Dear Venezuela: I really, really wish I knew how to quit you

Venezuela was the first country that I visited after coming to America.  It has been a long association with that country, which has been nothing but a poster-child for oil as a resource curse.  With the price of oil in a free fall of sorts, I was sure the news about Venezuela would not be pretty; after all, "Venezuela needs oil prices to hit $111 a barrel just to break even" and oil is trading at less than $30!

The Wall Street Journal opens its report with this:

The plunge in the price of oil is causing more investors to bet that Venezuela will default on its $120 billion pile of foreign debt, an event that would trigger a messy battle over the country’s oil shipments and deepen its economic and political crisis.

When pretty much all the oil-export revenue will go to serving the debt obligations, it leaves little for anything else:

The government owes more than $50 billion to private companies that service its economy, ranging from oil contractors and airlines to supermarkets that need dollars to import everything from flour to toilet paper. Major airlines have halted flights to the country and auto manufacturers and others have shut plants after the government was unable to pay for imports of needed parts and materials.

Oil prices are not projected to go up anytime soon.  So, more misery for the people in Venezuela.

Venezuela’s consumer inflation, already the world’s highest, will more than double this year to a level above all estimates from economists surveyed by Bloomberg, the International Monetary Fund said.
Inflation will surge to 720 percent in 2016 from 275 percent last year, according to a note published by the IMF’s Western Hemisphere Director, Alejandro Werner.

720 percent?

Venezuela’s economy will shrink 8 percent this year following a 10 percent contraction last year, according to the IMF. 

WTF!

When economic conditions worsen, then what happens to stuff that people need?  Remember this post from last April about the shortage of toilet-paper thanks to the screwed up "socialism" of Hugo Chavez and his anointed successor?

The situation has worsened, to say the least, since last April.

It’s also having a serious impact on the sex lives and health of many Venezuelans.

How so, you ask?

Contraceptives, including birth control pills and condoms, are also on the growing list of hard-to-get items. Only one-tenth of the normal volume of contraceptives used by Venezuelans was available last year, El Pais reported earlier this month, citing the head of the country's pharmaceutical federation. 

No milk. No toilet paper. No contraceptives.  Hmmm, can it get any worse?

Experts have been warning of the potentially devastating consequences of the contraceptive shortage in a country that already has one of the highest rates of HIV infection and teenage pregnancy in the region. ...Venezuela's economic crisis could turn into a health disaster.

Oh my!  Add to this the Zika virus too.

How awful!

Dear Venezuela: "I wish I knew how to quit you"

In a national survey, the pollster Consultores 21 found 30% of Venezuelans eating two or fewer meals a day during the second quarter of this year, up from 20% in the first quarter. Around 70% of people in the study also said they had stopped buying some basic food item because it had become unavailable or too expensive.

That is in Venezuela, not in some stereotypical sub-Saharan African country ravaged by decades of civil war after gaining independence from the colonial White supremacists!

I am not even from Venezuela and I get worked up reading such news--all because it was the first ever country that I visited after leaving India and making myself at home here in these United States.  In many posts, the last one in April, I have written about my intellectual and personal experiences in Venezuela, and about my utter disappointment with the recent developments.  I suppose for my own health, I should cease my relationships with countries and people; but then, to quote that wonderful line from Brokeback Mountain, "I wish I knew how to quit you."  Thus, here I am reading up and blogging about Venezuela!

Food-supply problems in Venezuela underscore the increasingly precarious situation for Mr. Maduro’s socialist government, which according to the latest poll by Datanálisis is preferred by less than 20% of voters ahead of Dec. 6 parliamentary elections. The critical situation threatens to plunge South America’s largest oil exporter into a wave of civil unrest reminiscent of last year’s nationwide demonstrations seeking Mr. Maduro’s ouster.

