Currency, Inflation and Debt in Brazil

It's hard for those of us who grew up in developed countries, or even those born after the Real Plan, to imagine what it is like to experience uncontrollable inflation, with prices of basic goods changing daily, and to go through multiple currencies in a single lifetime. Despite Brazil's fantastic economic success, both of these issues have had a lasting legacy on Brazilian spending and saving habits.

First, there's the issue of inflation. NPR did a great piece called "How Fake Money Saved Brazil," which is especially useful for those unfamiliar with Brazilian history. Here's an excerpt from the story, and take a few minutes to listen to the segment here:

"The four economists wanted to create a new currency that was stable, dependable and trustworthy.  The only catch: This currency would not be real.  No coins, no bills.  It was fake. 'We called it a Unit of Real Value — URV,' Bacha says. 'It was virtual; it didn't exist in fact.'"

Not only was this a testament to the type of Brazilian innovation that comes from existing challenges, but it also was linked to another problem: constantly changing currencies. This was eventually resolved with the Real Plan, establishing a currency that has proved not only stable but also part of the foundation of Brazil's economic success. Before the real, which was created in 1994, there was the cruzeiro real (used from 1993 - 1994), the cruzeiro (1990 - 1993), the cruzado novo (1989 - 1990), the [original] cruzado (1986 - 1989), the [second] cruzeiro (1970 - 1986), the cruzeiro novo (1967 - 1970), the [original] cruzeiro (1942 - 1967), and the reis (used until 1942). That means that Brazilian senior citizens born before 1942 have used nine different types of currency in their lifetime - ten, if you count the URV.

Now, there's a different problem with Brazil's currency, but for some people it's quite a good thing: it's overvalued on the world market. Brazil's finance minister has warned that there's a "currency war" underway as he hopes to bring down the real's value. The real's value has benefitted importers, as well as Brazilians traveling abroad, but it has hurt exporters, which is a huge part of the economy. Nevertheless, it hasn't seemed to hurt Brazil's consumers in the short term.

But getting back to the original point. The effect of dealing with uncertainty in the value of money has lead to a culture of a spend now, save later mentality. Even though there's no worry now about runaway inflation or the stability of the real, the legacy of economies past has effected Brazilian families and their spending habits (some would even argue that the Brazilian government sometimes exhibits this tendency, too). Saving and investing were traditionally perceived as a bad idea for a typical family, so a result has been to spend money when the money is available. Despite rising incomes and more affordable prices for consumer goods, consumer debt continues to be a problem largely ignored by the media and government. One of the latest small articles about debt was a survey done by Ipea, which showed that over 52 percent of Brazilian families are in debt, with the highest levels of debt in the North and Center West. The debt extends across the socioeconomic spectrum, with a high level of debt amongst the middle class.

Maybe this tendency will change with time, as people born in the era of economic stability increasingly put aside money - because they can. But it's also possible this habit will persist for awhile, particularly in the middle and lower classes, passed on from parents to kids, kind of like Jewish guilt. I'm hoping for the first scenario.

Comments

[Account Deleted]

This tendency of spending now is also somewhat based on the fact that the mandatory savings are there for them when they need in the future.
Contrary to the US, in Brazil you won't depend on private savings as the FGTS and other taxes and retirement funds that you can't opt out do exist. You don't need to save money in Brazil to pay for health, as it's free and a private/better healthcare coverage is reasonably cheap compared to other countries especially the US. The only thing you need is to be working, then you can expect a more or less comfortable retirement. Private pension funds are just to complement that income; and if you don't spend the FGTS to buy a house or having AIDS, then you have a huge sum in the bank when you retire.
So, the mentality is: if you'll be provided in the future, then spend what you are able now.

[James Miller]

Eventually the Brazil bubble will burst and people will stop talking about Brazil as an economic miracle. When they start closing up the favelas then I'll take Brazil seriously. Brazil is a developing country and it will always be a developing country.

[Rio Gringa]

@Rafael I see what you're saying about retirement and pensions, but if you think of the average middle class family and their monthly expenses, it is quite a lot: car payments, car insurance, health insurance (even if it's not ridiculously expensive like it is in the US), private school tuition or college tuition, food, sometimes rent, cell phone bills, sometimes phone bills, internet, cable and utilities. It adds up before you even get to purchases on consumer goods or luxury items/services, especially in expensive cities like Sao Paulo and Rio.

[Corin in Exile]

You've been on a roll lately, m'dear. Keep it up. I'm so glad about how intelligently, lovingly, and thoughtfully you write about Brazil... unlike some folks (some even in your own comments section... ahem).

[Kris]

Mr. Miller is quite the pessimist. The Brazil economic juggernaut may very well fall back to earth, as such "corrections" occur in all developed countries. AS far as measuring progress by "closing up" the favelas - have you been to Detroit lately?

[ana australiana]

A small legacy from this traveller - I only recently stopped freaking out about not having enough troca every time I had to make a purchase after being in Brazil.

[Michel]

"Closing up" the favelas?

Actually this would seem a great proposal to many middle and upper class Brazilians!