> "We didn't understand what it was," says Maria Leopoldina Bierrenbach, a housewife from Sao Paulo. "I used to say it was a fantasy, because it was not real."
I was 14 during the URV period. It was like that, nobody really understand what URV was, nor could explain to other what it was.
But, it was simple to use. Prices are in URV now, not in the old currency name, not a new currency, it is URV. URV acted as a good parameter, was simple to understand and use in practice, even if hard to understand in theory.
It is not that brazilian had lost faith in the currency, but we lost faith in currency changes and readjustment. Brazilian money had changed names several times in the 80s. And several times government had cut zeros from the currency ("Hey, everybody, now 1,000,000 is actualy 1,000 ok?). So there were no point in just creating a new currency. It HAD to be a virtual one, something different, something that people could not say "yeah, just another name change like all the others...". So they created URV, and it worked.
Applied Psychology, in the Financial Transactions Sector. *
I find it amusing that they named it 'real' once it was done.
*- a little inside joke.
While I was dating my wife 15 years ago, I was very self conscious of the fact that I had barely graduated high school, and here I was dating a professor and going to many professor parties. Many, many parties. I would be asked by almost everyone "What do you study?" as a little ice-breaker conversation starter. Since I had no PhD and was not even a college graduate, this made me a little uncomfortable and so I developed the above line to describe my business of buying and selling used capital equipment (which I did out of my pickup).
It went like this: They would ask what I studied, and I would respond with "Applied Psychology in Financial Transactions" and then steer the conversation to their work. I also learned quickly that I should have no opinions on THEIR work, or my night would be bad. It was a rare event to have to explain further, most people were delighted to talk at length about themselves.
"then steer the conversation to their work. I also learned quickly that I should have no opinions on THEIR work, or my night would be bad. It was a rare event to have to explain further, most people were delighted to talk at length about themselves."
Sounds like it's time to add Applied Psychology in the Academic Sector to the resume.
Brazilian here too. Although the URV maneuver did help psychologically, a lot of controlling the inflation had to do with the so-called "economic tripod" implemented with the Real plan, which basically involved:
- Negative primary deficit on the government budget balance;
- Floating exchange rate;
- Inflation targeting.
Addendum: the current government is just so bad at that (fiscal maneuvers to create an artificial negative primary deficit, interfering in the exchange rate by buying/selling dollars at below-market prices, etc) that our inflating is going up again. We just reached 8.17% in the last 12-month period. Compare that to 0.8% in the US for 2014, or even Brazil's 3% some 8 years ago... With the expectation of the Fed raising interests in the US with the improving economy, dollars are going to FLY out of Brazil and the already ridiculous exchange rate (1 USD = 3.15 BRL) is going to explode. Brace yourselves, inflation is coming.
Many of the things I buy in a grocery store in the USA go up 5% or 10% at a time, perhaps every year or two. Same situation with services.
The official inflation numbers for the US are very tricky. There's a lot of "adjustment" going on. I suspect that the rapidly falling prices for household electronic goods plays a big role.
The price of a 55" flat screen declining from (made up numbers) $1,500 to $500 in the last five years is small consolation if the price of meat and milk and cookies has gone up 25% over those five years.
Come on, just look at SELIC during the second FHC government... the interest rates went sky high, the Real had a monstrous devaluation overnight (from R$ 1.32 to U$1 to R$2.16 to U$ 1).
FHC sure helped to stabilize inflation rate, but he almost destroyed brazilian economy. His second government was nothing short of a disaster.
> It went something like this: 1. New President comes in with a new plan.
2. President freezes prices and/or bank accounts.
3. President fails.
4. President gets voted out or impeached.
5. Repeat.
Yeah... no. Between '64 and '85 we were living under a military dictatorship. No president during that period got voted out let alone impeached.
I'm a fan of Planet Money, but this particular episode made a lot of extraordinary claims (by the standards of the usual formulation of macroeconomics) and did not present a any extraordinary evidence to back up these claims.
As others in this thread are pointing out, the episode was very hand-wavy about previous attempts at limiting the money supply in the country and how effective those attempts were.
TL;DR: Brazil switched to dollar for a moment (to get out of inflation) and then to a new (stable) currency. The theoretical basis for this is the previous works from Persio Arida, André Lara Resende and Edmar Bacha.
Two important books about this subject:
* A real história do Real;
* A saga brasileira.
Inflation in Brazil was indeed rampant at this moment, but the cause (when URV entered the scene), wasn't public spending anymore.