Even as I read that, I recalled a colleague rambling on and on a few years ago about how Hugo Chavez--Maduro's predecessor and mentor--was the best thing that ever happened to Latin America.  "He is not any dictator like how he is presented here" she--an uber-left White American academic--argued.  I suppose every sociopath has his defender!

Caption at the source:
A woman holds up a giant hundred Bolivar note with the word, “Hungry” written on it in Spanish during a gathering to protest the government of President Nicolas Maduro, as well as economic insecurity and shortages, in Caracas, Venezuela, August 8, 2015.

The messed-up Chavez policies that Maduro has continued with were underwritten by high oil prices, which have fallen way down from their triple-digit highs.

A year ago, the international price per barrel of oil was about $103. By Monday, the price was about $42, roughly 6 percent lower than on Friday.

Indications are that the oil prices will not bounce back up any time soon.

David L. Goldwyn, who was the State Department special envoy and coordinator for international energy affairs in the first Obama administration, said that if the Brent global oil benchmark price stays below $45 a barrel, that is “a red flag for stability issues across the oil producing world.”
“The hemorrhaging of government budgets reliant on oil will force dramatic cuts in spending or dangerous increases in borrowing, if not both,” Mr. Goldwyn said. “The countries without significant foreign exchange reserves are most at risk, and they include Nigeria, Angola, Algeria, Venezuela and Iraq."

So, what is Venezuela doing?  Adding more zeroes to its currency in order to counter hyperinflation! 

Many Venezuelans have to carry wads of cash in bags instead of wallets as soaring inflation and a declining currency increase the number of bills needed for everyday purchases. The situation is set to get worse. Inflation, already the fastest in the world, could end the year at 150 percent, said the official.

Larger denominations will help those people from having to carry bags of cash to buy bread and milk!

The new notes -- of 500 and possibly 1,000 bolivars -- are expected to be released sometime after congressional elections are held on Dec. 6, said a senior government official who isn’t authorized to talk about the plans publicly.

When oil prices were high, Venezuela's Chavez sent highly subsidized oil across the waters to his pal, Castro.  What an irony that the Castro brothers have all but ditched their socialist rhetoric and now want to make friends with the US, while Venezuela is adrift in a hyperinflationary socialist mess where supermarket shelves are bare.  

Ben Bernanke caused the Arab "cereal" revolutions?

Yes, our Federal Reserve's Bernanke.  No, he doesn't command over a military, and no he doesn't really print money.  So, what is the link you ask?

Step back for a second.  Back in October, I blogged about the aggressive approach that Uncle Ben was taking, and quoted Martin Wolf of the Financial Times, who explained how the global "economic" war was being fought:

To put it crudely, the US wants to inflate the rest of the world, while the latter is trying to deflate the US. The US must win, since it has infinite ammunition: there is no limit to the dollars the Federal Reserve can create. What needs to be discussed is the terms of the world’s surrender: the needed changes in nominal exchange rates and domestic policies around the world.

I liked his phrasing of "no limit to the dollars the Federal Reserve can create" for the powerful simplicity.  Inflation in the rest of the world--particularly in all those countries like India and China and the rest where economies were growing.  Inflation then would show up in various commodity prices, and food in particular.

And, boy, did food price inflation happen!  For instance, India's coalition government was all shook up when onion prices zoomed faster and higher than the rockets its space agency launched. More from Derek Thompson:

Dramatic inflation in corn, wheat and other agricultural products is feeding discontent throughout the Middle East, where families spend up to 40% of their income on food. When you glance at how the average Egyptian spends his money, you understand why food inflation can traumatize a country.

But what the heck does U.S. monetary policy have do with the price of wheat in Egypt? Remember that Bernanke's policy of "quantitative easing" aimed to stimulate the U.S. economy by printing trillions of dollars to encourage lending and spending. Easy money seems to have driven up equity prices (look at the stock market), but it might also have encouraged banks to plow their liquid cash into commodities -- like petroleum, copper, and wheat.

