A recent story about the increased credit lines at BNDES (Brazil’s development bank) highlighted an issue dear to us: government spending. There have been many other initiatives that translate into increased spending, and one is reminded that this is an election year. The temptation to focus on the primary fiscal surplus and on the (potentially) positive short-term effects could, for the less skeptic, hide the long-term dangers of this growing spending binge. We highlight a couple of excerpts on this subject from our recent reports and this post with Charlie Munger’s parable about squandering away the wealth of a nation (complete with a link to Buffett’s Thriftsville vs. Squanderville classic piece).
- Memos From the Chairman, the book from which we’re taking the following quote, should be mandatory reading for everyone – but especially for government officials. One phrase that seems especially applicable: “When mortals go through a prosperous time period, it seems to be human nature for expenses to balloon.”
- In this post about our Q4 2009 report, we highlight the risk of extending to 2010 the mood seen in 2009 in the brazilian equity markets. One of the reasons to be careful was the election year.
- From our Q3 2009 report:
“There is no doubt that the decrease in interest rates, the outlook for the pre-salt oil and the benefits of Brazil’s growing role in the globalized world have been contributing positively and should continue that way. But two factors concern us: the State’s hypertrophy and prices. Stock prices in general reached a reasonable level for a scenario of harmonious growth. But political trends seem to drive us away from harmony.
The continuous increase in the State’s size compared with the economy as a whole is mathematically unsustainable. In our opinion, this is unsustainable and tends to generate a serious cost if not reversed. Also, its effects are delayed given the inertness of economic mechanisms. We will only feel the consequences of what is being made in a few years.
We have been studying the health sector globally and an analogy is clear: governments are like the immune system. They are central to life, defending the organism from predators and incompatible elements. When they are uncontrolled and exaggerate, such as autoimmune diseases, they attack healthy cells and organs, leading the organism to death if they are not controlled. In our opinion, many countries are suffering from autoimmune diseases.”
Tags: governmentspending, riskmanagement
