Posts tagged ‘Venezuela’

Living Atlas Shrugged in Venezuela

This sounds so much like the latter stages of Atlas Shrugged, when one by one Colorado businesses shut down, worsening shortages across he country.  The government tries to come in and restart each factory, but there is no confidence that the government can actually do the job and within months the whole thing has imploded forever.

Over the weekend, Kimberly-Clark said that the South American nation’s deteriorating economic situation had made “it impossible to continue our business at this time."  The company had made a number of hard-to-find staples in Venezuela such as diapers and face tissues.

As Bloomberg adds, the decision will likely to add to shortages that have gripped Venezuela for the past few years after the ruling socialists capped the price on many consumer basics below production costs." As we have documented repeatedly, desperate shoppers now routinely spend long hours in front of stores to purchase essential products ranging from toilet paper to rice. At the same time, companies face hefty losses on price-controlled goods, while the products are often flipped on the black market for many times their sticker price.

So in retaliation, Venezuela's government announced it had seized the factory.  Labor Minister Owaldo Vera said Monday that the socialist government took the action at the request of the 971 workers at the factory that the company decided to shutter. The seizure follows a similar takeover from 2014 when Clorox announced it was closing its doors.

"Kimberly-Clark will continue producing for all of the Venezuelans," Vera said in a televised statement from the factory surrounded by workers chanting pro-government slogans. That statement was not exactly true: former workers of the company would continue producing under the observation of government management. We doubt this "forced restructring" will survive more than a few months.

I have written this before, but I interpret Atlas Shrugged a bit differently than most.  There is much criticism of the one-dimensional characters and limited character development in the book.  But I have always thought this beside the point.  The main character in Atlas Shrugged is the world itself, and the main story arc is the decline and fall of the world under the increasing influence of socialism.  All the human characters are just props to this main drama.

In this interpretation, the climax of the book is when the hobo Jeff Allen tells the story of 20th Century Motors to Dagny on the train.  This story shows the final death throws of a group of people attempting to pursue socialism in its purest form.  It's a statement of the end towards which everything else is quickly heading.  After this point in the book, we immediately are in Galt's Gulch and end up with Rand's Utopian vision, which from a literary standpoint is awkward and boring.  That's because utopian novels are always dull as dirt.  Rand's triumph in that book was that she was absolutely prescient about how socialism plays out, which we are seeing today in Venezuela.

A Reliable Marker of Socialism: Politicians Accusing Private Individuals of "Hoarding"

When socialists destroy markets, shortages inevitably follow.  The current situation in Venezuela is a great example, where just about everything from food to toilet paper has disappeared off store shelves.   Rather than take a step back and say, "Wow, our policies sure have created a mess," socialists inevitably blame the shortages they created on private individuals.  Nothing says "I am a socialist" like a politician denouncing their citizens for hording.

Here is today's example from the state of New York.  New York has totally screwed up its real estate markets by making it nearly impossible to build new housing and putting rent controls on the housing that exists.  Which has inevitably led to shortages.  Which is of course blamed by politicians on individuals who are "hoarding"

State Assemblywoman Linda Rosenthal, one of the [anti Airbnb] bill's sponsors, disagrees, claiming that it targets "people or companies with multiple listings. There are so many units held by commercial operators, not individual tenants. They are bad actors who horde multiple units, driving up the cost of housing around them and across the city."

If Bernie Sanders and His Supporters Get Their Way, This Would Be the Food Line

Update:  Food lines in socialist Venezuela

food

Progressives are going to try to memory-hole their support for Chavez and Venezuela, but don't you forget that most prominent progressives were enthusiastic supporters of the imposition of socialism by Chavez in Venezuela.  It is only now, when its predictable failures are becoming too obvious even for the American media to ignore, that progressives have gone silent on Venezuela.  Give them a few years and they will likely develop a meme that this was some sort of failure of free markets.

