Is Brazil For "Real?"

“We were received with a hospitality hardly to be equaled…for [Brazil] asks neither who you are nor whence you come, but opens its doors to every wayfarer.”

– Louis Agassiz and Elizabeth Cabot Cary Agassiz, A Journey in Brazil (1879)

I recently spent two weeks in Brazil on a four-city tour – in Campo Grande, Sao Paulo, Florianopolis and finally Rio de Janeiro. What can I say about the experience? I can say that the caipirinha – Brazil’s national drink – is a potent cocktail; Brazilian meats are very salty; Brazilian desserts are very sweet. This taste for the extremes of the flavor spectrum extends to Brazil’s monetary brand, as well.

Today, the Brazilian real is strong (and the dollar is weak). The real is now at a 10-month high against the US dollar (having risen 40% from its lows in early 2009). This prompted the Brazilian finance minister to threaten weakening the real. You’ve probably heard of his comment about a “currency war.”

What he fears is that the strong real will hurt Brazil’s exports by making Brazilian goods more expensive, hence weakening the Brazilian economy. It is a tired line of reasoning. This idea that a country gets rich by destroying the value of its currency is a weed that won’t go away no matter how many times you pull it from the soil.

What’s curious about this notion cropping up in Brazil is that you’d think a Brazilian would appreciate the dangers of weakening a currency. Brazil has had a habit of blowing up its currency over the last 60 years.

From 1942 to the present, Brazil went through eight different currencies:

  • Mil Reis, 1833-1942
  • Cruzeiro, 1942-1967
  • Cruzeiro Novo, 1967-1986
  • Cruzado, 1986-1989
  • Cruzado Novo, 1989-1990
  • Cruzeiro, 1990-1993
  • Cruzeiro Real, 1993-1994
  • Real, from 1994.

The present-day real is but a teenager, a mere youth sprung from a bad family. Yet it is among the world’s strongest currencies today, bolstered by the commodity wealth and strong growth rate of Brazil’s economy.

Say what you will about the US dollar, which has been a poor currency as far as retaining its purchasing power over time, it’s never gotten so bad that we had to start over – at least not yet. Brazil’s experience makes the dollar look like a gold standard. It was not that long ago that Brazil’s inflation rate hit 2,700%. It happened in one 12-month period from 1989-1990.

Even as late as 1999, Brazil was a financial basket case. In 1998 and 1999, its finances were such a mess that Brazil got the biggest IMF rescue package in history up to that point, $41.5 billion.

During the 20th century as a whole, Brazil had a cumulative inflation rate of more than a quadrillion percent. If you were a net saver in Brazil and kept that money in Brazil’s currency, you lost big. You might as well have set the money on fire.

Today, Brazil is in a different position. The currency is so strong, its politicians fret. American travelers find no bargains in the shops of Sao Paulo or Rio. Brazil, too, has huge currency reserves and is now a net creditor, not a debtor. Brazil is even accumulating gold – the real thing. We met with an economist on our trip there who made a presentation that showed Brazil’s central bank has 5% of its reserves in gold – and it’s been buying more.

Today, US investors go out of their way to buy products that give them exposure to Brazilian reais, instead of US dollars. It’s incredible when you think how much things have changed in just the last 10 years.

Of course, Brazil could screw it up again.

There are some worrisome signs. The new president is Dilma Rousseff. She is a former Marxist guerrilla. Captured in 1970, she was beaten and tortured. Hers is a quite a tale. But she has since mellowed out, supposedly. Most see her as simply continuing the policies pursued under former President Lula. But we’ll see…

As with any emerging market, there are big problems, but also big opportunities. Still, Brazil’s economic challenges seem less complicated and smaller than those in the US, where debt and deficits are much larger. And currency screwups are relative. Forced to make a choice, I’d rather bet on the Brazilian real than the US dollar. (But gold is the best currency of all.)


Chris Mayer
for The Daily Reckoning

The Daily Reckoning