It was a so-called inertial inflation (a theory, of course. See "Inertial inflation and monetary reform in Brazil"[1]), caused by public (merchants, industry etc) perception (or fear) that prices were always going up.
Before that, government made a great job reorganizing the budget, untying public prices from inflation, renegotiating debts with Wall Street and making new debts with the FMI.
After the roots of inflation where addressed, it's "inertial psychological" component (as they called it) was shut down with URV.
URV, of course, was no virtual or fake currency. It was an index based on (or simply copied from) US dollar price.
The real deal here is: how a lean team with a very strong leadership solved this big mess. Those guys were no amateurs and at least on of them were a inflation specialist Phd from MIT (Persio Arida, a Brazilian).
The first book was written from a member of staff of this team and it's description of the team gatherings is awesome.
It's also worth noting a counteracting event: the inflation caused by the switch to the euro in many European countries like Italy [1], Spain [2] and Finland [3]. These were sometimes actual inflation and sometimes more a matter of perception -- a price hike in a few products and goods may not show up significantly in the official price index radar, but it does wonders to skew public perception.
"In common with other countries with low-value currencies, where people are accustomed to paying in units of hundreds and thousands, the introduction of the euro, which was valued at 166 pesetas, led to stealthy but rapid inflation. Within in year a cup of coffee that in most bars cost 100 pesetas was priced at €1 while the cost of a 1,000-peseta three-course lunch leapt to €10 – a 66% increase." [2]
Of course, there were two components: the physical (stopping the runaway printing of money) and the psychological (changing people's expectations). So the title should more properly be something like "How Current Abstraction Helped Stop Runaway Inflation in Brazil."
----
"You have to slow down the creation of money, they explained. But, just as important, you have to stabilize people's faith in money itself."
A somewhat similar pricing mechanism seems to be developing today for payments in Bitcoin. Very few things you can buy in Bitcoin are actually price denominated in Bitcoin. You'll see things selling for $25 worth of Bitcoin, rather than 0.1 BTC, considering the historic volatility. Almost all merchants accepting Bitcoin use the USD as a base pricing denomination.
URV was a nice hack, but people overestimate these economists brilliance. Here are the dates when the latin america hyperinflation ended in each country:
Mar. 1990 Brazil
Aug. 1990 Peru
Mar. 1991 Nicaragua
Mar. 1990 Argentina
So what's was the essence of the trick: did Brazil have some special case of inflation where country was in fact economically healthy, but the people massively underestimated its economical health? Sounds so unreal (maybe that's why the currency was named so :) ).
The essence of the trick was convincing people that the money that they received wasn't going to suddenly become worthless, so they wouldn't go out and spend it immediately, perpetuating the inflation - killing off the vicious cycle.
i.e. it was a hack to reduce the velocity of money in Brazil.
In all likelihood inflation would have come down anyway at some point around that time. Energy prices had stopped rising. Perhaps this made it happen a few months or even a year earlier, though.
If they'd tried this trick in the beginning, while energy prices were still rising it would have done fuck all.
"Real" in Portuguese has two meanings, one is the same as in English, the other is "related to the king".
Brazilian money had this name since we had a king, then, at the inflation time its name was changed, a dozen times or so, and came back to the original.
I lived through it. The URV was the turning point for inflation in Brazil, and a huge part was in fact the impression people had the the price was not going to change in the next day.
In addition to slowing the production of money, the URV program essentially tied wages to the inflation rate. To me, that seems like a fundamentally important step in both restoring the people's faith in the currency and maintaining the standard of living for them. By only printing less money, they could easily fall into a period of widespread poverty while inflation rates continued to rise -- albeit at a slower rate.
Of course, I'm just an armchair economist, so perhaps there's part of the picture that I'm not seeing.
Mandating that salaries are tied to inflation is an interesting concept indeed.
I'm still majorly confused as to why not all legislation uses "inflated dollars" or some metric that keeps things in line with inflation. Well not confused, per say, more like disappointed.
Sorry, but that's exactly wrong. There was widespread indexation before the URV or, more precisely, before the Real Plan. Salaries, pensions, interest rates, fees, etc, everything was tied to an inflation rate or another.
The Real Plan did away with the indexation.
I lived in Brazil for 3 years during the early 90's and I distinctly remember two currency changes: Cruzeiro to Cruzados and then Cruzados to Cruzados Novos. While living there, our strategy was to keep our money in US Dollars until the last second when we decided that we wanted to buy something because inflation was so crazy. Then I remember hearing this story on NPR almost 2 decades later and I was blown away about the psychological game that was used to stabilize Brazilian currency.