Of course, Bernanke doesn't think so.  He has been making the rounds defending his policies and offering  counterarguments to his critics.  I am thinking, hey, take a bow--you have done the world a huge favor by ridding a few dictators already, and it appears that quite a few more will follow suit.

Bravo, Ben Bernanke!  You did with paper what the mighty American military could not have ever achieved ...

Currency wars reach the Indian shores

A few days ago, I quoted Martin Wolf, who wrote in the Financial Times that:

To put it crudely, the US wants to inflate the rest of the world, while the latter is trying to deflate the US. The US must win, since it has infinite ammunition: there is no limit to the dollars the Federal Reserve can create. What needs to be discussed is the terms of the world’s surrender: the needed changes in nominal exchange rates and domestic policies around the world.

And ...?  Here is the NY Times:

The Indian rupee is soaring — up 9 percent against the dollar in the last 16 months. That has taken a toll on exports like textiles by making them more expensive on the world market. And the strong rupee poses longer-term threats of overheating the economy.

So, one would expect India to take appropriate action?  Not yet ...

instead of fighting currency appreciation, as Brazil and some other countries have done, India has been willing to let the rupee rise — for now, at least.
India is simply too hungry for the foreign capital that is drawn to the strong rupee and is driving it higher, because that influx of money is helping support this country’s approach to developing a modern consumer economy.

Makes sense,right?  A developing country will need capital for all kinds of investments, and if foreigners are eager to send their money across, hey, grab that:

The influx of capital has helped fuel a nearly 9 percent annual growth rate for India’s economy. It has also powered the Indian stock market to near record highs. A big beneficiary of the stock rally has been the government, which is selling shares in state-owned firms like Coal India, the world’s largest coal miner.
The government, which has a large budget deficit, plans to raise $9 billion in the current fiscal year from share sales and spend the money on jobs for the rural poor and other welfare programs. A stronger rupee also reduces India’s bill for commodities, like oil, that it needs to import.

Imagine if China too allows its currency to appreciate ...

Be responsible and ... go spend money?

So, given the economic conditions over the last two years, should we praise those saving money, or praise those who are fearlessly spending like there is no tomorrow?  (BTW, this might be a good time to read Somerset Maugham's take on the Ant and the Grasshopper ... I can't seem to find a free version online though!)

Roger Lowenstein writes that being an ant is ok, but sometime soon we better become grasshoppers:

Credit and inflation are really two sides of the same coin. When credit expands, people have more money to pay for goods, and prices go up. The Federal Reserve Board has kept short-term interest rates at nearly zero, effectively jamming the credit-creation pedal through the floor. But it hasn’t persuaded people to take out their wallets or their credit cards, stoking fears of a Japan-like deflation. Core inflation (which measures price increases of everything but energy and food) has fallen to its lowest level in 44 years. As people pay back loans rather than take out new ones, they exert a drag on business.

 Keep in mind that this a deflation threat along with high unemployment levels.  Anyway, when would Americans get back to being Americans and spend, spend, and spend, while taking on more debt in the process?

The Conference Board, which asks consumers every month whether they anticipate buying a home, a car or an appliance within the next six months, reported plummeting numbers in June. Consumers used to get their kicks from new Sub-Zero refrigerators; now they chip away at their balances. The turn is yet to come.

So, ok, that is Lowenstein.  Economics being economics, there has to be more than one interpretation, right?  Of course, yes.  Here is the libertarian Reason being sarcastic (so what's new, you ask?)

With inflation hawks questioning his every move and disloyal Fed underlings urging an interest rate hike, Bernanke finds himself unable to do the one thing he's spent his career preparing to do: save the world by throwing money at it.
Like many supergeniuses, Bernanke is in trouble because his plan is too brilliant. It really is possible to create inflation if you have the will. Just print another trillion or two, stop paying banks to keep that money in their vaults, and the country will be flooded with dollars. The problem is that the Fed keeps trying to micromanage the inflation, explode the monetary base without anybody noticing. But at some point you have to commit to devaluation of your currency. The moment to strike is now: Personal savings rates have been increasing for the last three months [all pdfs] measured. There are still millions of jobs to save or create. It's time to send a clear message: We're going to keep printing money until you stop saving it.

