This article was published by The McAlvany Intelligence Advisor on Wednesday, April 20, 2016:
One of Warren Buffett’s favorite expressions is “when the tide goes out, everyone will see who’s been swimming naked.” In Brazil the tide went out at the start of the Great Recession and now the whole world can see who was swimming naked.
When President Lula was elected in 2002 the commodity boom was underway, and Brazil was enjoying the ride. Its major exports are soybeans, sugar, and iron ore, and under Lula Brazil’s GDP was running 10 percent a year. Lula implemented major expansions of the welfare state, including putting in place such generous pension plans that state workers could retire at age 54 for men and at age 52 for women at 90 percent of their final pay. The average Brazilian’s household income rose, and statists worldwide pointed to Brazil’s success story, naming it as one of the BRIC countries that would soon overtake the developed nations of the world, and doing it while expanding government spending.
But when Dilma Rousseff took over in 2011 the Great Recession was revealing the true nature of spending far beyond the ability of the economy to sustain it. In 2014 the government’s finances were in such dreadful shape that she tried to hide it from the electorate with loans from state banks and agreements to delay paying bills until after she was reelected.
It was just a matter of time before she was exposed. It also happened concurrently with Operation Car Wash, an investigation that revealed (and continues to reveal) deep corruption at Petrobras, the state-owned oil company, its executives, and politicians in Rousseff’s Worker’s Party. Her claims that she didn’t know anything about the corruption being exposed while she was head of Petrobras increasingly fell on deaf ears. How could she not know?
When the Operation Car Wash investigation exposed the speaker of the house for skimming some $40 million in bribes, he decided the best thing to do was to deflect attention away from himself and onto Rousseff. He moved to impeach her for the fraudulent bookkeeping she arranged in 2014.
Meanwhile the economy continued to slide, moving from 10 percent growth per year under Lula to negative 4 percent shrinkage under her administration.
She tried all the standard interventionist (read: Keynesian or socialist) remedies: first, she had the country’s central bank lower interest rates during her first term in order to stimulate the economy. All that did was set off inflation, now hitting double digits. To rein in inflation, her central bank raised interest rates, exacerbating the recession that continues today. She put price controls on energy prices, causing energy companies to post losses and prompting others to cancel investments across the country. She promoted major infrastructure improvements, including the facilities to support this summer’s Olympic Games in Rio de Janeiro.
Today unemployment is in double digits, households have seen their real incomes drop from $13,000 annually to under $8,000, and credit rating agencies now rate Brazil’s sovereign debt as junk. Still she continues to spend. Government spending now absorbs 41 percent of the nation’s total annual economic output, far beyond the 35 percent that it receives in revenues. That shortfall, or deficit, now puts Brazil in a rare category: it runs an annual deficit that is larger, as a percentage of its GDP, than any other country in the world.
It’s no wonder then that more than three million people showed up recently in protest, demanding her impeachment.
The irony is that nearly half of those voting to impeach her on Sunday are themselves under investigation for fraud, money-laundering, and other forms of corruption, including the leaders of both houses of congress.
Also corrupt is the man likely to take office when Rousseff leaves office, Michel Temer. Recent polls show that he is so deep in corruption that half of Brazil thinks he ought to be impeached as well!
What happens next is predictable: the Brazilian senate will meet later this week to put onto the agenda a vote to accept the house’s recommendation that she be impeached. It only takes a majority to do that, and observers say the vote to try her for her financial machinations is a lock. After that the Senate will investigate and then determine whether to impeach her or not. In the meantime Rousseff will be replaced by Temer who will have all the power and authority to continue Rousseff’s policies. If he dares to insert common sense into the mix, such as cutting back on those ridiculous pension benefits or those infrastructure projects, he will meet resistance from Rousseff’s party members (at least as many of them who are still in office and not in jail), along with pushback from labor unions, Marxist agitators, political activists, and, of course, that huge proportion of the Brazilian populace that has now become dependent upon the government for all those goodies it can’t afford.
This writer has asked before: where are the Brazilian statesmen? Where are those who see what is happening to their beloved country and know that the real remedies involve less government rather than more?
In their absence, the corruption and the self-dealing will continue, while the government continues to spend itself into bankruptcy. Then the tide will really reveal who has been swimming naked: that huge part of the Brazilian citizenry that thought the government freebies and benefits would just continue forever.
The New York Times: Vote to Impeach Rousseff Prompted Cheers, But Won’t End Turmoil in Brazil