Lets not forget that economics is a social science like psychology or history. Also lets not forget that there is no such thing as "fake" and "real" money and that the economy is a social construct. The concept of fake dollars pesos or reales its a valid one but fake money is just nonsense.
Mexico has an interesting similar concept, it's called UDI: (Unidades de Inversión, Investment Units), it's a currency tied to inflation, its a currency tied to inflation and it's used by financial entities to hedge against inflation.
Everything have long lines, because your money would be worth nothing in the next day, so everybody went in the markets in the 10th day of the month, when they received their paychecks.
I'm from Argentina and a similar plan was implemented there. The REAL plan was to subscribe free market principles, sell state owned companies and reduce the fiscal deficit.
This fake currency was attached to USD price in Brazil. In Argentina was created from the beginning and it was also attached to USD.
Sorry to bother with the reality, I'd prefer the Big Fish style story that was told in this article, but it was a fake.
[+] [-] soneca|10 years ago|reply
I was 14 during the URV period. It was like that, nobody really understand what URV was, nor could explain to other what it was.
But, it was simple to use. Prices are in URV now, not in the old currency name, not a new currency, it is URV. URV acted as a good parameter, was simple to understand and use in practice, even if hard to understand in theory.
It is not that brazilian had lost faith in the currency, but we lost faith in currency changes and readjustment. Brazilian money had changed names several times in the 80s. And several times government had cut zeros from the currency ("Hey, everybody, now 1,000,000 is actualy 1,000 ok?). So there were no point in just creating a new currency. It HAD to be a virtual one, something different, something that people could not say "yeah, just another name change like all the others...". So they created URV, and it worked.
[+] [-] _lce0|10 years ago|reply
[+] [-] gregpilling|10 years ago|reply
I find it amusing that they named it 'real' once it was done.
*- a little inside joke. While I was dating my wife 15 years ago, I was very self conscious of the fact that I had barely graduated high school, and here I was dating a professor and going to many professor parties. Many, many parties. I would be asked by almost everyone "What do you study?" as a little ice-breaker conversation starter. Since I had no PhD and was not even a college graduate, this made me a little uncomfortable and so I developed the above line to describe my business of buying and selling used capital equipment (which I did out of my pickup).
It went like this: They would ask what I studied, and I would respond with "Applied Psychology in Financial Transactions" and then steer the conversation to their work. I also learned quickly that I should have no opinions on THEIR work, or my night would be bad. It was a rare event to have to explain further, most people were delighted to talk at length about themselves.
[+] [-] jerf|10 years ago|reply
Sounds like it's time to add Applied Psychology in the Academic Sector to the resume.
[+] [-] mixmastamyk|10 years ago|reply
http://en.wikipedia.org/wiki/Real
[+] [-] gusmd|10 years ago|reply
- Negative primary deficit on the government budget balance;
- Floating exchange rate;
- Inflation targeting.
Addendum: the current government is just so bad at that (fiscal maneuvers to create an artificial negative primary deficit, interfering in the exchange rate by buying/selling dollars at below-market prices, etc) that our inflating is going up again. We just reached 8.17% in the last 12-month period. Compare that to 0.8% in the US for 2014, or even Brazil's 3% some 8 years ago... With the expectation of the Fed raising interests in the US with the improving economy, dollars are going to FLY out of Brazil and the already ridiculous exchange rate (1 USD = 3.15 BRL) is going to explode. Brace yourselves, inflation is coming.
edit: typo
[+] [-] PhantomGremlin|10 years ago|reply
Many of the things I buy in a grocery store in the USA go up 5% or 10% at a time, perhaps every year or two. Same situation with services.
The official inflation numbers for the US are very tricky. There's a lot of "adjustment" going on. I suspect that the rapidly falling prices for household electronic goods plays a big role.
The price of a 55" flat screen declining from (made up numbers) $1,500 to $500 in the last five years is small consolation if the price of meat and milk and cookies has gone up 25% over those five years.
[+] [-] alberich|10 years ago|reply
Come on, just look at SELIC during the second FHC government... the interest rates went sky high, the Real had a monstrous devaluation overnight (from R$ 1.32 to U$1 to R$2.16 to U$ 1).
FHC sure helped to stabilize inflation rate, but he almost destroyed brazilian economy. His second government was nothing short of a disaster.
SELIC history: https://www.bcb.gov.br/?COPOMJUROS
[+] [-] Semiapies|10 years ago|reply
[+] [-] brc|10 years ago|reply
[+] [-] digi_owl|10 years ago|reply
huh?