So, what do you say, Professor Krugman?

Like others, I’ve been warning that policy makers in the United States are defining normalcy down — accepting high unemployment and below-target inflation as just the way things are. It’s not just an obsession with inflation risks; it’s an abdication of responsibility for the economy, even if prices are falling rather than rising.
The passivity of the Bank of Japan offers an object lesson. The BOJ is now under political pressure? Why? Because it still sees no reason to act after fifteen years of deflation.
Is this a glimpse of the Fed’s future? That’s what I’m afraid of.

The coming deflation?

While hyperinflation is to be worried about, a little bit of inflation does not worry most of us--in fact, most central banks work towards maintaining that healthy rate of inflation. 
Deflation, on the other hand, is a serious monster.  Krugman adds more to why we need to worry ...

Ever since the economic crisis began there have been two schools of thought about inflation prospects. One school basically has a Phillips curve, aggregate demand view: because major economies are operating far below full employment, we should expect disinflation, and possibly deflation. The other is basically monetarist with a touch of Austrianism: look at all the money central banks are printing and governments are borrowing, it says, inflation — maybe even hyperinflation — is just around the corner.
Guess who’s been right so far?

“Spain joins therefore Slovenia, Portugal and Ireland in the number of countries where core prices are falling compared to the previous year,” said Luigi Speranza, an economist at BNP Paribas.

What about the US? Well, various measures of core inflation — like the Dallas Fed trimmed-mean deflator, the Cleveland Fed median CPI, and indexes excluding food and energy have all fallen from 2.5-3 percent inflation at the start of the crisis to around 1 or lower. If the trend continues — which it will unless the recovery is stronger than I fear — deflation is in our future, maybe next year.

 Table? crawl under it. stay there. until 2020?

9.7 % unemployment, but the employed have a great life :-(

Throughout this Great Recession, I have been worried about unemployment. Because it seemed like those whose productive economic lives get derailed might have a very hard time getting back.
But, of course, the stock indices have been climbing up quite impressively--here in the US and elsewhere too. (So much so that one commentator worries that this is another bubble in the making!)

Which is why my brother, who was impressed with all the talk about recovery, was probably surprised at my rather pessimistic statement that things are not good. I told him something like, "it is a great time if you have a job because prices are even falling, but it is a horrible time to be unemployed." A college-mate who now lives in the UK has been unemployed for almost a year now, and his is one of the many, many millions of such horror stories.

Of course, the scientific method means that we don't trust our own intelligent guesses but want evidence for the notion that some people and professions are doing well through this Great Recession. And, slowly that evidence is trickling in.

Richard Florida, who can be quite single-minded in his "creative class" arguments ad nauseum, writes:

Computer, sciences, and engineering professionals experience lower rates of unemployment than arts, design, and entertainment workers. But the lowest rates of unemployment and the most stable employment are found in meds and eds occupations - health and education - where unemployment stays consistently low, even during downturns.

The full analysis is here.

Notice again that meds and eds go together? (yet another evidence for another gut feeling of mine that if healthcare bugs us because costs are always going up, then eds should bug us even more. more here.)

So, ok, some professions have not experienced this recession big time. How about their real earnings? You might think that people have jobs, but have taken paycuts. Not actually, writes David Leonhardt:

Wage growth has picked up in the last several months, according to two different government surveys. You don’t hear or read nearly as many stories about pay cuts these days. Even though unemployment has reached its highest level in 26 years, most workers have received a raise over the last year.

That contrast highlights what I think is one of the more overlooked features of the Great Recession. In the job market, at least, the recession’s pain has been unusually concentrated.

And it hasn’t been concentrated in the typical way. Nearly every region and every demographic group has indeed been affected. But the pain has been concentrated within groups.

