On September 7, 2002 when Brazilians commemorate their Independence Day, as a Brazilian citizen, I will be wondering if Brazil still is an independent nation or if Brazil has surrendered its sovereignty to the International Monetary Fund (IMF) in exchange for a few dollars. Who runs the Brazilian economy today? The IMF or the Brazilian government?
My ancestors José Bonifácio de Andrada e Silva (the Patriarch of Brazilian Independence) and his brother Martim Francisco Ribeiro de Andrada (the first great Brazilian financier, Martim Francisco is credited with developing and implementing the financial plan, which financed the war effort for the Brazilian independence, when he was Finance Minister in 1822), would be very disappointed with the economic policies being implemented in Brazil in the last four years by the Brazilian government.
José Bonifácio and Martim Francisco had a very good grasp of economics and finance, and they did not believe in borrowing money from foreign sources with strings attached. They believed in creating a domestic pool of capital to fund the development of the Brazilian economy. I am sure that both of them would be 100 percent against all these Brazilian government borrowings from the International Monetary Fund and from other international banking institutions.
Is it a coincidence that the largest bailout ever given by the International Monetary Fund almost matched the amount of $27 billion dollars that U.S. banks have as claims on Brazilian borrowers as of the end of March 2002? This IMF loan was the largest loan given to any one country to date. The US$ 30 billion loan to Brazil was an amount higher than expected and surprised most people. Was this loan a bailout to Brazil or to the U.S. banks?
The Wall Street Journal reported on August 8, 2002 that the major American banks, which will benefit from this bailout are as follows: Citigroup with $11.4 billion total exposure in U.S. dollars to Brazil, FleetBoston with $10.4 billion, and J.P. Morgan Chase also has a substantial exposure.
On August 9, 2002 The New York Times reported that as soon as the loan package was announced the shares of Citigroup and FleetBoston jumped 6 percent each in response to the news. There is no question that this IMF loan was a bailout to the major U.S. banking houses.
Reckoning Day Postponed
Whom can you believe today when it comes to economic and financial news information? Most people have short memories, and they don't learn from prior experiences. Everything was wonderful with the Asian economies before they had the Asian economic meltdown. Russia was following all the instructions from the West on how to become a capitalist and open market state. Then there was the Russian economic meltdown.
In the last ten years, Argentina was the new star and the showcase for free-market economics, economic restructuring, and government privatizations (the Argentinean government privatized everything in sight; including the zoo in Buenos Aires).
It did not take long for an Argentinean meltdown, which is becoming also a Latin American meltdown. I used to believe in a free market economy, but today I am having second thoughts about this subject.
Today, Brazil is that country which has been doing all the right economic moves as reported by the American press. The Wall Street Journal on August 8, 2002, in a written release by the Treasury Department quoting Secretary Paul O'Neil, said: "Brazil has the right economic policies in place to maintain stability so that the economy can continue to grow."
Brazil has been following all the rules stipulated by the IMF (the string that comes attached to IMF borrowings). The IMF has the formula down pat on how to wreck a country's economy. We don't have to look further than Argentina, but if you prefer you can look at a number of examples in Africa.
Please don't be surprised by the future economic meltdown of Brazil. This IMF loan package just moved forward the day of reckoning for the Brazilian economy.
I know most people are naïve, and they don't act when they still have time to save themselves from the mess. It does not matter how many times the Brazilian population gets shafted; they still have that Brazilian attitude, and they say "deixa pra lá, meu" or "a gente sempre dá um jeitinho."
The coming run on Brazilian banks
I find it to be a sad situation when I see on the 6 o'clock news so many people banging on bank doors in Argentina and Uruguay, begging the banks to let them withdraw their own money. Most people in Argentina are seeing all their life savings going up in smoke and there is nothing that they can do at this point to recuperate their losses. The money is gone! The country Argentina is bankrupt and broke!
Now, it is Brazil's turn to go through an economic meltdown. Brazil is traveling on the same road that other countries have traveled before their total collapse. The Brazilian government is also using that same old road map provided by the IMF, which leads a country to economic meltdown and chaos. The handwriting is on the wall; it is only a matter of time and we will have a Brazilian economic meltdown similar to the one in Argentina. The economic meltdown is right on schedule.
