We have seen a rash of socialist policies globally since the financial crisis in 2008. Brazil is no exception. Brazilian President Dilma Rousseff has interfered with the economy to a higher level than her predecessor, Luiz Lula da Silva, who impressed many with his surprisingly market friendly and sound economic policies, although he built a large welfare state.
Rousseff has doubled down on her Marxist roots, micromanaging the economy and interfering in financial markets. She says her focus has been unemployment and wage growth but the consequence of her meddling has been significant damage to the Brazilian economy. She has interfered with interest rates, profits, and regulatory impact. Predictably, growth in the Brazilian economy has slowed and now is in recession. The currency, the Brazilian Real, has sunk to its lowest level in years. The question is where Brazil will go from here.
The election looked as though it could go either way and for a while, it was possible Rousseff would be pushed out by a more market friendly candidate. However, tactics by the incumbent to scare the population regarding the loss of benefits and a reduced overall standard of living pushed the race to a dead-heat prior to voting. With the results being counted, it looks as though Rousseff has won the first round and a run-off will be required.
The real issue is not whether or not Rousseff wins but what will be Brazilian economic policy going forward. Rousseff has made conciliatory gestures that she will work on reducing deficit spending and reduce government interference in the private market. Many think she is just mouthing the words and her heart will not be in these measures. In fact today Rousseff stated, “We have carried out a peaceful social revolution over the past 12 years to diminish longstanding social inequality in Brazil. We took the hunger map of Brazil made by the United Nations and we lifted billions of Brazilians to university. To complete that, we are now preparing Brazil of a new cycle of even more profound change.”
What will be the further consequence of a Rousseff victory? Most likely it will be continued slow or negative growth, high inflation, large budget deficits, and general economic malaise. A Marxist cannot change her spots. The future effect on the Brazilian currency is more cloudy but one could expect further weakening of the real. Brazilian bond yields will definitely rise as there will not be an emphasis on fiscal responsibility. The binge in spending prior to the election is typical of a socialist government looking to buy votes. The problem is they will not be able to stop spending as the people will demand more and more. It’s a vicious cycle.
One thing is for sure, the real will not be a reserve currency or store of value anytime in the near future. Brazil is joining the long list of countries, the United States and Europe included, that have decided short term political results are more important than the long term economic future of their nations. If only their grandchildren knew what they were doing to them.