Wednesday, 19 September 2012

IPEA’s Economists: “Brazil’s property bubble will burst when interest rates rise” and “it’s all the government’s fault”

A study done by IPEA (Institute of Applied Economic Research), a Brazilian government agency says that there real evidence from the microeconomic and the macroeconomic point that there is a property bubble in Brazil. The property bubbly was created by an inflation of 165% for Rio de Janeiro and 135% for Sao Paulo, instead of the 25% estimated from 2008 to 2012. This too high inflation causes many dysfunctions in the economic system that will be soon departed through the whole economy of Brazil causing the bubbly burst. This is all because Brazilian government adapted an inflationary policy. It results to increase the cost of living, but this leads to a global interest rate at a record minimum level and this means that rates will inevitably increase, sooner or later. Then the research says that the true cost associated with the current tax will at that point appear leaving Brazil in an economic crisis. We could compare this financial crisis to the one that United Stated are in, but started in 2007-2008 due to too much credit for houses and apartment which results to an higher price of these. On the other hand, for the Brazilian Government it is a different situation than them because they don’t export as much as USA. Finally, once the property bubble will explodes it will leave the Government under hard circumstances. However we all know that they will still have the last word over the Brazilian population, leaving them with a fix for the problem they created by themselves because of a misjudgment of the budget of the nation.

Here is how they define their study:
“This article verifies the occurrence of a real estate bubble in the Brazilian economy. Overall, our results suggest the existence of a bubble in the real estate sector of the economy. The Austrian School of economics provides a solid explanation to this phenomenon, which are reinforced by statistical techniques, suggesting the Federal government, with equivocate fiscal and monetary policy, as the main responsible for the creation of this problem.”

Blog from; Posted September 18th

Alexis Poulin

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