Because of the Brazilian government's economic policies of the last few years. In the last 3 and 1/2 years, the main culprit in this economic debacle in Brazil has been the Brazilian government policy of defending that moribund currency the "Real."
The international monetary game changed completely with the birth of the "Euro" on January 1, 1999. The Brazilian politicians and government officials were still playing in the old currency game, and they did not catch on as yet that the rules of the international currency game have changed since January 1999.
I am going to give you an idea of the mentality of the current members of the economic team of the Brazilian government and give you some clues as to how their reasoning process might work when they are trying to resolve a major economic problem. The only thing we can do is to sit back and have a good laugh. I find pathetic that senior members of the Brazilian government's economic team, at this stage of the game, are still contemplating the possibility of creating a new currency for South America. I believe one of the names that they are considering for that new currency is the "Bankrupt." I find that name very appropriate, when we take in consideration what is happening today to the economies of all the countries in South America.
This loan package from the IMF is the last call before the economic meltdown. If you are living in Brazil and if you have any assets and brains, you should be converting most of your Brazilian assets preferably into Euros and transferring your assets out of the country.
Let me clarify this last statementout of the country to a country such as Switzerland, France, and GermanyI don't mean for you to transfer your assets to another country such as Argentina, Colombia, Bolivia, Paraguay, and Uruguay. I suggest that you convert your assets into Euros instead of U.S. dollars, because I believe that in terms of investment the Euro will be a better bet for the future than the U.S. dollar.
I know that most Brazilians will be caught by surprise when the run to the banks starts in Brazil. They will wonder what is happening when the banks are closed and their money is frozen in their accounts. They will blame the banks and the government for their predicament. They also will be banging with pieces of metal in the bank's outside wall and they will be using that same wall to write nasty comments about these banks, calling them crooks and so on.
I know my Brazilian compatriots well. I know that most of you are thinking that what happened in Argentina and in Uruguay will not be allowed to happen in Brazil. Most of you probably will disregard this article as just a negative bunch of boloney.
Brazilians have a short memory, and many have forgotten that not long ago their bank accounts were frozen by the Fernando Color administration. Brazilians are ready for another round of that bad medicine. They have forgotten how bitter the medicine tasted at that time.
Today, the majority of the Argentinean population just can wish that they could turn back time about one year, for them to take some action, when they still had the chance to move their savings to a safer country in Europe or to the United States.
Brazil's Achilles Heel
When I wrote my articles about Brazil adopting the Euro as its new currency, I received many emails and letters regarding that subject. Some readers opposed my idea regarding the Brazilian currency, because in their view Brazil would be giving up its sovereignty as a country if it adopted the Euro.
Since January 1999, the Brazilian Real lost over 60 percent of its value in relation to the U.S. dollar. If Brazil had adopted the Euro in January 1999, today the Brazilian GNP would be over US$ 1 trillion instead of the current US$ 558 billion. People don't understand how much damage has happened to the Brazilian economy because Brazil has this very weak currency, the Real.
It is humiliating for Brazil when they have to crawl and go begging to the IMF in their pursuit of more money. This IMF money is very expensive to Brazil because of the strings attached to it. They have a profound impact on the country; not only economic impact but political as well.
Some of the IMF requirements are that the Brazilian Central Bank keep interest rates very highabove 18 percent. Credit card rates in Brazil for Brazilian customers are calculated based on the unpaid balance of their accounts and the interest rate charged to their accounts varies from 9 percent to 12 percent rate per month. These interest rates levels are ridiculous when we take into consideration that Brazil has been operating under less than a 5 percent annual inflation rate.
The country Brazil and the Brazilian population are getting poorer and poorer by the minute. Since President Fernando Henrique Cardoso took office in 1995 the Brazilian government privatized over US$ 100 billion worth of government assets.
The Brazilian government has been wasting all government reserves, the moneys received from the sale of government assets, and the moneys that they have been borrowing from the IMF in this absurd effort to defend this moribund currency the Real.
The second and final option.
It does not matter who becomes the next president of BrazilLuis Inácio Lula da Silva or Ciro Gomesthere is only one option left for the Brazilian government to avoid the coming economic meltdown and chaos in Brazil. The new president should have the courage of adopting the Euro immediately as the new Brazilian currency.
