What a Real Economic Collapse Looks Like – The Slow Death of Venezuela

Hey, millennials, which socialist nation is about to implode? Did you guess Venezuela? Because its Venezuela.

Food Line
This is what a bread line looks like in the 21st Century.

For those less in the know about what is happening to Venezuela, the country is nearing a total economic collapse, brought about by a decade and a half of total mismanagement by an old-school socialist dictator entirely in keeping with the historical context of South America.

51fPoJuD0OL
The author of this book is completely serious. I mean it.

Once hailed as a hero by such famous radicals as author Tariq Ali and professional curmudgeon Naom Chomsky, Hugo Chavez was the ideal socialist leader for a number of people who would never have to live under his dictatorial reign. Chavez nationalized oil companies and provided extensive programs for Venezuela’s extensive poor. But more than a decade on, and three years following his death Venezuela’s luck has seemingly run out.

Chavez’s hand picked replacement, President Nicolás Maduro, has kept on with Chavez’s well established tradition of blaming all of his nation’s problems on the United States since he took office in 2013. But the reality is that Venezuela has been a victim of it’s own poor planning and it’s outcome entirely predictable.

Having made the cornerstone of it’s economy the export of oil, the nation has suffered greatly for three reasons. First, Dutch Disease, or the result of a rising value of a domestic currency as a result of selling an extensive natural resource. Put simply, nations that sell a lot of oil tend to have a petro-currency, which makes domestic manufacturing less competitive on the global stage.

Mideast Israel Palestinians
On Hugo Chavez, Chomsky said that “for the first time, the country is using…energy resources for its development…in construction and health.”

Second, cronyism; Chavez was old school in his commitment to creating a personality cult around him. Positioning himself as the savior of the poor he did many things to try and improve the lives (and earn the love) of Venezuela’s many impoverished people. But in the course of that he also removed anyone who might be his opposition. From the standpoint of the management of Venezuela’s oil reserves it has meant poor production and no new investment. Oil production fell 25% in the time Chavez ran the country.

Bloomber Venezuela

The last reason is of course the price of oil. As oil prices fell the fragility of the economic system made itself obvious. Today Venezuela is broke and the look of total economic collapse is depressing and scary. Inflation is out of control. Some estimates say inflation will hit 189% this year, while the IMF thinks it will be 720%. To fight the growing poverty, which is now 76% and up from 55% in 1998, the government has hiked the minimum wage by 30%; the twelfth such hike since President Nicolás Maduro took office. Real wages fell last year by 35% and their currency has lost over 90% of its value in two years.

Bolivar vs Dollar

The people of Venezuela now face a frightening prospect that any economic recovery will be decades away, and that the policies followed by their socialist government have made them an outlier from the largely positive trends that have been improving life across many developing nations. But this is not about hypothetical future problems, but current issues. There is no food in Venezuela, no toilet paper, no basic necessities and no prospect for reversing course. In January this year the government told people they would have to begin producing their own food, a follow-up from governments telling farmers that they would have to sell their food to the government at pre-determined prices.

Global Poverty
Global rates of poverty have collapsed and now sit at under 10%. Sadly this isn’t the case for Venezuela. (Read the article here)

Unsurprisingly, none of this bodes well for Venezuela’s population. Violence is a real potential and people are wondering when (or if) Maduro will step down, and whether a government change can occur without violence. So far he has resisted and despite the recent loss of congressional elections he still holds sway over the judiciary and economic appointments. In fact his current economic czar doesn’t believe in inflation. No really.

Archer mem

 

All this leads to some disquieting truths, most important of which is that economic realities catch up to everyone. Since the fall of the Soviet Union and the so called “End of History” there has been a growing warmness to socialism by a generation who has never experienced it. Venezuela is a good reminder that bad economic policies are always bad, and the economic challenges we all face, be it poverty, damaging wealth inequliaty, globalised manufacturing or predatory banking do not resolve themselves magically with a flip of the switch and friendly socialist rhetoric. Instead those problems must be solved within the system, not by destroying it.

Pay No Attention to the Bubble Behind the Curtain

Housing Bubble
From The Financial Post Magazine, Sept 15, 2015: “Canada’s Ever Growing Housing Bubble”

In the Wizard of Oz we were told that to enter the Emerald City, everyone had to wear green tinted glasses to “protect their eyes” from the “brightness and glory” when in fact it was the method by which the city itself was made to appear green. The first great illusion of the Wizard in the book. Canadian housing feels much like this. The worse the situation gets the more we are assured that the “brightness and glory” of the housing market is unassailable or simply not an issue, and we are invited to don our own emerald glasses.

Toronto LifeThe latest installment challenging that gilded view of housing and mortgages come from the November Toronto Life. Titled “Mortgage Slaves” it is a depressing look into the world of shadow banking and sub-prime mortgages here in Toronto, which far from popular belief is a lively and growing business. Private lenders and shadow lending can turn the reasonable prospect of paying a mortgage into a spiralling mess of debt. The family they interview took a moderate second mortgage for renovations, and promptly found themselves in financial trouble. Seeking help they refinanced several times with private lenders, moving their borrowing rate up from a reasonable rate of interest to 12%. Ten years on and they owed more money than they had paid for their house and were poised to have their home sold from under them.

FSR MFC LendingPossibly the most frightening thing is that Canadians borrow $10 billion a year for their down payments, meaning that the whole point of down payments is undone. And it is here that we see how problems arise. Housing has gone from being one of the most conservative practices to one of the most aggressive. Down payments are small, you still only need 5% to get a mortgage. The secondary banking business is growing, precisely in the area we don’t want with less credit worthy families. Housing prices are ballooning at rates far in excess of what would be deemed sustainable. The CMHC, the people insuring many of the mortgages and who will be on the hook for significant defaults, also believes that the housing market is vulnerable to a correction.

Home prices adjusted for inflationThe response from political parties during the last election isn’t just underwhelming to these problems, it was counter productive. Harper had promised to raise the maximum you could borrow from your RRSP for the First Time Home Buyers Plan. Trudeau’s plan was arguably worse, allowing you to dip more than once into your RRSP. The best plan was from the NDP to cut taxes to build more rental units.

The IMF, the Bank of Canada, the CMHC and The Economist all believe that our housing market is over valued. The response from banks, private lenders and politicians is to shrug and tell us not to worry. There is complicity from home owners and realtors, who are enjoying seeing the rising home valuations and the flurry of activity that it brings. Economists don’t worry because despite the high level of debt, Canadians don’t owe all that debt at once but over decades. So what’s the concern?

Economist HousingBut it should not take a MENSA level intellect to determine that nothing good can come from growth in the continued drop in quality of the banking system or in the quality of debt on issue. Politicians and citizens have to face a reality that high house prices are only good too a point, and that taming the housing market will pay greater dividends than the eventual fall disinterested parties are predicting. But most importantly, young Canadians should know that buying a house at any cost does not define financial success. But it could spell financial failure.