Brazil Is the New America: How Brazil Offers Upward Mobility in a Collapsing World (31 page)

Hence, the pertinence of the famous observation, first made in the 1920s by Wharton economist George Taylor, known as the “hemline effect.” Taylor observed that in times of prosperity women's hemlines rise and more bare skin shows. But when hemlines tumble and women's clothes cover more body surface, it's time to hold on to your wallet.

After the Wall Street Crash in 1929, women turned the short skirts of the 1920s into dishrags. Hemlines tumbled to the ankles, where they remained throughout the Great Depression. The fact that Brazilian women are adorned in some of the world's most revealing fashions underscores my central observation about Brazil: it is in a different phase of the leverage cycle than the major Northern Hemisphere economies.

Because Brazil's consumer economy is relatively nonleveraged, Brazil's adjustment to the credit crisis—known as the
terremoto
(Portuguese for “earthquake”)—did not necessitate deleverage, much less lead to covering the bodies of Brazil's well-tanned women.

The startling differences between indebtedness in a highly leveraged economy like that of the United States and an underleveraged economy like that of Brazil flows through into practically every dimension of the economy.

Unfortunately for economic prospects in the United States, when leverage is compounding, growth accelerates, but tends to recede when leverage declines. In fact, ever since Nixon closed the gold window, economic growth in the United States has seemed totally dependent on compounding leverage rather than income growth. See
Table 8.1
.

Table 8.1
Leverage in the U.S. Economy Soars

Source:
U. S. Federal Reserve, “Credit Market Debt Growth by Sector,”
www.federalreserve.gov/releases/z1/Current/z1r-2.pdf
.

Median real per capita income in the United States was higher in 1973 than it is now. It topped out almost 40 years ago, soon after Nixon repudiated the Gold Reserve Standard. As
Table 8.1
shows, total household debt in the United States has exploded by twentyfold since then.

While we tend to think of U.S. prosperity as driven by free market vitality, a case could be made that in recent decades GDP growth has been driven not by income growth but by financial engineering to inject increased leverage into an ever-less competitive economy.

To the extent that is true, you can expect the U.S. economy to painfully contract as leverage in the system recedes. In my view, as one who wasted decades of his life trying to draw attention to the peril of national bankruptcy posed by spending vast sums out of an empty pocket, I see little hope that a collapse can be avoided. It is hopelessly utopian to expect any decisive fiscal or monetary reform until the United States experiences the traumatic consequences of the coming solvency crisis. Any attempt at reform by accelerating the deleveraging process would engender tantrums from powerful lobbies that would make the Greek protests seem measured and responsible.

The trillionfold or even 14 quadrillionfold inflation coincided with complete stagnation in real income growth in Brazil. This underscores one of the many paradoxes in economics. Although hyperinflation rewards debtors by wiping out the value of money, it also wipes out credit.

This points to another strength of Brazil, namely that it owes its growing prosperity to actual income growth rather than just credit expansion.

Per capita GDP in Brazil more than doubled in the past decade in U.S. dollar terms, in a low leverage economy. This happened in the face of the highest real interest rates in the world. While Greenspan and Bernanke were inflating a credit bubble with invisibly low rates in the United States, Brazil was growing robustly in spite of interest rates on consumer debt that were at times higher than 60 percent—so high they would stop the U.S. economy dead in its tracks.

Part of the reason that rates were so high is that laws were not configured to maximize lending. Until recently, for example, creditors absorbed the risk of insolvency because only in the past decade were Brazilian bankruptcy laws changed to give creditors priority claims on collateral if a borrower became insolvent. Naturally, this discouraged lending and magnified the spillover effects.

High real interest rates reward savers. If you are a saver, you will realize higher returns on your savings in Brazil than in the United States, or any of the highly leveraged advanced countries where interest rates are kept invisibly low to stimulate recovery and bail out insolvent banking systems.

Of course, high real and nominal interest rates also assure that Brazil will retain a tool of economic stimulation in its arsenal long after the advanced economies run out of scope to easily promote stalled growth. As of November 30, 2011, the SELIC rate in Brazil, (the equivalent of the U.S. discount rate), was 11 percent. It was reduced twice in the second half of 2011 in recognition of a growing danger of a global slowdown. The Brazilian SELIC rate can be trimmed many times from 11 percent before it becomes as nugatory as the 0.25 percent level of the equivalent discount rate in the United States.

If the world slips into a deeper state of depression, as seems entirely possible, with governments in the advanced countries wrestling with the prospect of total collapse, they will also be starting more or less from scratch as they grapple for effective ways to stimulate growth. As Charles Hughes Smith observed,

Despite all the brave talk of the manipulators on the Board of the Federal Reserve, they've run out of manipulative tricks. With interest rates already near zero, their most basic toolbox is empty. Now they're reduced to bleating about all the phantom tools in their possession and playing around with long-term bond yields and mortgage rates—interventions that cannot possibly create jobs or organic (i.e. real, unmanipulated) demand for stocks and housing.
26

Brazilian politicians and central bankers are certainly not above manipulating markets. But because Brazil has high nominal and real rates authorities, there will retain a conventional mechanism for rekindling economic activity. They will cut interest rates from the sky-high 11 percent range into single digits, although not necessarily into fractional decimal points as has been the case with the United States, Great Britain, and Japan.