The benefits of such a move should be immediate. The one major benefit is currency stability. Brazilians will not be afraid of losing all their savings because of major currency devaluations. Currency stability would give Brazilians confidence to repatriate to Brazil the over US$ 150 billion that they have stashed away in Europe and in the United States to protect these assets from currencies meltdowns.
The other major benefit is that interest rates charged to Brazilian businesses and to the Brazilian population would go very lowit would get in line with interest rates charged in the Euro countries. Another immediate benefit would go to the companies of the Euro countries that have investments in Braziltheir currency risk would be eliminated in Brazil.
Until recently, I used to believe in a completely free market economy. Today I know there is a place for government regulations and government protection of its industrial base against foreign competition. Deregulation has been a disaster in the U.S. to the airline, the energy, and the telecommunications industries. For example; many airlines are on the brink of bankruptcy in the United States.
Business Week magazine of August 5, 2002 reported that since the Telecommunications Act was passed in 1996 to deregulate the telephone industry, investors have lost over US$ 2 trillion as the stock prices tumbled 95 percent or more from their highs. The crisis could relegate the U.S. to second-class status in the communications industry in the future.
I used to think that governments at all levels usually wasted lots of money, and that they were a very poor allocator of resources. I used to think that the free open market system was the best allocator of resources. Today I have my doubts about unregulated and a savage and destructive type of capitalism I have seen in operation since the mid-80's. It started with the savings & loan scandals and debacle of that industry in the 1980's and culminated with the latest string of company scandals on Wall Street. I believe that the government has a role in stabilizing the economy.
For years, an overvalued financial market built on misleading and false information sent highly misleading signals to investors who eventually lost trillions of valuable national savings, which were misallocated to unneeded and wasteful investments. Investors lost over US$ 2 trillion in the telecommunications industry and over US$ 1 trillion in the dot.com fiasco. These investments are gone and will have an impact on many people's retirement plans in the future, since a lot of their pension money was invested in these promising areas.
Is It That Hard to Get?
Many people don't understand the idea that the Brazilian economy will be better off if Brazil adopts the Euro as its new currency, instead of continuing with the Real (which eventually will put Brazil in the poor house) or adopting the new currency the Bankrupt.
I know that they can't grasp the idea but I will try one more time. The fact is that Brazil would benefit and prosper if it adopts the Euro. Let me give an actual example.
In January 1999, the economies of Brazil and of California were very close in size; each economy had a gross national product (GNP) of approximately US$ 1.1 trillion. Today, California still has an economy that exceeds US$ 1.2 trillion, even though energy deregulation went out of control in California and almost bankrupted that state. California faces a budget deficit of US$ 24 billion; a figure that represents almost 30 percent of its total budget. If California were not protected by the value of the U.S. dollar, because the U.S. dollar is the currency of California, then we would have a different story.
California is the largest state economy in the U.S. and the second largest is New York, which is about 70 percent the size of California's. If California was an independent country their economy would rank number six in the world in terms of GNP.
If California had its own currency such as the Real, then their currency would be crashing right now. Their banking system would be in shambles as in Argentina, and Californians would be crawling and begging the International Monetary Fund for a bailout. Interest rates in California would be choking any possibility of future growth, unemployment would be exploding, businesses would be going belly-up left and right and California with all the strings attached from the IMF would be headed to economic meltdown and political chaos.
Since Brazil does not have the same type of protection of its currency, you can see very clearly the result to each economy. In the last 3 and 1/2 years California was able to keep its GNP level even with all the economic adversities they had during that period. In contrast, Brazil lost half of the value of its GNP to about US$ 558 billion and its economy is on a free fall.
I would risk to say that if Brazil had adopted the Euro in January 1999, even the crisis in Argentina may not be happening today. At least not as severe as the current situation. I also believe that the entire region of South America would be in much better shape financially today.
The Iraq nonsense
I wish the Bush administration would stop talking about this nonsense of attacking Iraq. Every South American nation should be against such an attack with the exception of Venezuela for obvious reasons.
