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Currency Wars | Welcome to the Desert of the Real

The daily column of Luis Nassif, the notable Brazilian business and economics «spreadsheet head».

Last Friday, March 9, 2012, will be regarded by posterity as the day Brazil officially awakened to the currency wars, which for so long have eaten away at the fabric of Brazilian industry.

The federal treasury is taking stronger measures against the entry of speculative dollars, while last week, the Banco Central accelerated the lowering of interest rates, cutting the basic rate by 0.75%. And most importantly, President Rousseff has cut out the middlemen, stating an official position of her own regarding the impending tsunami.

Personally, I pray for a return to the golden years of USD=BRL 2.50. I could afford to stay in three- or four-star hotels and wander the country at will. Now, the cost of living is getting close to parity with the cost of living in New York. The Enigmatic Mermaid has taken to referring to the local bakery O Novo Ladrão — the New Lion — as O Novo Ladrão, for jacking up its prices, as the local gas station also did during a fuel delivery strike last week.

Welcome to the desert of laissez faire economics au gogo.

In recent weeks, this column has been calling on the government to review its position.

First of all, it should acknowledge that a state of war exists in the struggle over the strengthening of the real and the deindustrialization of the economy. Next, it should establish an emergency operations center with a senior management team working quickly in response to all aspects of the currency tsunami..

And last but not least, it should drop its currency policy of silence and summon  Brazilians to the battle.

The day has finally come for a sense of urgency, and a central point of attack will be to reverse the appreciation of the Real.

Treasury calculations show that to achieve parity with the initial situation of the Plano Real, the dollar should be priced at BRL 2.50.

This is absurdly unbalanced. A product costing R$ 1.000, for example, with the dollar at R$2.50, goes for US$ 400. With the dollar at  R$ 1,70, it will go for US$ 588 – up 47% terms of dollars.

No productivity, innovation or credit initiative can resolve this disequilibrium.

And that is not even to mention other currencies . The situation is even worse with respect to the Chinese yuan.

It is precisely this fact that explains why the invasion of Chinese products is taking over all links in the industrial value chain. from finished goods to components of comonents.

Yesterday, no less a figure than Jim O’Neill of Goldman Sachs, coiner of the term BRICs … warned of the dangers presented by an overly strong real. The risk of a bubble forming is a real one and is already underway. 

This fact was slow to dawn on the government, but there is still time to stop it..

There are considerable challenges ahead..

There are stopgap measures to implment, there are defensive measures to take with respect to Brazilian businesses, there are import taxes to raise for certain key import goods. These will only serve as an appetizer, however, if the exchange rate is not corrected..

Doing so may produce some inflationary pressure, but nothing that cannot be overcome through so-called prudential measures — restricting credit instead of raising the Selic rate, for instance.

O risco maior será a necessidade de controlar a inflação impondo achatamento nos preços dos combustíveis. Com a dependência de petróleo e o alinhamento dos preços internacionais, deveria haver uma correção nos preços dos combustíveis proporcional à desvalorização cambial. Certamente não haverá, prejudicando a capacidade financeira da Petrobras para enfrentar os desafios do pré-sal.

Justamente por não existirem saídas fáceis, mais do que nunca será fundamental a boa comunicação e, principalmente, a percepção de que o país precisará estar unido para enfrentar o tsunami.

Translation TK.