Bernie Sanders and The Panama Papers

As much as Bernie would like to blame the money laundering and money-hiding in the Panama papers on capitalism, in fact the vast majority of clients in those papers appear to be from socialist and strongly interventionist, populist governments.

Socialist countries tend still have winners and losers just like capitalist countries.  However, those winners and losers are not determined by success in making products and services in the marketplace, but in success in reaching a leadership position in the government or cozying up to those in government.  Soviet government elite had special privileges and special stores not accessible by ordinary Russians.  The Castro brothers and Hugo Chavez's daughter are among the richest people in the western hemisphere.

However, these wealthy leaders now have two problems.  First, they likely spend most of their time spouting egalitarian claptrap, so that they would like to hide their wealth in order to mask the obvious consistency problem.  Perhaps more importantly, their socialist policies have likely destroyed the country's economy -- there is, for example, no place any sane person would want to invest a billion dollars in Venezuela.  They need to get their money out of the country but because everyone else in a socialist country is also trying to get their money out, the self-same leader has likely instituted capital controls.  So the leader needs to put his or her money in a different country where it can actually be invested productively, and in doing so must evade their own capital controls.

That Mysterious, Unavailable "Correct" Price

This quote from a hotel owner in Venezuela that now asks its patrons to bring their own toilet paper caught my eye:

Camacho says she refuses to buy toilet paper from the black market on principle.

“In the black market you have to pay 110 bolivares [$0.50] for a roll of toilet paper that usually costs 17 bolivares [$ 0.08] in the supermarket,” Camacho told Fusion. “We don’t want to participate in the corruption of the black market, and I don’t have four hours a day to line up for toilet paper” at a supermarket….

I see this all the time, the notion there is somehow a "correct" price that no one is willing to charge.   There is nothing real about the 17 bolivares price.  It is a fiction.  There are only two real prices in the market -- 110 bolivares PLUS any risk/penalty from breaking the law or 17 bolivares PLUS 4 hours of your personal time.  My sense is that if the legal risk of buying on the black market is low, and you knew the average order size and the value people placed on their own time, you would find these two prices converging.  But in any case, it is dumb to continue to insist that 17 bolivares is the "right" price.

Scenes from the Last Chapters of Atlas Shrugged

I have always read Atlas Shrugged not as a character story (and thus I don't get bent out of shape by the stiff black and white characters) but as a story about the world itself changing and crashing under socialism and cronyism.  As such, my favorite scene in the book is the hobo's tale of the socialist experiment on the 20th Century Motor Company.

Anyway, the final chapters of the book are full of more and more outrageous state interventions that build to a point that they are hard to believe anyone would actually ever try such things.   Unbelievable, until one looks at Venezuela

Venezuelans soon may need to have their fingerprints scanned before they can buy bread and other staples. This unprecedented step was proposed after Maduro had the brilliant idea of proposing mandatory grocery fingerprinting system to combat food shortages. He said then that "the program will stop people from buying too much of a single item", but did not say when it would take effect.

Privacy concerns aside (clearly Venezuelans have bigger, well, smaller fish to fry) there was hope that this plunge into insanity would be delayed indefinitely, as the last thing Venezuela's strained economy would be able to handle is smuggling of the most basic of necessities: something such a dramatic rationing step would surely lead to.

Unfortunately for the struggling Venezuelan population, the time has arrived and as AP reported over the weekend, Venezuela "will begin installing 20,000 fingerprint scanners at supermarkets nationwide in a bid to stamp out hoarding and panic buying" as of this moment.

The government has been selectively rolling out the rationing system for months at state-run supermarkets along the western border with Colombia where smuggling of price-controlled goods is a major problem.

On Saturday, President Nicolas Maduro said that seven large private retail chains had voluntarily agreed to install the scanners.

Last month the owners of several chains of supermarkets and drugstores were arrested for allegedly artificially creating long queues by not opening enough tills.

It gets better: Maduro also accused Colombian food smugglers of buying up price-controlled goods in state-run supermarkets along the border.

What a mess.  An entirely predictable mess.

