From real to virtual... then back to real

[gene]

http://www.npr.org/blogs/money/2010/10/04/130329523/how-fake-money-saved-brazil

How Fake Money Saved Brazil

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.

Perception is key.

[chaord]

Interesting story! We just need to trick people into using bitcoin.  Ironically, unlike the federal reserve system, ticking savers into using bitcoin is actually a good way for them to preserve their purchasing power, rather than erode it.

[caveden]

Perception might have some importance, but holding back the printers is what really counts.
After Real adoption, they stop expanding the monetary base so crazily as before. Taxes raised a lot and government had to sell some stuff in order to keep the budget.

[caveden]

For you to have an idea, from January 1980 to June 1994 (last month before Real), the Brazilian monetary base expanded 2.303.797.693.883%. That's an average of 518% per year.
On the other hand, from July 1994 until April 2009, almost the same period, the monetary base expanded "only" 1.938%.

That's what actually "saved" Brazil, not a terminology trick.

Source: http://tinyurl.com/6jdvruq
He uses official data.

[ptd]

http://www.npr.org/blogs/money/2010/10/04/130329523/how-fake-money-saved-brazil

How Fake Money Saved Brazil

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.

Perception is key.

It is. In this case, they just switched to something that actually had real value and the market, in its infinite wisdom, agreed. It wasn't an illusion, it was real.

[grondilu]

I don't understand how this was a "trick".

The URV was actually displayed in all grocery stores, right ?

So to me this money was not that virtual.  Basically it was existing via these marks that were put on products.  They had to come up to consistent numbers, and the cruseiro was only used as an intermediary.

It's great story anyway.  I had no idea this was how the real was introduced in Brasil.

Notice that in some way this is how the ancester of Euro, the Ecu, was introduced too.

[gigitrix]

Fascinating stuff. So this is how you approach an existing system and supplant it with a new currency.

[caveden]

You don't need an intermediary step to change a country's official currency. Brazil changed currencies many times... I remember at least 2 before the Real, and I was a kid at the time. Every time the numbers were getting too high, they would just divide everything by 1.000...

I think this intermediary step of URV was needed to handle state debt. I'm not sure, but I think state debt was attached to the country's currency, which was hyperinflationary. If that was the case, the interest rates needed to be huge. If they just stopped printing in order to control inflation, they would end up with unpayable debt bounds and would need to default. I guess they used the URV in order to switch the debt to this stabler unity, making interest rates lower. Then, after all debt has been rolled-out in new bounds attached to the URV instead of the Cruzeiro, it was ok to make the URV the new currency and decelerate the printers.

[dwdollar]

I don't believe this is anything new.  Bankers have been pulling this trick for centuries.  What's more disturbing is NPR writing a story on it.  Is it time to expand the role of the SDR?