Currencies: Stop Passing the Buck

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Last March the Brazilian government launched a bold attack on a 255% annual inflation rate by freezing prices, raising wages and creating a new currency unit, the cruzado, which was officially pegged at 13.8 to the U.S. dollar. Now the government's war is taking a new turn. Brazilian federal police have conducted dozens of raids across the country aimed at shrinking a rapidly growing black market in U.S. currency. The widespread illegal activity seemed to indicate rising fears among the citizenry that President Jose Sarney's well-publicized anti-inflation campaign might be running out of steam.

Dollars have long served as an inflation hedge in Brazil in bad times. The irony was that they now seemed to be serving that purpose in good times. The government's recent policies beat inflation back to a 1.2% monthly rate in July, and wage increases gave consumers the wherewithal for a huge spending binge. But the buying spate has created shortages -- at official prices -- of such items as automobiles, meat and eggs, leading merchants to ask for under- the-table sweeteners, meaning renewed price pressure. When the raids were launched, illicit greenbacks were selling in Brazil for 88% more than the legal rate, or nearly 26 to the dollar. That was the highest unofficial premium in 33 years.