Tuesday, October 5, 2010

A Real Printing Problem

from NPR:
by Chana Joffe-Walt

This is a story about how an economist and his buddies tricked the people of Brazil into saving the country from rampant inflation. They had a crazy, unlikely plan, and it worked.

Twenty years ago, Brazil's inflation rate hit 80 percent per month. At that rate, if eggs cost $1 one day, they'll cost $2 a month later. If it keeps up for a year, they'll cost $1,000.

In practice, this meant stores had to change their prices every day. The guy in the grocery store would walk the aisles putting new price stickers on the food. Shoppers would run ahead of him, so they could buy their food at the previous day’s price.

The problem went back to the 1950s, when the government printed money to build a new capital in Brasilia. By the 1980s, the inflation pattern was in place.

It went something like this:

1. New President comes in with a new plan.
2. President freezes prices and/or bank accounts.
3. President fails.
4. President gets voted out or impeached.
5. Repeat.

The plans succeeded at only one thing: Convincing every Brazilian the government was helpless to control inflation.

There was one more option that no one knew about. It was dreamed up by four guys at the Catholic University in Rio. The only reason they enter the picture now — or ever — is because in 1992, there happened to be a new finance minister who knew nothing about economics. So the minister called Edmar Bacha, the economist who is the hero of our story.

Listen to the story HERE.

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