The Heart of Brazilian Culture in America’s Biggest Community

So like, besides the fact that the whole money thing doesn't really work to stop inflation when the industry is all powerful and the financial markets are super connected, the whole "keep interest rates high and save up foreign money" thing made the government and rich people even more connected. That is, like, while the public sector was losing its ability to make fiscal moves to channel public and private investments into industrial transformation,69 as the adjustment imposed more and more restrictions on public spending, the public indebtedness (external and internal) became super useful in supporting the private speculative activities.

External Shocks and Economic Turmoil, but make it extra spicy!

In 1979, the financial situation was so wack that Simonsen got booted as Finance Minister. And then things got even crazier in the second half of the year. In his place, the military government brought back Antonio Delfim Netto, the Finance Minister from the "miracle" era. This was, like, such a fail and totally not vibin' attempt to bring back some development policies. The international interest rates hike, like, totally wrecked everything, ya know? And then there was the second oil price shock in October and November of 1979, which was, like, a big deal. But what really messed things up was how the Brazilian policymakers reacted to all of it. They basically couldn't control investment flows anymore and couldn't stop the private sector from making risky investments. It was a total disaster, dude. That was a total bummer, tbh. The rates of inflation were like, totally not vibing with the old-school policies and just went all the way up, getting hella unstable. The monetary policy was like lowkey to blame for the crazy inflation rates cuz the high interest rates made it hella expensive for companies, and they had to pass on those costs to us by raising prices. Smh. From 1978 to 1979, like, the financial costs of the thousand biggest firms in Brazil totally skyrocketed as a percentage of their operational incomes, while their mark-ups stayed at around 40% in 1979.

The Road to Public Financial Fragility, fam

External indebtedness was like, totally matched by a similar and related process of public domestic indebtedness, ya know? The way external debt is connected to domestic debt is like never mentioned in neoliberal stuff, it's so unconventional. It may be so cuz like, external and internal debt went up and got all tangled together cuz of those super liberal policies in the mid-70s. The main goal of the Finance Minister, Mario Henrique Simonsen, was to flex on inflation by straight up controlling domestic demand. OMG, like in 1976 Simonsen totally flexed and freed up the interest rates of the banking system. It was lit AF! Yo, like, the government wanted to create a gap between loans from our own country and loans from other countries. They thought that by raising interest rates, people would stop spending and investing so much, which would, like, get rid of the extra demand that's causing inflation. OMG, like in Figure 13 below, the interest rates on consumption financing, on working capital financing and on public bonds like totally blew up from negative to positive rates in 1977 and 1978. It was cray cray! However, in terms of inflation and control of money supply the results
On the flip side, like, by getting more international cash flow, the money vibes kinda messed up its own goals at home 'cause the boost in foreign reserves kinda canceled out and annoyed the domestic money moves. OMG, like, while the BACEN was all like "let's increase the banking reserves ratio on deposits" to, like, limit the banks from giving out too much credit, the commercial banks were all like "nah, we don't care" and they, like, totally broke the rules by borrowing more money from abroad under Instruction 63. Like, so, like, in the late 70s, the deposit on demand thing went down by about 3%, but at the same time, foreign resources totally took over as the main thing that commercial banks owe, and it increased by a whopping 116% in real terms. Crazy, right? OMG, like the real interest rates became hella hard to keep up with, either cuz foreign reserves were like boosting the money supply or cuz inflation was going cray cray.

To keep their targeted real interest rate on fleek, policymakers had no choice but to flex with open-market operations to sterilise the inflows. 

By flexin' with dem indexed public bonds, the gov let the public swap out them mad liquid and lit public bonds for non-indexed money (M1). OMG, check out Table 22 below! Like, in the six years from 1975, the means of payments totally tanked by over 5 percentage points in GDP. So wild, right? OMG, like the payment methods went down as a percentage of GDP to, like, the bare minimum for day-to-day stuff, but the financial assets went up by 2.5 percentage points in GDP in just three years starting from 1975. So lit! In like, the first vibe that caused domestic public debt was the need to keep interest rates lit amidst mad capital inflows. So, like, the government was all about swapping financial assets for cash money by issuing public bonds to balance out the impact of money coming in and to keep interest rates in the real world on the up and up. This process was like totally doing its own thing, ya know? It ended up causing mad public debt to make up for all the cash coming in and to keep interest rates from going negative. OMG, like, from the private sector's POV, in the context of an economic slowdown and mad uncertainties, indexed public bonds became a way better option than productive investments 'cause they were protected against inflation and had guaranteed liquidity through repurchase agreements. Lit AF!