Death of the Dollar: Brazil Edition

Brazil has burned through 30 percent of its foreign reserves trying to defend the real and it has nothing to show for it. It has spent roughly 5% of GDP. And the real weakens.

Alhambra: OECD Gets Brazil Really Wrong; Common Factors With Far More Than Brazil
The relevance of Brazil relates to the orthodox mangling of what the “dollar” truly represents, and further how that damage manifests (and how far it might). To be clear, I’m not suggesting the world will all follow as far as Brazil has and might still in the near future, only that there are some very realistic and very negative scenarios that should be accounted for in analyzing the potential future economic track anywhere the “dollar” is upsetting conditions. I think in many cases, at least some very important “dollar” and “dollar”-related markets, there is already thinking in that direction for much more than EM’s.

That depression potential again extends as much from the sustained decline as its ultimate degree. Without the “dollar” these financialized economies have no support and thus the artificial nature of the past two decades or so is being revealed in a decidedly weak economic foundation. In many ways, an extended contraction is much, much worse than even a violently sharp but temporary recession. While I believe fully that the global economy’s permanent alteration and predicament traces back to the events of the eurodollar panic and Great Recession, there was at least some reasonable hope in 2009 for symmetry. Just the potential for sharp recovery makes a big difference, especially in financial factors that can become only disastrously self-reinforcing without it. That is Brazil already, and there is a lot it can tell us about both potential “unexpected” weakness and the (sometimes intentional) inability of economists to understand it.

Brookings: IMF Therapy for Brazil
More to the point, Brazil has run out of good – let alone easy – options. The only alternatives to an IMF program are an inflationary spiral to dilute the real value of debt and other nominal liabilities, or a downward economic spiral that may cause a need for debt restructuring.

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