Many countries in South America are going through an economic collapse, a financial meltdown not seen since the depression of the 1930's. If the United States attacks Iraq and now there is talk in Washington of the possibility of the U.S. even take over Saudi Arabia's oil fields (according to an article on The New York Times of August 12, 2002), oil prices will skyrocket to between US$ 60 and US$ 80 per barrel. What does the Bush administration think the consequences of that act would be to South America?
We already have a bad economic environment in South America, and that continent will not be able to absorb the economic impact of such an increase in the price of oil. At this point, the skyrocketing price of oil, on top of the current economic depression might trigger a major civil war in the entire South American continentwith complete political and economic chaos in all the South American countries.
The Soviet Union Collapse
In the summer of 1986 I was present at a dinner party in my mother's house, and she had about twelve guests at that diner. Among their friends, who were present that evening, there were two couples who came to the United States from Rumania, and they had been living in the U.S. since the early 1970's.
Sometime during the evening the conversation turned to politics and economics. Then I told the people at the diner table that from all the information I had been reading about the Soviet Union for a while, I had come to the conclusion that there was a very good probability that the Soviet Union was in the process of going broke.
Remember this was in 1986, Ronald Reagan was telling everyone about the potential dangers and threats from the Soviet Evil Empire. Our friend from Rumania told me in an emphatic voice "Fifty years from now the Soviets still will be one of the major powers in the world. I lived under Soviet rule, and I know how powerful they are."
I never forgot that evening because I became the joke of that dinner. I was the only person in the world to believe that the Soviet Union was going bankrupt. That evening, everyone had a good laugh at my expense. They thought I was out of my mindthe Soviet Union going broke, what a silly idea. Where does this guy get these crazy ideas?
When the Soviet Union collapsed in 1989-1990 nobody was laughing at me any longer. About a month ago I went to a party to commemorate the 50th wedding anniversary of that Rumanian friend. I reminded him of that party in 1986. He told me that he still can't believe to this day what happened to the Soviet Union. The Soviets had made such a big impression on him that after all these years, he still is in shock from the Soviet Union's demise.
The Crash of 2000.
I am on record. On September 27, 1999, I wrote and posted the following information on various investment newsgroups on the internet:
"The Dow Jones Index increased from 72 in 1920 to 360 in October 1929 when the stock market crashed. Then four years later the Dow Jones had declined to 60; a decline of 80 percent from its high point in October 1929.
The Japanese market index increased from 4,350 in December 1975 to 38,916 in December 1989 when the Japanese bubble burst. Then by 1998 the Nikkei sunk as low as 13,000. From 1990 to 1998 the Japanese stock market declined by more than 70 percent.
The Dow Jones index increased from 780 in 1982 to the current 11,000 level in September 1999. The Dow Jones has increased by 14 times in 17 years. Not Bad!!!
But when we compare this increase with the 12 percent average increase per year for the Dow Jones over the long term, then we know that we are close to the exploding point of the bubble.
During the summer of 1929, many fools thought the increase of the Dow would go up forever. We will have a reality check in the near future. If you want further evidence for the coming crash, just check the historical average market P/E ratios with the average market P/E ratios of the Japanese stock market before the crash in December 1989, and the current American market average P/E ratio.
Market crashes give smart people the opportunity to find many bargains. It is just a matter of having cash on hand to pick up the bargains."
I received various emails at that time, calling me a doom n' gloom monger and saying that I was sadly deluded. I wonder how much money these people (who did not believe my stock market predictions) lost in the market since September 27, 1999. The Dow Jones started heading South in January 2000 and the NASDAQ started its dive in March 2000. Many trillions of dollars have gone up in smoke in the American stock market since January 2000.
I have been living in the United States for many years. The members of my immediate family and extended familywhich includes two boys: a 4 and 1/2 year old and an 8 year oldare all American citizens. What happens in the United States today and in the future is important to me, because it will affect not only myself, but also my family. What kind of country are we leaving behind for this new generation?
Today I see a lot of U.S. economic data and trends which I find disturbing. In my opinion we are heading in the near future for turbulent times ahead, right here in the United States. I don't agree with the U.S. government's militaristic and imperialistic policies of today, in their effort of trying to rule the world as the only remaining superpower.
The U.S. government is spending far too much on the military industrial complex. All that money should be invested instead on the future of the country, making a better investment for the American people, such as building new infrastructure including ports, bridges, tunnels, highways, bullet trains, etc. These moneys also could be better used to build new nursing homes, a better health system and other improved social programs.
