Economic cycles marked by booms and busts, often exacerbated by easy credit, can lead to significant turmoil. Central banks, in their attempts to stabilize these cycles, frequently end up enlarging the extremes rather than smoothing them. A recent wave of instances highlights this tendency.
One prominent example in recent history is China’s excessive concrete usage. By injecting credit to boost construction, the country has managed to mix and distribute staggering quantities of concrete across its landscapes.
Between 2011 and 2014, China utilized 6.6 gigatons of cement. While the exact measure of a gigaton might be elusive, it undoubtedly represents an unfathomable weight. Comparatively, the United States consumed only 4.5 gigatons of cement over the span of the last century.
What could possibly drive an entire nation to such extremes? The answer lies in misguided stimulus policies that have pushed economic activity into absurd territory. This overinvestment and overcapacity will require a lengthy and painful adjustment period to align with the actual economy.
All this construction needed raw materials, which led nations and communities to adapt their ways of life to accommodate the demands of China’s monumental building frenzy. As the tide turns from boom to bust, the repercussions of this shift are starting to surface.
No Miracle Option for Brazil
Turning our attention to Brazil reveals a significantly distressing scenario. Earlier this month, Standard and Poor’s downgraded Brazil’s credit rating from investment grade to junk status.
Brazil’s rapid economic expansion over the past decade largely hinged on commodity exports to China, its largest trading partner. Unfortunately, instead of utilizing the windfall to reduce debt, the government opted for imprudent spending. Now, with plummeting commodity prices and dwindling exports to China, the fiscal deficit has widened alarmingly.
The ramifications are wreaking havoc on Brazil’s currency. Recently, the Brazilian real fell to its lowest point since its inception in 1994, trading as low as 4.0667 to the dollar, representing a staggering 35 percent depreciation against the dollar this year.
As the currency loses value, inflation spikes. Currently, Brazil experiences an inflation rate of 9.6 percent while its economy contracts, leaving little room for effective monetary policy interventions.
The classical approach of reducing interest rates to stimulate demand would only exacerbate inflation further. Brazil, therefore, faces the need for drastic cuts in deficit spending, which would likely intensify the economic contraction, or it must experience a miraculous rebound in commodity prices and renewed demand from China—an improbable solution.
However, Brazil has discovered a unique avenue amid its economic struggles…
Brazilian Model for Wealth and Prosperity
Remarkably, the swift depreciation of the real has fostered an unexpected economic boom. Rather than focusing on mining and exporting commodities, Brazil has turned to a new sector: cosmetic surgery. Procedures like Brazilian butt lifts and tummy tucks have become lucrative as international visitors seize the opportunity to take advantage of favorable exchange rates.
According to Bloomberg, “From buttocks enhancement to wrinkle reduction, Brazilian cosmetic surgery presents a bargain for visitors amid the collapse of the real.” Medical tourism is on the rise, creating a rare silver lining in a country grappling with its most severe recession in nearly a century, along with a political crisis.
Gomes, a teacher from Dallas, says she is among many medical tourists capitalizing on these discounts. For example, a $500 skin treatment in Dallas costs a mere $25 in Brazil. Her upcoming visit will mark her third trip this year for beauty procedures, leading to substantial savings.
Such deals appear almost too good to be true—who wouldn’t want a 90 percent discount?
Yet, history does not show any nation achieving wealth through cosmetic surgery alone. It’s improbable that Brazil will manage to grow its economy sufficiently through body enhancements to overcome its substantial deficits.
Real economic recovery will require more than just medical tourism; it demands diligent work and prudent financial management. Pumping demand with cheap credit simply won’t suffice.
Ultimately, what Brazil needs are savings, investment, hard work, and tenacity. Unfortunately, in the face of central banking policies, even a modest nest egg can be eroded faster than one can imagine.
Sincerely,
MN Gordon
for Economic Prism
Return from Brazilian Model for Wealth and Prosperity to Economic Prism
