BRAZIL-The misery contnues to expand

Some things to watch

The pre-Lenten Carnaval has begun. Millions of revelers are on the streets perhaps to burn off frustrations, but certainly to have some fun.

Interspersed with the reports of the parties, the press has reported some items worthy of note:

• Dilma Rousseff is reportedly and once again pressuring the Central Bank to reduce the base interest rate (SELIC);
• Inflation in January was 1.27% - unusually high and highly dispersed. That rate, if it prevails yields an annualized rate of inflation of 15%. Some analysts predict the rate could fall on the heels of increased unemployment;
• Several companies have informed that they will be reducing their work forces after Carnaval;
• Vehicle sales fell 29% in January;
• Dilma Rousseff opened the post-holiday Legislature with an appeal for the tax on financial transactions (CPMF) and was loudly booed by the Congress;
• Industrial output in 2015 fell 11% in 12 of the 15 geographic regions analyzed;
• A major bank has forecast a GDP decline of 4% for 2016. This was my original forecast and I expect it will be somewhat worse going forward;
• The “creative accounting” of 2015 has been reported to continue under a new framework;
• The Lava-Jato investigation is expected to resume “full force” following the Carnaval break.

Analysis:

Inflation might or might not increase in 2016. Some predict that the combined effects of rising unemployment and recession will lead to downward pressure on final consumer prices. 

However, the government continues to spend faster than it acquires revenues so worsening stagflation is not out of the question. In short, it’s a toss up.

The obstinacy of the administration to continue to pursue expansionist policies is extremely difficult to understand. Clearly, there is a method to the madness, but the method appears to involve simply ignoring the fact that the policies are not working and credible analysts do not expect them to. 

It is not difficult to believe that everything that is being done is with the deliberate purpose of dismantling the economy.

As one pundit observed, Brazil’s output is roughly 90% produced by the private sector. The administration has proclaimed often that the role of development should be the responsibility of the state and the state alone. It’s virtually impossible to ignore the bad news coming out of the economy and the legislature appears to be largely unconcerned for the situation. So, the destruction and dismantling continues unabated. 

If the policies are not designed to achieve this end, we can conclude only that they are incredibly obtuse!