Hilarious Misdirection

Progressive green web site the Thin Green Line takes on subsidies for petroleum products, saying that reducing such subsidies could immediately have a major impact on CO2 production.  Fine with me, I am no fan of subsidies by governments of any private activities, though I don't live in fear of CO2.

However, the author, trying I guess to buff his progressive credentials in a sort of typical knee-jerk for green writers, tries to imply all this largess is somehow flowing to large oil companies, and the implication is that western nations like the US are subsidizing folks like Exxon and BP:

The timing couldn't be better: With BP's oil continuing to pollute the Gulf Coast, the question of how much our alliance with the oil industry really costs us is at the front of the everybody's mind.

The International Energy Agency released an early draft of a report documenting, for the first time ever, how much the fossil fuel industries get in subsidies each year (H/T Grist). The timing is, of course, coincidental: The IEA's work stems from an agreement made at this years G20 conference that subsidies of fossil fuel industries should be phased out as part of international efforts to reduce carbon emissions.

So "” drum roll, please! "” how much money are the energy giants taking in? $550 billion a year.

But the author is, I believe, misunderstanding the study and the underlying economics (no surprise there from a green progressive writer).  This is from a study of 37 developing, not rich, nations.  There is no way these guys are paying $550 billion in cash into private oil company pockets.  In fact, most of these countries barely let the private oil companies even play, or force them into some marginal operator role subservient to their state oil company.

If these countries are subsidizing producers at all, the vast majority who are getting such largesse are large state-run companies, not western private oil companies.

However, my guess (and I have not seen the report yet) is that what they mean by most of these subsidies is actually selling fossil fuels to their citizens at below-market prices.  These subsidies are not transfers of state dollars to oil companies at all, but below-market pricing of oil products to consumers by state-run oil monopolies.   The people getting subsidized here are poorer consumers, not private oil companies.  Countries like China, Iran, Iraq and even Venezuela (run by progressive heart throb Hugo Chavez) sell petroleum products way below market prices to their citizens.  I am fairly certain this is the half trillion dollar subsidy the report refers to.

So we have the ultimate irony of a "progressive" lamenting government-subsidized energy for poorer people in developing nations.  Wow, I never thought I would say this, but if this is the progressive position, I agree with it.  The whole situation does highlight the difficult tension between development and CO2 reduction programs, and reinforces my argument that aggressive worldwide CO2 abatement will mainly hurt the poor.

Eskimos Running Out of Ice

At least, that is, when the government is managing the ice supply:

Venezuela's economy is in trouble despite the country's huge oil reserves. Blackouts plague major cities. Its inflation rate is among the world's highest. Private enterprise has been so hammered, the World Bank says, that Venezuela is forced to import almost everything it needs.....

This is not the way it was supposed to be. Venezuela is one of the world's great energy powers. Its oil reserves are among the world's largest and its hydroelectric plants are among the most potent.

Explain the Difference

Is there any difference between Hugo Chavez and Barack Obama in terms of how they approach the auto industry?  "Make the kind of cars I thing you should, or the government will take you over."

Mr. Chavez said his socialist government is going to apply strict quotas regarding the number and types of vehicles auto makers can produce. The president also ordered his trade minister, Eduardo Saman, to inspect the Toyota plant, saying it may not be making enough "rustic vehicles," a style of all-terrain vehicle that is much-needed in Venezuela's countryside, where they are often converted into minibuses.

"They'll have to fulfill [the quotas], and if not, they can get out," Mr. Chavez said during a televised address. "We'll bring in another company."

He said if the inspection shows Toyota isn't producing what he thinks it should and isn't transferring technology, the government may consider taking over its plant and have a Chinese company operate it. "We'll take it, we'll expropriate it, we'll pay them what it's worth and immediately call on the Chinese," Mr. Chavez said. Chinese companies, he said, are willing to make vehicles made for the countryside.

