globoTRENDS blog (from Summit Global Education)

People who have witnessed hyper-inflation may fear that if crisis hits again, they may loose all of the value of their savings….and so with a hint of potential crisis to come…they spend their money on physical goods because they know that physical goods will remain even if the money in the bank were to loose its value.  The resulting “spend-it-while-you-can” dynamic is harmful to the nations savings rate, increases the current account deficit, and in turn scares away foreign investors…driving down the exchange rate, and pushing the country closer to crisis.

Upon my arrival in Brazil , after having been away since September, and having missed the past 4 months of the global economic crisis, I was curious to see how much might have changed.   I was shocked to see that (on the surface at least), it appeared as if the crisis hasn’t effected Brazil all that much (as of yet).  True, everyone was talking about the `crisis`, but the shopping malls were full.  Packed.  More full than I ever remember seeing them before, either in Brazil or out.    Sure, some of that had to do with a post Christmas bounce, perhaps …but I started to wonder if something else might be going on…

Responding differently…

In the US, when consumers were faced with “crisis”, they stopped spending.  In Brazil, perhaps because “crisis” has been more common in recent memory, the consumers seemed less effected.  Or, perhaps, they just reacted in a different way…

My thought was that a country with a history of hyper-inflation (Brazil) is responding differently than one that recently never experienced crisis (at least, not in my generation in the USA).

While I dont think inflation is a risk in Brazil at the moment (although a weakening currency might make imports more expensive), I think that when the poor in Brazil hear that `crisis` is coming, they usually associate crisis with hyperinflation (as they have often gone together in Brazil).   It appeared to me as if poor / middle class of Brazilians (perhaps subconsciously) believed that inflation monster would bite again, and bank-account wealth will be wiped out (again)…so when talk of looming crisis appeared in the news, they did the opposite of Americans and spent rather than saved.

Policy decisions:

The Brazilian government isn’t helping people shift from consumption to savings.   In fact, they are doing their best to spur consumption now.  In an effort to keep the economy going, the government is doing its best in Brazil to encourage people to spend money on big-ticket items by waiving taxes on cars, and giving people incentives to spend now, rather than wait.  The trouble is not that Brazilians lost any desire to purchase cars, nor that their prices have gone up (with tax cuts, the cars are now cheaper than ever)…the problem is that credit availability for big-ticket purchases has all but vanished.

Having the government encourage consumption may be good for the economy (now), but if the downturn is more permanent globally, it may be more wise for the Brazilian government to encourage savings rather than consumption (follow the Asian model, and not the North American one!).

Looking at the numbers…

So, when you are looking at overall economic activity of a country such as Brazil, you might be inclined to think that they were motoring on well in spite of the global economic crisis.  But, my theory is that much of this economic boost is temporary rather than sustainable.

Comparison with Asia…

This “fear of saving” (due to a history of hyper-inflation) is a clear indicator of why Latin America has historically lower savings rates than in other developing nations (especially in Asia), and is one of the main problems about why Brazil may get sucked right into the financial hurricane that is brewing beyond its shores.

Without the luxury of having inflation expectations firmly rooted, Brazilian consumers have more of an inclination to spend their savings at the hint of a crisis, rather than tuck the money away in a savings account.

But in this global environment, it is exactly savings which would insulate them from the outside financial world),  and not consumption (which drives up the import bill, and leads to current account deficits).

On the other hand….

Maybe its just that Brazilians are extremely optimistic, and dont believe that the crisis will effect them.  Brazil as the land of optimism:  even in 2009, with global economy in slowdown…”According to IBOPE, a pollster, 74% of Brazilians expect this year to be better than last.” says, the Economist

Be Sociable, Share!

•