It must be awful to be unemployed. I can still recall, with horror and shame, my year of unemployment--well, through a massive, massive underemployment. I was so frustrated that I seriously considered taking up taxi driving. In Los Angeles! But, to be unemployed when one is 40+, or worse 50+, well, that I am sure is nightmarish.

So, how good life is for the employed lucky?

Executives of companies don’t cut pay, even when demand for labor has fallen. They worry that employees will become less motivated or start looking for another job, says Laury Sejen, who oversees the compensation consultants at Watson Wyatt. So companies instead lay off workers or stop hiring. They concentrate the pain.

The added wrinkle in this recession is that inflation has dropped below zero, thanks largely to a sharp fall in energy prices. In most recessions, inflation remains positive — indeed, higher than wage growth, which means that inflation-adjusted pay declines. In this recession, average prices have fallen 2 percent over the past year, while weekly pay has either been flat or risen 1 percent, depending on which data you believe.

So inflation-adjusted pay is up 2 to 3 percent. Amazingly enough, that’s almost as big as the peak increases during the late 1990s boom.

I am thankful for the job I have. And, of course, the email from the student is worth more than a few million dollars.
Here is to hoping that the unemployed, including my college-mate, will soon find gainful employment.

Recession. Need inflation. Onion to the rescue.

In his column in the NY Times, Harvard's Greg Mankiw argues that inflation can help us out. He writes:

Suppose that, looking ahead, the Fed commits itself to producing significant inflation. In this case, while nominal interest rates could remain at zero, real interest rates — interest rates measured in purchasing power — could become negative. If people were confident that they could repay their zero-interest loans in devalued dollars, they would have significant incentive to borrow and spend.
Having the central bank embrace inflation would shock economists and Fed watchers who view price stability as the foremost goal of monetary policy. But there are worse things than inflation. And guess what? We have them today. A little more inflation might be preferable to rising unemployment or a series of fiscal measures that pile on debt bequeathed to future generations.

Krugman says that he provided such an argument in the Japanese context a decade ago. In other words, he tells Makiw, "hey, I have a Nobel!" And then Krugman writes that:

Since that was the answer I arrived at for Japan more than a decade ago, I have to say that it makes sense in principle.
But here’s why it won’t work now, at least not yet: we’re talking about making a credible commitment to fairly high inflation over the medium term, yet you still have distinguished central bankers appalled at the Fed’s 2 percent inflation target.

But, you know who has the best answer of all? The Onion. These people have a brilliant idea to add value to the pieces of paper that we refer to as American currency:


Treasury Department Issues Emergency Recall Of All US Dollars

Inflation is here. Beware.

If we decide to have pizza, we always go to Bene, and have their Mediterranean, which used to cost $18.50. Last week it was $19.75. A significant jump in the price. The croissants at our neighborhood grocery store, Market of Choice, look a tad smaller than before. I think they are trying to maintain the price the same, but are actually delivering a little less to account for inflation.

Well, Daniel Gross explains:

[producers] have been able to pass on only about 60 percent of their higher
costs to consumers. The result has been sharply lower profits. .... many
companies have reached their limit in absorbing higher costs. That is why we've
had large bankruptcies in the restaurant industry (Bennigan's), and in
retailing (Linens 'n Things). Today, every company is faced with a choice of absorbing the higher costs passed on to them by suppliers or passing them on to consumers. Many companies are choosing the latter course. Airlines are furiously tacking on
charges for luggage, food, drink, blankets, and pillows. Hershey's, complaining
of costs for sugar and other commodities that have risen between 20 percent and
45 percent so far this year, in August announced a 10 percent price increase. Frank Bruni reports in Wednesday's New York Times that restaurateurs are
substituting cheaper goods (shiitake mushrooms instead of morels, lump crabmeat
instead of jumbo lump crabmeat) and keeping the prices steady. When you pay the
same for smaller portions or for goods of lower quality, that's inflation.