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Brazil, the 'B' in the BRIC acronym, was widely considered to be a model
of emerging-market economic excellence during 2003-2011. Now it is widely
considered to be an economic basket-case. What went wrong?
There are always many factors involved in a major economic turnaround, but
for Brazil's economy - and for many other economies over the past 15 years -
the most important point to understand is that the impressive growth was not
genuine; it was an artifact of rapid monetary inflation. Brazil's government
was just as corrupt and interventionist as ever during the period of
impressive growth, but for a long time nobody noticed (or cared) because
rapid domestic monetary inflation in parallel with a commodity bull market
driven by rapid global monetary inflation created the illusion of increasing
prosperity.
Brazil no longer has a monetary inflation problem. In fact, as depicted in
the True Money Supply (TMS) chart below, it is now experiencing monetary
DEFLATION.
And yet, Brazil's central bank is still 'tightening the monetary screws'.
As illustrated by the following chart, it moved its targeted interest rate to
an 8-year high of 14.25% in mid-2015 and has kept it there.
 
The current situation in Brazil underlines the problem of having monetary
central planners. Even the smartest and most incorruptible of central
planners will make the economy less efficient, because the right level for a
price is the price that would exist in the absence of government or
central-bank interference. However, monetary central planners tend to make
matters even worse by reacting to backward-looking economic data and to the
lagged effects of earlier policies.
In Brazil's case, rather than acknowledging the extreme current tightness
of monetary conditions and acting accordingly, the central bank is fixating
on the CPI, which is, in turn, accelerating upward due to the lagged effects
of the monetary inflation that happened years ago. This is a good example of
how central bankers not only fail in their self-proclaimed mission to
smooth-out the business cycle, but also greatly amplify the economic
oscillations.
Brazil's experience over the past 10 years is another in a long line of
real-world demonstrations of Austrian Business Cycle Theory. Rapid monetary
inflation and the lowering of interest rates results in an artificial boom,
during which the GDP numbers look good at the same time as wealth-destroying
investing mistakes are being made on a grand scale. The boom sets the stage
for a bust, which wipes out all of the preceding gains and then some.
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