O’Neill Says Brazil Criticism of QE3 No Fix for Economic Woes

Goldman Sachs Asset Management Chairman Jim O'Neill
Goldman Sachs Asset Management Chairman Jim O'Neill said blaming the Fed is “frequently an excuse to distract attention from the contradictions of monetary and fiscal policy in Brazil.” Photographer: Simon Dawson/Bloomberg

Jim O’Neill, the economist who bound Brazil to Russia, India and China to form the BRIC investing strategy, has some advice for Latin America’s biggest economy: Stop criticizing Federal Reserve efforts to revive the U.S. and do more to fix your own problems.

Blaming the Fed is “frequently an excuse to distract attention from the contradictions of monetary and fiscal policy in Brazil,” O’Neill, chairman of Goldman Sachs Asset Management, said in a telephone interview from London. The U.S. is the world’s biggest economy, and “if the Fed does something which is going to reduce the scale of the recession or boost the economy, that is really important for every other country, end of story.”

The Fed’s latest stimulus package dominated this month’s International Monetary Fund meetings in Tokyo, with policy makers from the Philippines to China warning that yield-seeking investors will flood emerging markets with capital. Chairman Ben S. Bernanke used the talks to rebut those arguments after Brazilian President Dilma Rousseff at the United Nations last month slammed rich nations for “fraudulent” protectionism.

Bureaucratic bottlenecks and inefficient tax and judicial systems have left Latin America’s top economy less competitive than Bangladesh and Uganda, according to the World Bank. While Rousseff has lowered interest rates that are still among the highest in the world and taken steps to improve poor infrastructure, she’s raising tariffs to protect local industry even as she accuses the U.S. of “trade manipulation.”

‘Selfish’ Fed

The Fed last month announced a third round of quantitative easing, or QE3, saying it intends to buy $40 billion of mortgage debt a month until the labor market shows sustained improvement. It also expects to keep the federal funds rate near zero at least through mid-2015.

Brazil’s Finance Minister Guido Mantega repeated in Tokyo that QE3 threatens to reignite a “currency war,” the phrase he coined back in 2010 during a previous round of stimulus, as nations competitively devalue their currencies to boost exports.

“It is a selfish policy that weakens the efforts for concerted action,” Mantega told officials on Oct. 12, adding that Brazil “will take whatever measures it deems necessary to avoid the detrimental effects of these spillovers.”

Brazilian officials want to avoid a repeat of 2011, when capital inflows doubled and the currency rose to a 12-year high even as they raised taxes on foreign investment and stepped up dollar purchases.

‘Diplomatic Rhetoric’

Such concerns may be misplaced this time, said former Brazilian central bank President Gustavo Franco. Unlike the previous Fed stimulus in 2010, when Brazil’s economy expanded a decades-best 7.5 percent, growth this year is forecast by the central bank to reach 1.6 percent. Globally, the outlook has also dimmed with Europe’s debt crisis dragging into its fourth year and China’s economy in the third quarter growing at the slowest pace since March 2009. The IMF this month reduced to 3.3 percent from 3.5 percent its estimate for world growth in 2012.

Rousseff and Mantega’s criticisms of the Fed are a “tool of diplomatic rhetoric” that don’t reflect the economic reality, said Franco, who served as monetary chief under former President Fernando Henrique Cardoso of the opposition Social Democracy Party.

Press officials for Rousseff and Mantega declined to comment.

With controls on inflows still in place, the real has weakened 24 percent since July 2011 and is little changed since QE3 was announced. Trade Minister Fernando Pimentel said Oct. 18 that the government wants to keep the currency stable at its current 2 reais per dollar rate so exports stay competitive amid the U.S.-led “monetary tsunami.”


“It’s a shame because it draws their attention away from doing other more important things, such as tax reform and other measures that could improve competitiveness,” Franco, who is also the founder of asset manager Rio Bravo Investimentos, said in a phone interview from Rio de Janeiro.

