Sunday, February 21

After continuing string of bad decisions Venezuela raises gasoline price 600%, devalues currency 60%.

Thirty years ago Venezuela had the highest per-capita income in Latin America.  But for the last 20 years or so the country's economy has been run into the ground by a socialist/(communist) government.  Each year that nation’s economic crisis has growing worse. 

In an open society that would be a clear signal that the leadership needed to change course.  But in the manner of all communist dictatorships, being a de-facto emperor means never having to admit to making a bad decision.

The astonishing low price of oil has hit all exporting nations (and oil-producing states in the U.S.) hard, but Venezuela--where oil accounts for 95 percent of the country’s export revenue--has been particularly hard-hit.  With oil prices around $30 per barrel, the country’s resources are draining fast.

Recently the country's socialist president, Nicholas Maduro, made a five-hour televised address to the country, in which he claimed the national oil company only took in $77 million for the central bank in January of this year--less than one-tenth of the $815 million earned in the same month last year--and down from $3 billion in January 2014.  Current oil revenue is less than 3 percent of what it was two years ago.

Between socialist economic mismanagement and "regular" totalitarian blunders the nation's GDP shrank 10 percent in 2015 and is forecast to fall by another 8 percent this year.

In response to this crisis, rather than loosen the iron grip of his party Maduro announced two actions:  He increased the price of gasoline sold inside Venezuela by 600 percent.  And he devalued the already hammered currency by 60 percent.

The fuel price increase will bring in an extra $800 million per year.  But Venezuela has $10 billion in maturing debt this year and a rapidly shrinking ability to meet those obligations. Inflation is expected to reach a staggering 720 percent this year. 

So why would any of this be relevant to you?  Couple of reasons.  First, the huge drop in oil revenue--which, again, used to be the source of 95% of the country's export earnings--makes it extremely unlikely that Venezuela will be able to avoid some flavor of social upheaval.  This is dangerous to other countries because one of the things dictatorial regimes reliably do when confronted with mutterings of revolution is to blame all the nation's problems on a foreign conspiracy.   Maduro and his cronies have already been doing this, blaming both the U.S. and neighboring Colombia for their economic problems.

Short answer:  This increases the probability of at least some flavor of war.

But a second lesson is likely of far greater significance to Americans:  Politicians rarely know much about economics, and socialists are worse than most.   One reason is that in their efforts to bribe the poor to support them, they promise huge "freebies" or subsidies to the poor and middle class, with virtually no thought as to the long-term costs and effects on the economic picture.  So now, when events throw a wrench into the nation's budget, the rulers aren't willing to take away these freebies--thus ensuring bankruptcy.

We have two such candidates running for president here, today:  Hillary and Sanders.  Both have promised the moon to their supporters.  Sanders has promised to make college "free" to anyone who wants it, and will more young people liking "free" Hillary is starting to tack leftward to counter Sanders.

Hard to imagine how this will play out if either Democrat is installed as president.


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