Brazil’s Rousseff Concerned About Loose Monetary Policy, Essay Example

Summary

This article describes a meeting between U.S. President Obama and Brazilian President Dilma Rousseff. Brazilian President Dilma Rousseff has complained to the U.S. President Barack Obama that loose monetary supplies in industrialized nations including the U.S. have been harming developing countries like Brazil. She has also suggested that U.S. and European countries should stop over-relying on low interest rates which also keep the currency values low and give developed countries an unfair advantage against developing nations. Ms. Rousseff has also complained the policy actions by the industrialized nations have been encouraging speculative activity in countries like Brazil where investors are going in search of higher returns. As a result, Brazilian government is trying to prevent economic overheating without hurting future growth (Lee).

Theory: Monetary Policy

Monetary policy refers to policies by the central bank aimed at controlling the size and rate of growth of money supply. When money supply increases, the value of domestic currency declines and interest rates also fall. This helps increase borrowing and spending activities by both the businesses and the consumers because it is cheaper to obtain funds. But there is also a risk of inflation as more money starts chasing the supply of goods and services.

How is the theory being presented?

Low U.S. dollar value has also made U.S. exports cheaper for foreign customers including Brazilians.  Moreover, Brazil’s exports are now more expensive for Americans, thus, Brazil’s trade of balance with America is deteriorating.

How is it impacting the situation?

Expansionary monetary policy is helping keeping U.S. Dollar’s value lower against the international currencies. This makes U.S. products cheaper for international customers and increase foreign demand for U.S. products. Lower dollar value also means foreign products become more expensive for Americans who respond by decreasing their demand. Thus, expansionary monetary policy is helping the U.S. improve its trade of balance. Brazilian producers are hurting due to lower demand from abroad as a result of appreciated value of Brazilian currency.

How is it working/not working? How does the theory help to explain what is going on?

The low currency value is helping U.S. and other industrialized nations improve their trade of balance with trading partners through higher exports and lower imports. But it is also negatively affecting developing nations whose exports are becoming more expensive for foreigners to buy. This is why developing countries like Brazil have been facing low economic growth rates recently.

What are the future implications of the theory in application?

It is also possible that developing countries may try to depreciate their currency but they will also have to make sure they don’t trigger too much inflation in the process.

Theory: Fiscal Policy

Fiscal policy refers to government’s collection of revenues and spending policies aimed at influencing the economy. One way to increase aggregate demand is through low interest rates. When interest rates are lower, it becomes cheaper for businesses and individual citizens to borrow. Businesses undertake more capital investments and expand their production. They also hire more workers to meet the excess labor needs. High employment level also helps increase the aggregate demand because there are now more people with income. Individual customers realize that it is now cheaper to borrow funds. Thus, they also respond by borrowing more to fund their consumption lifestyle.

How is the theory being presented?

The U.S. Fed is keeping interest rates lower to encourage consumption that may help the economy recover and/or grow. As a result, investors are targeting countries where interest rates may be high which in this case includes Brazil. As a result of investors’ demand, the borrowing is becoming more expensive for businesses in Brazil and the economic growth is slowing down.

How is it impacting the situation?

The low interest rate in the U.S. and other industrialized nations are helping these countries to recover from the financial crisis thought the progress has been slower in some European countries due to the debt crisis. The near-zero interest rate in the U.S. is making it cheaper for businesses to borrow and they are increasing their investment as well as hiring activities. Hiring activities are helping the U.S. lower unemployment rate and more people in the workforce means higher aggregate spending by the consumers. In addition, the consumer confidence also gets boost and optimistic future expectations also encourage spending. Low interest rates in the industrialized countries are driving investors to emerging economies like Brazil in search of higher interest rates. This not only puts upward pressure on interest rates in Brazil but may also damage future growth by making it expensive for Brazilian businesses to borrow.

How is it working/not working? How does the theory help to explain what is going on?

Even though low interest rates and depreciated value are helping U.S. recover from the financial crisis, the policies in industrialized nations are having unintended effects on developing nations. The reason the policies are working better in the U.S. as compared to some European countries is because U.S. debt situation, though of concern, is not as worse as it is in some other countries like Greece and Spain. At a time when Euro-Zone future is in doubt, European Union has no choice but to keep interest rates lower because otherwise the situation would have been even worse.

What are the future implications of the theory in application?

The low interest rates option is not entirely risk-free because if money supply grows too fast or demand exceeds supply, there is a serious possibility of inflation going out-of-control. Thus, the Fed will continue to monitor the situation and if it foresees a serious threat of inflation, it may raise interest rates to make borrowing more expensive and discourage spending and investment activities to some extent. Keeping interest rates too long is also harmful as the Fed’s actions during the early 2000 demonstrate. Too much access to money also leads to speculation and risk-taking.

 Personal Reflection

Developing nations like Brazil have legitimate concerns but every country has to take care of its own problems first. Developed nations like U.S. and many in Europe have suffered more than emerging economies like Brazil, India, and China, thus, it’s understandable why they are trying to boost consumption and spending activities. Their policies are having undesirable impact on developing nations but the developed nations have little choice now. They have to keep interest rates low so that the commercial activities grow and more workers are hired in order to bring the unemployment levels down.

Reference

Lee, Carol. Brazil’s Rousseff Concerned About Loose Monetary Policy. 9 April 2012. 28 April 2012 <http://online.wsj.com/article/BT-CO-20120409-709564.html>.