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Comment by leovonl | Hacker News Reader

Sorry, but this story gets nowhere near the real reasons for the inflation reduction.

The major and most important change on the Brazilian government to achieve this was the LRF - Lei da Responsabilidade Fiscal, "Fiscal Responsibility Law" in English (free translation).

With these law, federal, state and municipal governments, which added much more oversight and control to public spending, requiring budget increases to go through congress, forbidding "money printing" practices and also requiring detailed accounting records to be submitted to a branch of the judiciary (TCU) for approval.

I could go on and write a huge document here, there's a lot of historical questions involved too. If anyone is interested in more details please let me know.

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Yes there were policies that augmented the recovery but the article hits upon a key point: you need the people of a government to trust the government for it to succeed.

The entire economic system is based upon trust. Trust that you can pay back a debt, you can take out a loan, you will get paid and the money will hold its value, the government will honor and stand behind it currency. This trust is lost when a government defaults on its debt, which was the case in Brazil and much of South America.

The real created an illusion of trust by listing prices in a phantom currency.

To a certain extent I disagree. As long as you have to pay your taxes in the sovereign's currency, and failure to pay those taxes has real consequences, there will be demand for that currency...

In what way do you disagree?

Pretty much. What the URV system did was get rid of the "inertial" inflation that was left over after they finally managed to get the government accounts in order.

Public spending is never the underlying reason for hyper inflation. Usually there are other circumstances like supply problems. Money chasing too few resources. If resources and production kept up with money supply increase, then there would be no problem. Deficit spending is necessary if you want private sector to have savings.

For example, look at Japan. Central Bank tried for over 25 years to increase inflation without success. It's actually not very easy to do.

I agree. Most historical cases of hyperinflation had major structural/sytemic issues limiting production capacity relative to demand. Currency creation is only a problem relative to the capacity to produce.

If the government spends in excess and prints money to cover the costs, that means an increase in money supply. Which leads to inflation. Indeed, the spending alone would not be a problem if it was properly managed.

Just a correction: the TCU is a branch of the legislative (congress), not of the judiciary.

This is wrong. Actually, the LRF was only sanctioned in 2000, when inflation was already at 5.97% yearly.

The main factor behind reducing the inflation was not the URV hack, but the government's fulfilled commitment to markets to keep inflation low at all costs: through skyrocketing interest rates [around 25%], for instance (thus reducing credit -> reducing consumption -> reducing prices); or by binding it to the US Dollar and bankrupting many national industries.

I'll take you up on that offer - I'm interested!

If you have any pointers on English language material (books, news articles) regarding the subject, that'd be interesting as well!

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