"He said, 'Well, I've just been named the finance minister. You know I don’t know economics, so please come to meet me in Brasilia tomorrow,' " Bacha recalls.
So, three things had to happen:
1. A politician had to admit his ignorance
2. Some bright spark technocrat somewhere had the right solution to a seemingly impossible problem.
3. The right politician asked for help from the right technocrat
Afterward, everyone with a stake in the country's direction realizes that having a technocrat who shares your views and has personal access to the administration is a great way to influence policy. The money spigot opens, and pretty soon having the 'right' opinion is far better for your career than independence. Survivor bias eventually ensures that the technocracy is dominated by people with the 'right' opinion.
And that's when you'll know that your country has achieved parity with the United States.
Just like the New Deal only worked once and now every scam just claims it's the New, New Deal.
Sure, the populace might have a memory of a generation but the technocrats have a longer memory and after first success, the next effort is dogged by the realization, "look what I'm going to get, look who I get to be..." (as the gp said, it's the careers of the technocrats one has to look at).
I say this looking at the horrible, awful fail of the current president, a fail of what could have been the renewal of the country but by this very mechanism was fore-ordained to be a lurid catastrophe. Roosevelt sold out a lot to Wall Street too, btw, he just had a clean enough start to make his approach work.
The New Deal never worked but oddly enough, it's trying to happen again. Bad deals happen over and over. The ones that work, the ones that require effort only happen once.
More accurately, some of the New Deal (deposit insurance, fiscal & monetary expansion, leaving the gold standard) worked, but some of it hurt. The fact that many countries suffered for just as long and worse, if not longer, without analogous policies makes me wary of the authors' modeling.
> Recovery came only after the Department of Justice dramatically stepped enforcement of antitrust cases nearly four-fold and organized labor suffered a string of setbacks, the economists found.
That wouldn't have been around 1939-45 or so, would it?
And it definitely felt like one. You have no idea how much the country changed (for the better) because of this improbable miracle.
Nobody believed it would work because the whole country had lost faith in "magical" economic reforms like the one before it, the Collor Plan.
Imagine you wake up one day and all of your bank accounts are frozen - that's what happened to my parents (and most of the population) on March 16, 1990 when the Collor Plan was announced. It's your money, but you can't spend it - sorry. My father had been saving money in order to buy a new house. Years later he recovered less than 1/10 of the original sum. Lots of small businesses (including family and friends) went broke.
When I talk to my parents about pre-real days it feels like they were born in a different country than I was.
Wow, I guess that explains the uptick in the brazilian population in South Florida during that time. One year of school I only knew one brazilian kid on the bus. The next year over half the bus was brazilian. Big migrations like that usually happen because of economic reasons or war. I just never put 2 and 2 together until now.
There is no such thing as a "real value" as measured in a vacuum. Value only comes in relation to something: a commodity or a basket of goods. What they did in Brazil was to establish a new currency which the government promised not to inflate, then as inflation destroyed the previous currency, the way was open for the new one. This is how inflation was ended in Weimar Germany, post-WW2 Hungary, '90es Serbia/Romania/Russia. Only Zimbabwe handled things so poorly that the national currency vanished completely.
Even if people learn the value of their inflating money with respect to more stable things, inflation STILL eats away at the value of their savings. It does them no good to learn prices are stable (with respect to an arbitrary standard) except to learn they are indeed getting poorer.
Also, freezing bank accounts and banning the trade of foreign currency only makes matters worse. People not being able to access their money does make them poorer still.
1. You can't inflate at leisure without destroying the currency.
2. You can't have a peg to a foreign currency if you keep inflating faster than that currency's central bank.
3. You can't then cover up for the misdeeds of the government by denying people access to their savings.
Of course there is no "real value". However, inflation is not solely the result of the government's wishes to inflate the currency (as examples of hyper-inflation obviously show).
Inflation is also simply in the minds of the people using the currency. If everyone expects high inflation, and keeps raising their prices to match their expectation of inflation, then inflation will happen - the raising of prices will ensure that. And if you try to fix that by force, as you pointed out, the inflation accelerates even more, because it's now happening in a black market with even more waste.
The way they fixed inflation in Brazil was, it appears, by changing people's expectation of what should happen to currency. They had to get everyone to believe that the brazilian currency can be stable. The mechanism they used to do that was the cheap trick of creating an alternative currency and calling it "real". It may be a cheap trick, but from the look of it, it worked.
No, inflation is not only in people's minds, it's a real measurable monetary phenomenon.
Sellers can raise prices but if there is not enough money to pay the price then no transactions occur, The sellers would then have to lower their price to sell the items.
In other words an increasing rate of inflation throughout the economy can only occur if there is enough money/credit available to pay the higher prices. You need more money available, an increasing money supply.
What's wrong with this NPR article is for everybody to think a "cheap trick" is what made it work. No, the tight fiscal policies (ie balanced budget) enacted by Brazil at the same time made it work.
The ideas in this article, coupled with Krugman's debt default idea is sending you down a river to a waterfall.
The price of goods can vary somewhat based on public sentiment, but the underlying cause is the printing of money. And it is correct of the public to mistrust a government that has proven untrustworthy in the past. The first steps to regain confidence are to end money production and cut expenses. A drunkard can't be trusted unless he is seen without a bottle first. So basically the government cleaned up its act first, there was no deception. If deception had indeed happened, money production would have still accelerated.
If you’re a politician, it’s easier to admit your ignorance when your five predecessors who claimed to know what they were doing got brutally mugged by reality.
So, three things had to happen:
1. A politician had to admit his ignorance
2. Some bright spark technocrat somewhere had the right solution to a seemingly impossible problem.
3. The right politician asked for help from the right technocrat
They're not kidding. It is a miracle.