Fiscal Dominance is when a central bank can no longer print currency or intervene directly in the economy without causing massive distortions and capital destruction in financial markets. The central bank effectively yields to the policy wonks in the government responsible for initiating the “right monetary policy.” The central bank and government must then figure out the revenue that is required to pay for the government’s insane spending and how many government bonds need to be floated to meet that demand. Tis hard to do when you’re already at Junk bond status.

The three prerequisites for Fiscal Dominance are: ridiculous levels of public debt, unstable financial markets, and long term debt-based insolvency. Brazil can check all of these boxes. It is at the Keynesian endgame, the nightmare scenario for policy wonks. Make the slightest mistake and Brazil enters hyperinflation faster than a Russian Kaliber missile striking a USIS oil depot.  

The Loony Lab

The fate of Brazil today is an interesting one. It is another petri dish that showcases the monetary contagion caused by planned economies. It has become a hangout, a college nerd club for academics and economy hacks who have never run a business, never created anything of worth, or ever held a real job. It is a disaster for politicians, who are too late to do anything and usually don’t have the cohones to call the socialistic policies of the last several decades the abysmal failure that they truly are. Then again why should they? Socialists never blame socialism.

Brazil’s economic failure will reverberate throughout the world. The Guerrilla fears that its fiscal toxicity is something even the RICS (Russia, India, China, and South Africa) will not take on as bailing out Brazil via the infant New Development Bank will torpedo everything the BRICS and its associate nations have been trying to build. At the same time, it will not look good to the rest of the BRICS associate nations (now over 105) to see a founding member implode. Brazil will be forced to restructure. It will become a failed state, but its vital industries will be supported by the RICS and stabilized from total collapse. Perhaps one day Brazil and much of South America will realize that socialistic policies are incompatible with REAL economic growth.

As you read this, countless politicians and academics are holding meetings and forums to argue whether or not Brazil is in “Fiscal Dominance” mode. To this The Guerrilla, the only sane economist on this matter, says, “Adeus Brasil, foi bom saber que voce.” (Good-bye Brazil, it was nice knowing you).