The Age of Breakable Things

With Brexit around the corner, the potential for a Donald Trump presidency and a host of other global problems (big problems), it’s hard not to talk about all the chaos and what it might mean to investors even when there is lots of other things to go over. For now, this will be our last article on the subject of Brexit until next week following the vote. I will take a look at some other issues later in the week.

One thing that jumps out at me about “Brexit” is how fragile much of our world is. Progress is most often thought of as making things stronger or better, but that is only true to a point. Progress also has the unfortunate downside of making things much more fragile. The more progress allows us to do, the more fragile each step makes us.

Freedom Tower
Beautiful tall buildings like this remain a testament to our progress and how profoundly fragile it all is.

Historically that fragility can frequently be seen during times of war. Britain, undoubtedly the world’s most powerful empire at the outset of the first and second world war, saw how quickly its strengths could be overcome by the weaknesses of a far flung empire. The supply lines, the distant resources and the broad reach of the war all exposed the underlying frailty of the British Empire. Two World Wars was all it took to end an empire that had been 500 years in the making.

What we hold in common with the British Empire is the causal assumption that things are the way they are naturally, that we cannot change the inherent status quo in our lives. Canada, the United States and Europe are rich nations because they are naturally rich nations, and not the result of a combination luck, science, philosophy and culture that have conspired to land us where we are today.

https://twitter.com/Walker_Report/status/727159709912825856

We live in a breakable society, one that doesn’t realize how fragile it is. In the past few years it has been tested in a multitude of ways, and this year is no exception. Brexit isn’t even the worst of how it can be. Syria has been reduced to rubble, Turkey has essentially lapsed into a dictatorship, with Russia having gone the same way. Venezuela, which I wrote about earlier, has moved from breadlines to mob violence.

https://twitter.com/Walker_Report/status/744955054520700928

Progress isn’t just uneven, it also isn’t guaranteed. Nations, empires and great civilizations have all come and gone, each of them burning brightly, however briefly, before being extinguished. The speed of a decline in Venezuela isn’t just a result of bad management, it is a reflection to just how much support our civilization needs. The rise of the new introverted nationalism doesn’t see this, and has sought an imagined self sufficiency as a way to relieve temporary difficulties. If people thought that the EU was difficult to deal with when you were a part fo it, wait until you aren’t.

Capture

Brexit is a choice that is both scary and appealing because it is scary. For an entire generation there may never be a choice like this again, a chance to permanently alter the geopolitical landscape, even with little understanding of what those changes can mean or do. Whether Britain will be poorer or richer over the next decade may ultimately hinge on the vote this Friday. Far more frightening is whether our ability to build something lasting, powerful but fragile will be permanently undone in the European sphere.

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.

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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.