O’Neill said Rousseff’s recent moves to lower borrowing costs and shift to private investors the burden for developing the country’s infrastructure were steps in the right direction. The central bank has reduced interest rates 525 basis points since August 2011, more than any other Group of 20 nation, to a record 7.25 percent.

Still, Brazil’s benchmark rate is the highest in the G-20 after Russia and India, making it a magnet for investors borrowing at near-zero rates in the U.S., Europe and Japan. At the same time a surge in public spending and loans by state banks to propel growth are adding to inflation that’s running above the government’s 4.5 percent target since September 2010, limiting the room for further rate cuts.

Brazilian Protectionism

Another distortion is Brazil’s own protectionist push, which relieves pressure on manufacturers to become more competitive. Last month, the government raised tariffs on hundreds of goods ranging from petrochemicals to steel, drawing a complaint from U.S. Trade Representative Ron Kirk. Mantega responded that “the U.S. has adopted many more protectionist measures than Brazil,” and that one of QE3’s goals is to “increase American exports.”

At the IMF meetings, Bernanke tried to refute arguments that it was U.S. monetary policy that was undermining competitiveness in the developing world.

“It is not at all clear that accommodative policies in advanced economies impose net costs on emerging-market economies,” Bernanke said. “Monetary easing that supports the recovery in the advanced economies should stimulate trade and boost growth in emerging market economies as well.”

Exports Down

One reason for Brazil’s irritation with U.S. monetary policy is the poor performance of its exports to the world’s largest economy.

Trade between Brazil and the U.S. has swung from a $1 billion goods surplus in favor of Brazil in 2007 to a deficit that last year reached $11.5 billion, according to U.S. Commerce Department data. Brazil and the U.K. were the only nations among the top 15 U.S. trade partners to see their trade advantage reverse over that timeframe.

Brazil ranked 126th out of 183 nations in the World Bank’s 2012 study of competitiveness, trailing Bangladesh at 122nd and Uganda at 123rd for the ease of doing business.

Brazilian officials aren’t the only ones who have criticized QE3.

China Vice Foreign Minister Cui Tiankai told reporters in Brussels on Oct. 16 that the policy is adding to commodity price uncertainty, financial market instability and inflationary pressures in developing markets, echoing concerns expressed in Tokyo by People’s Bank of China Deputy Governor Yi Gang.

Collateral Damage

“We remain concerned about the collateral consequences such actions may cause, such as volatile capital flows, erratic exchange rate and asset price movements, commodity price surges, and the associated complications for macroeconomic management in other countries,” Yi said in an Oct. 13 statement.

IMF Managing Director Christine Lagarde said monetary easing is likely to cause large and volatile flows that could lead to “overheating, asset-price bubbles and the build-up of financial imbalances” in emerging economies, even as she applauded Fed efforts to boost growth.

Still, Mantega “is the only one who seems, at the moment, to be talking so repeatedly,” O’Neill said. “I don’t have a lot of sympathy because it doesn’t seem to make a lot of sense.”

QE3 has its American critics too. Republican presidential candidate Mitt Romney said that the Fed policy of “printing more money” isn’t getting the economy back on track and could stoke faster inflation. He’s called for replacing Bernanke when the chairman’s term expires in January 2014.

‘Just Stop’

Despite two completed rounds of quantitative easing, the U.S. unemployment rate has remained above 7.5 percent since January 2009, while growth slowed to an annual pace of 1.3 percent in the second quarter from 2 percent in the first three months.

The Fed has “been very unsuccessful in stimulating the economy in this process, and they should just stop it,” David Kelly, chief global strategist at JPMorgan Funds in New York, said in a phone interview.

Brazil’s warnings aside, policy makers should be cheering on the Fed because of it has the capacity to revive the global economy, said Franco. At $15.1 trillion, the U.S. economy is about 12 percent larger than all the BRICs combined, World Bank data shows.

“The quantitative easing policies by the United States have been positive for Brazil because they have prevented the United States from falling into a deep depression,” Franco said. “That’s positive for the world.”

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