[+] [-] nandemo|10 years ago|reply
Yeah... no. Between '64 and '85 we were living under a military dictatorship. No president during that period got voted out let alone impeached.
[+] [-] marcosdumay|10 years ago|reply
[+] [-] drcode|10 years ago|reply
As others in this thread are pointing out, the episode was very hand-wavy about previous attempts at limiting the money supply in the country and how effective those attempts were.
[+] [-] motoboi|10 years ago|reply
Two important books about this subject:
* A real história do Real;
* A saga brasileira.
Inflation in Brazil was indeed rampant at this moment, but the cause (when URV entered the scene), wasn't public spending anymore.
It was a so-called inertial inflation (a theory, of course. See "Inertial inflation and monetary reform in Brazil"[1]), caused by public (merchants, industry etc) perception (or fear) that prices were always going up.
Before that, government made a great job reorganizing the budget, untying public prices from inflation, renegotiating debts with Wall Street and making new debts with the FMI.
After the roots of inflation where addressed, it's "inertial psychological" component (as they called it) was shut down with URV.
URV, of course, was no virtual or fake currency. It was an index based on (or simply copied from) US dollar price.
The real deal here is: how a lean team with a very strong leadership solved this big mess. Those guys were no amateurs and at least on of them were a inflation specialist Phd from MIT (Persio Arida, a Brazilian).
The first book was written from a member of staff of this team and it's description of the team gatherings is awesome.
1 - https://ideas.repec.org/p/rio/texdis/85.html
[+] [-] ojosilva|10 years ago|reply
"In common with other countries with low-value currencies, where people are accustomed to paying in units of hundreds and thousands, the introduction of the euro, which was valued at 166 pesetas, led to stealthy but rapid inflation. Within in year a cup of coffee that in most bars cost 100 pesetas was priced at €1 while the cost of a 1,000-peseta three-course lunch leapt to €10 – a 66% increase." [2]
[1] http://news.bbc.co.uk/2/hi/business/2098033.stm [2] http://www.theguardian.com/world/2014/aug/31/spaniards-holdi... [3] http://ec.europa.eu/economy_finance/publications/publication...
[+] [-] jstalin|10 years ago|reply
----
"You have to slow down the creation of money, they explained. But, just as important, you have to stabilize people's faith in money itself."
[+] [-] crdoconnor|10 years ago|reply
[+] [-] tinkerrr|10 years ago|reply
[+] [-] neves|10 years ago|reply
Mar. 1990 Brazil Aug. 1990 Peru Mar. 1991 Nicaragua Mar. 1990 Argentina
You can see a compiled hyperinflation rates in a table in this paper: http://object.cato.org/sites/cato.org/files/pubs/pdf/working...
[+] [-] kozak|10 years ago|reply
[+] [-] crdoconnor|10 years ago|reply
i.e. it was a hack to reduce the velocity of money in Brazil.
In all likelihood inflation would have come down anyway at some point around that time. Energy prices had stopped rising. Perhaps this made it happen a few months or even a year earlier, though.
If they'd tried this trick in the beginning, while energy prices were still rising it would have done fuck all.
[+] [-] marcosdumay|10 years ago|reply
Brazilian money had this name since we had a king, then, at the inflation time its name was changed, a dozen times or so, and came back to the original.
[+] [-] rtpg|10 years ago|reply
[+] [-] mig39|10 years ago|reply
[+] [-] josefresco|10 years ago|reply
[+] [-] snappieT|10 years ago|reply
[+] [-] stashpro|10 years ago|reply
[+] [-] unknown|10 years ago|reply
[deleted]
[+] [-] nahiluhmot|10 years ago|reply
Of course, I'm just an armchair economist, so perhaps there's part of the picture that I'm not seeing.
[+] [-] rtpg|10 years ago|reply
I'm still majorly confused as to why not all legislation uses "inflated dollars" or some metric that keeps things in line with inflation. Well not confused, per say, more like disappointed.
[+] [-] marcosdumay|10 years ago|reply
[+] [-] nandemo|10 years ago|reply
See motoboi's comment for more details.
https://news.ycombinator.com/user?id=motoboi
[+] [-] joeblau|10 years ago|reply
[+] [-] koolkat|10 years ago|reply
[+] [-] pacofvf|10 years ago|reply
[+] [-] bizarref00l|10 years ago|reply
[+] [-] joe_torres|10 years ago|reply
Everything have long lines, because your money would be worth nothing in the next day, so everybody went in the markets in the 10th day of the month, when they received their paychecks.
[+] [-] pyabo|10 years ago|reply
[+] [-] unknown|10 years ago|reply
[deleted]