There is an irony on this heavy U.S. military spending. As reported by The New York Times on February 2, 2002, the U.S. government is increasing the military budget up to US$ 451 billion by year 2007. On February 5, 2002 the Times reported a breaking down of the 2003 U.S. budget including US$ 379 billion for the military budget, which represent 18 percent of the total budget of US$ 2.1 trillion.
On March 16, 2002, the Times had an article entitled "Europe's Military Gap" in which they claim that the European Union and England (NATO countries) were spending only about US$ 140 billion for their military budget in year 2000. The article said, "Europe's perennial unwillingness to spend more for defense has undermined its credibility with the United States and damaged NATO as a military alliance, senior American and European officials say.
Devastated by military conflict in the 20th century, Europe prefers to spend its money on social welfare at home and aid to poor countries abroad. The European Union provides 56 percent of the world's aid and 36 percent of the budget of the United Nations."
Slaves Financing Master
On the other hand the United States needs to borrow about US$ 1.3 billion per day from foreigners to finance its current account trade deficit. The actual U.S. current account trade deficit for 2001 was over US$ 420 billion. As reported by Mr. Martin Wolf, a respected Financial Times of London journalist, on February 26, 2002, "In his assessment, one of the most likely sources of unrecorded funding for this U.S. deficit is capital flight from poor countries. In other words, precious resources from poor countries are being used to finance the bloated consumerism habits of the world's richest people."
He also mentioned that, "At the end of 2000, the net international investment position of the U.S. was minus US$ 2,187 billion, a little over a fifth of gross domestic product. The estimated net international position was minus US$ 2,600 billion at the end of 2001. ...The IMF says that last year the U.S. current account deficit was financed by a European Union contribution of around US$ 210 and the balance by Japan, Asian developing countries, oil exporters and the capital flight from poor countries."
Since the U.S. military budget of US$ 379 billion for 2003 is so close to the estimated amount of the U.S. current account deficit of over US$ 420 billion, we can make a connection and conclude that the people financing the U.S. current account deficit are the actual people who are financing the U.S. military expending. From another perspective, seems to me that the slaves are the financial backers of their master. They are financing the bombs which might be dropped on their lands if they get out of line in the future.
Other Concerns About the US
I have many concerns about the future of the U.S. economy, because I live here in the U.S., and also because of the impact that problems in the U.S. economy might have on the Brazilian economy. We had a recent experience in that regardthe September 11, 2001 terrorist attack in the U.S. had devastating economic effects also in Brazil.
1) I have a concern about the level of the U.S. government debt and its effect on the future of the country. The U.S. government has a cumulative federal government debt of over US$ 6 trillion as of July 2002. The U.S. government also has other borrowings from various funds, which are not included in the above figure.
These other U.S. government borrowings added to the debt another US$ 1.8 billion as of July 1999, and included the following: Social Security US$ 845 billion, Medicare US$ 148 billion, Military Retirement US$ 140 billion, Civilian Retirement US$ 490 billion, Unemployment Compensation US$ 81 billion, Highway US$ 35 billion, Airports US$ 15 billion, Railroad Retirement US$ 21 billion, all others US$ 58 billion.
When the numbers are adjusted to reflect all this other debt, then the new total of the U.S. cumulative debt as of July 2002 is estimated to be around US$ 8 trillion. Since the U.S. government will be running budget deficits in the coming years, it will not be long before the U.S. government debt reaches a new astronomical total of about US$ 10 trillion. I wonder how much debt the U.S. government can get away with, before they have to borrow and follow the disastrous rules imposed by the International Monetary Fund (IMF).
2) It is not by chance that the U.S. government is dismantling its welfare and affirmative action programs. The U.S. will not be able to afford in the future the costs of these programs. Besides the U.S. government being deep in debt, the U.S. will have another problem: an exploding cost related to the aging population.
The current population of 36 million people over 65 years old will explode to around 70 million by the year 2012. Not only the population that gets Social Security and Medicare will double in the next ten years, but the cost will explode even further because the population is living longer. Heavy costs will come from an exploding group of people, those 85 years old and older.
