ECONOMIA do BRASIL

One of the topics most often mentioned by foreigners we've met is the recent rise of the cost of living in Brazil compared to neighbouring countries. Many hotel and restaurant owners we've spoken to are particularity worried about falling tourism and about falling currencies back home, where they've kept most of their savings. Unfortunately out of the people we've met, nobody has offered an explanation besides stating that what is going on in the global economy is irrational.

Here is a common explanation evoked for current values of exchange rates. The carry trade is when financial institutions borrow money in one currency where interest rates are low and invest it in another where interest rates are high. Borrowing US dollars or Japanese Yen at minimal interest rates and investing in Brazilian bonds at close to 12% is profitable. The demand for Reais pushes its value higher as financial institutions search for profits. The theory states that the Reais will rise until the profit margin between interest rates closes due to the rising cost of acquiring the currency. Alternatively, it can also reverse it's course, often precipitously, when economic conditions change causing investors to repatriate their dollars home. The recent rounds of quantitative easing by the US Federal Reserve, which has unleashed vast amounts of liquidity, as well as current volatility of global financial markets are two factors accentuating this trend as financial institutions seek to diversify their holdings in order to reduce risk.

Although Brazil is a vast country with ample natural resources and strong economic activity, the standards of living and levels of productivity we've encountered so far do not support the current costs of living, which in some cities are approaching those seen in developed economies. Brazilians consume on credit and save very little, making the country more vulnerable to economic shocks. Nevertheless, this is an interesting time to be in Brazil, with most people focussing on the good times at home, and showing little interest in the global economy. Brazilians are simply enjoying the current boom and it's fun to have the opportunity to witness it and to join the party too!