Brazil and Interest Rates and FUN!

Today I had class with a banker. His office was 16 flights up, and the elevator was down (see that word play?) Anyways, I get up, tired, panting, and then had a fascinating class where he finally illuminated me on all the Brazilian fiscal policy and it's effect on their consumerism. Now, I don't have any classical knowledge of finance, only personal curiosity. However, I find it in interesting case. Brazil has been growing at a 5% GDP rate like clockwork for years, re-opening the joke "Brazil is always the country of the future." Brazil also has had many bouts with out-of-control inflation in the past. They also have a population that appears to me to be completely ready to buy their fridges, microwaves, cars, etc. This is all very much like China, however, obviously unlike China their economy is not as centrally planned.

The interest rate in Brazil is 8.75%. I asked if this was the bank lending rate or consumer lending rate and I didn't understand what he said, but it wouldn't really matter anyway as I'll get into. So, 8.75 is really high. By the end of the year, he said that it would likely be pushed up to 10%. The main and overriding concern of Brazil's central bank is inflation, as it should be. In fact, the whole country takes it's cues from the inflation rate rather than GDP growth. Workers unions, for instance, have inflation adjusted pay. If they predict 4% inflation, that's what their pay will be adjusted. However, if it turns out it was 6%, they will strike until their pay is fixed.

Anyways, the strange thing isn't really high inflation, that was expected. But the consumer habits in Brazil are quite odd. When I first arrived I was always thrown off by the pay-by-installment plans that were used for almost every item. I looked at shoes and thought R$50 sounds reasonable until you realize it's 50x4. Almost everything is financed, toasters, microwaves, etc. So, many stores are making most profit off of the interest.

The peculiar thing is that the interest rates they are selling these at is huge. I was told it was often at 30%. But, when you have the poor and middle class peoples who want these things: home appliances, electronics, etc. but can't afford them, they go into the store and the salesman make a deal. 'Okay, what can you pay? $20/mo? You pay $20/mo for 72 months and you have yourself a TV." Absurd right? Again, it was explained, that the worst part is that many people are not even aware of the interest rate, they have no idea they are paying 30% on the installments because of 2 factors: 1) Lack of consumer knowledge 2) There didn't really seem to be effective consumer protection laws.

And it's especially worth noting that electronics and many things are much more expensive in Brazil. So adding in the interest rates, on top of the high cost, they are paying so much more for a microwave. Microwaves are like $20 in the US. And mainly, what I couldn't understand is why then paying by credit card would not be more popular, as you could pay it up front and only be paying 13% on the month. And it seemed to me that he was implying it was easier. For the lower classes with little education, they don't understand interest rates, credit cards, etc, but they do understand someone saying that if they pay him $5 a month they can take home the toaster now.

Ultimately, I find it odd that there wouldn't be a greater movement for consumer education. They would have so much more purchasing power if they weren't continually paying for dozens of months at a huge interest rate. But, I suppose I have to wonder if the government even cares, as they already need to restrict this as seen by 10% interest rates, and this lets them do it by merely burdening the poorest classes. Always an easy option.

But it's always worth stepping back and realizing that was a lost decade for much of the western world has been the best of times in the developing world. All of this growth and this, before Brazil has even really begun production of their oil fields.

Also, write in my damn comment box. And, correct me if i'm wrong on things.