3) In the subject of pensions, Business Week magazine issue dated August 5, 2002, had an article, "Pensions: A Time Bomb for Corporations." The piece describes the problem of a major under funding in U.S. private pensions.
The article starts, "Amid the wreckage of the worst bear market in at least three decades, hemorrhaging corporate pension plans are rapidly becoming Wall Street's biggest new worry." Then the article paints a very bleak picture.
Silver Bullet Solution
The number one New York Times bestseller, Rich Dad, Poor Dad by Robert T. Kiyosaki, was published in 1997. Some information on this book regarding pension called my attention. I am quoting the following from page 137 of the book:
"Cyril Brickfield, the former executive director of The American Association of Retired People, reports that private pensions are in a state of chaos. First of all, 50 percent of the workforce today has no pension. That alone should be of great concern. And 75 to 80 percent of the other 50 percent have ineffective pensions that pay US$ 55 or US$ 150 or US$ 300 a month."
The book also mentions that, "In his book The Retirement Myth, Craig S. Karpel writes: "I visited the headquarters of a major national pension consulting firm and met with a managing director who specializes in designing lush retirement plans for top management. When I asked her what people who don't have corner offices will be able to expect in the way of pension income, she said with a confident smile:
"The Silver Bullet."
"What," I asked, "is The Silver Bullet?"
She shrugged, "if baby boomers discover they don't have enough money to live on when they're older, they can always blow their brains out."
The above information about pensions describes a very serious problem that will have a very negative effect on the American economy. I hope that "The Silver Bullet" program does not become the major U.S. government program designed to take care of the baby boomer generation; when Social Security and Medicare run out of money.
4) The press has been reporting that Homeland Security will cost an extra US$ 100 billion per year to try to protect the American people from further terrorist attacks in the United States. In ten years this program alone will drain the American coffers by US$ 1 trillion. This terrorism threat here in the U.S. will slow down the entire American economic system (the movement of goods). Not only foreigners will have second thoughts about visiting the U.S., but at a certain point this new environment will start affecting the economic figures as well. Many productive illegal aliens living in the U.S. are returning to their countries. This trend eventually will affect real estate prices in states such as New York, New Jersey, California and so on.
This terrorism threat will affect productivity in the U.S. in many ways. I don't even want to think what will happen to the U.S. economy if terrorist attacks become more frequent in the future.
5) Another problem that will have a negative impact on the U.S. economy is when the real numbers start being recorded by major U.S. companies and profits will go down affecting the price of their stock which in turn also will go down in value. The financial scandals of the last year will make people of other countries lose confidence in the American financial system.
One thing we have to keep in mind: until the fall of the Soviet Union in 1989, the United States benefited from all these communist countries being out of the international financial markets. In the fifty years period up to 1989 the communist countries did not compete with the U.S. for the pool of money available for investment from around the world.
Today the U.S. has a lot more competition from other countries than in the past. There is a real possibility that in future years the competition will become even tougher, and a large portion of this money will go to other countries instead of the United States.
In the past I had a very good gut feeling about economic issues and I have been right about many of them. Regarding the collapse of the Soviet Union, about the bursting of the stock market bubble in the U.S., about the direction of the Real and gold prices, and so on. I hope that my negative gut feelings about the future of the U.S. economy don't became reality. I hope that the U.S. does not become another basket case such as the Soviet Union.
In Time for the Elections
The Economist magazine of June 15, 2002 had an article about the Brazilian upcoming election in which Mr. George Soros, the famous currency speculator, put Brazil on noticevote for the candidate of President Fernando Henrique Cardoso or expect an Argentine-style crash in which Brazil would be forced to default on its government debt.
The Brazilian people can send a message to Mr. Soros and to his pals in the upcoming election, by voting for Mr. Ciro Gomes. Mr. Gomes has already announced that if he is elected president of Brazil, he would replace the current president of the Brazilian Central Bank, Mr. Armínio Fraga (a prior employee of Mr. Soros.)
I understand why Mr. Soros is so upset about the upcoming Brazilian election. If Mr. Ciro Gomes wins the election, Mr. Soros will lose control of the strings at the Brazilian Central Bank.
Ricardo C. Amaral is an economist and author and can be reached at email@example.com