Unlike the United States, Greece, Portugal, and Spain, Brazil has sufficient financial reserves for a rainy day, or
anos de vacas magras
(“years of the skinny cows”) as they would say in Portuguese. The country's total net debt as a percentage of GDP is only a bare fraction of that of the United States, and Brazil is sitting on a fat stash of $350 billion in currency reserves, while the United States has none.

I think the case for Brazil as the most attractive of the BRICs is overdetermined. I have previously indicated a prejudice, in that I married a beautiful Brazilian lady who has deepened my appreciation of the good things Brazil has to offer. Like many things in life, my marriage did not work out. But that doesn't diminish the attractions of Brazil.

There is much more to Brazil's appeal than what you see in
The Victoria's Secret Catalogue
and a low degree of leverage throughout the economy—although that alone will account for a lot of growth potential as compared to highly leveraged economies like Greece and the United States that are destined to endure painful deleverage in the decades to come.

Next, we take a look at liquidity in another sense—the world's water situation and Brazil's liquid riches, part of its unique position as the world's first tropical agricultural superpower.

1
This story was confirmed to me by Donald Trump.

2
More recent calculations by Professor Kotlikoff put the total obligations of the U.S. government at $211 trillion. See
http://theeconomiccollapseblog.com/archives/shocking-charts-and-statistics-that-prove-that-america-is-no-longer-a-wealthy-nation
.

3
Dennis Cauchon, “U.S. finding for future promises lags by trillions,”
USA Today
, June 6, 2011,
www.usatoday.com/news/washington/2011-06-06-us-owes-62-trillion-in-debt_n.htm
.

4
“World GDP: In Search of Growth,”
Economist
online, Graphic Detail (blog), May 25, 2011,
www.economist.com/blogs/dailychart/2011/05/world_gdp
.

5
Quoted in Simon Schama, “Bill Clinton talks to Simon Schama,”
FT Magazine
, October 14, 2011,
www.ft.com/intl/cms/s/2/e0c1418c-f526-11e0-9023-00144feab49a.html#axzz1sanF4sIO
.

6
“Deleveraging: You Ain't Seen Nothing Yet,”
The Economist
, July 7, 2011.

7
CIA World Factbook,
https://www.cia.gov/library/publications/the-world-factbook/geos/xx.html
. Updated June 7, 2012.

8
“Deleveraging: You Ain't Seen Nothing Yet.”

9
Billy Mitchell, “Private Deleveraging Requires Fiscal Support,” The Billy Blog, September 14, 2010,
http://bilbo.economicoutlook.net/blog/?p=11545
.

10
Thayer Watkins, “The Hyperinflation in Brazil, 1980–1994,”
www.sjsu.edu/faculty/watkins/brazilinfl.htm
.

11
David Lipschultz, “Advanced Online Banking, Born of Necessity; Hyperinflation Prompted Brazil to Find Ways to Clear Checks Quickly,”
New York Times
, March 25, 2001,
www.nytimes.com/2001/03/25/business/business-advanced-online-banking-born-of-necessity.html
.

12
Leslie Evans, “How Brazil Beat Hyperinflation,” Los Angeles: UCLA International Studies & Overseas Programs, February 22, 2002,
www.econ.puc-rio.br/gfranco/How%20Brazil%20Beat%20Hyperinflation.htm
.

13
Evans, “How Brazil Beat Hyperinflation.”

14
Ibid.

15
Ibid.

16
Ibid.

17
Evans, “How Brazil Beat Hyperinflation,” 2.

18
Ibid.

19
Ibid.

20
Ibid.

21
Evans, “How Brazil Beat Hyperinflation,” 2.

22
Ibid., 4.

23
“Banco Itaú BBA's Candido Bracher: ‘The Party Will Not Be as Fancy as Before,'” Knowledge@Wharton, December 18, 2008,
http://knowledge.wharton.upenn.edu/article.cfm?articleid=2117
.

24
Federal Reserve Statistical Release H.3, “Aggregate Reserves of Depository Institutions and the Monetary Base,”
www.federalreserve.gov/releases/h3/current/
.

25
“The Party Will Not Be as Fancy as Before.”

26
Charles Hugh Smith, “Another Reason for Stocks to Tank in 2012: Jobs,” Of Two Minds.com December 8, 2011,
www.oftwominds.com/blogdec11/stocks-jobs12-11.html
.

The Lord shall open unto thee his good treasure, the heaven to give the rain unto thy land in his season, and to bless all the work of thine hand: and thou shalt lend unto many nations, and thou shalt not borrow.

—Deuteronomy 28:12

In these forests the multitude of insects that bite, sting, devour, and prey upon other creatures, often with accompaniments of atrocious suffering, passes belief. The very pathetic myth of “beneficent nature” could not deceive even the least wise being if he once saw for himself the iron cruelty of life in the tropics.

—Theodore Roosevelt, on nature in Brazil,
Through the Brazilian Wilderness,
1913

One of the perennial confusions in economics is that between monetary inflation and relative price increases. This was in play again with the early January 2012 announcement that in December 2011, Chinese inflation had jumped by 4.1 percent over its rate a year earlier.

On its face, that seems to represent about a 25 percent improvement over the average Chinese inflation rate of 5.4 percent in 2011. But look more closely. The same report reveals that Chinese food prices jumped 9.1 percent year on year in December. This is quite ominous for China, but very bullish for Brazil.

Here is why. In recent years, China has been the world's largest agricultural power, producing more food than any other country. The trouble is that China's farm output is unsustainable. Soil erosion as a consequence of overplanting, land mismanagement, and an acute shortage of water for irrigation are undermining the productivity of Chinese cropland.