It seems like Venezuelan workers want the same deal Obama gave the UAW:

Venezuela's auto sector is in tatters amid recurring labor problems that have led to a lack of productivity. Analysts say many auto workers hope their company is nationalized so they can become de facto government workers and enjoy the extra job security that comes with that status.

By the way, this seems like a suckers play -- please put more valuable stuff in your store window so when we break in there is more to steal:

Mr. Chavez said late Wednesday the Japanese auto maker needs to transfer more new technologies and manufacturing methods from headquarters to its local unit in Venezuela.

While Mr. Chavez directed most of his criticism at Toyota, he said other auto assemblers, including Fiat SpA and General Motors, are also guilty of not sharing technology from abroad with their Venezuelan units.

The left often seems to imply that the US government is too eager to shed blood to protect American industry overseas, but in point of fact American industry has had to live with the reality for decades that foreign governments often steal billions of dollars in American-owned assets with barely a peep being heard from the US government.  For example, there is really no such thing as a Saudi or Libyan or Venezuelan or even Mexican oil industry - those are just assets paid for and built by private Western concerns and then stolen by local governments.

The Science Has Been Settled the Same Way Elections Are Settled in Cuba

Via Wawick Hughes, this "voting" site is pretty funny.

showyourvote2

Apparently Google has launched a site where you can "vote" on climate change and the IPCC process.  Except that you can only vote "yes." Fill in your name and hit submit, and you are counted as having voted the party line.  Seriously.  Since when does this meet anyone's definition of "vote?"

Every day Google innovationist Justin Baird pedals to work at the internet giant, where he is thinking big in his global campaign to act on climate change.

"My personal mission is to drive positive change through technology," he said.

"I am in a position where I can understand the issues surrounding climate change. And understanding the technology solution that can empower us to communicate collectively."

I guess we know now why Google did not have any qualms about cooperating with the Chinese government. They have been "communicating collectively" in their elections for years.

"From your local postcode it aggregates it together to a state level, then country level, then across the world, so what we're doing is generating a global statistic. Over time it starts to generate and show the strength of public support of what's happening," Mr Baird said.

Wow - I am predicting his point of view wins in a landslide

Chairman of the Copenhagen Climate Council, Tim Flannery, says the Google tool is an interesting invention.

"I can imagine a day not so long from now where the UN secretary-general is elected through Show Your Vote. It's a very interesting world that we're entering into," he said.

Yeah, unfortunately, I can imagine a day too.  Already leaders around the world in countries like Venezuela, Cuba, and Iran are elected just this way.

If America Did Not Exist, Dictators Would Have to Invent It

Via Q&O:

Venezuelan President Hugo Chavez told the military and civil militias today to prepare for war as a deterrent to a U.S.-led attack after American troops gained access to military bases in neighboring Colombia.

Chavez said a recently signed agreement that gives American troops access to seven Colombian bases is a direct threat to his oil-exporting country. Colombia has handed over its sovereignty to the U.S. with the deal, he said.

"Generals of the armed forces, the best way to avoid a war is to prepare for one," Chavez said in comments on state television during his weekly "Alo Presidente" program. "Colombia handed over their country and is now another state of the union. Don't make the mistake of attacking: Venezuela is willing to do anything."

Dictator play book page 1, paragraph 1:  When domestic situation goes bad, find an external enemy.

Another State-Run Oil Company Fiasco

And it couldn't happen to a nicer guy (hat tip to a reader):

Venezuela's daily oil production has fallen by a quarter since President Hugo
  Chavez won power, depriving his "Bolivarian Revolution" of much of
  the benefit of the global boom in oil prices...

The state oil company, PDVSA, produced 3.2 million barrels per day
in 1998, the year before Mr Chavez won the presidency. After a decade
of rising corruption and inefficiency, daily output has now fallen to
2.4 million barrels, according to OPEC figures. About half of this oil
is now delivered at a discount to Mr Chavez's friends around Latin
America. The 18 nations in his "Petrocaribe" club, founded in 2005, pay
Venezuela only 30 per cent of the market price within 90 days, with
rest in instalments spread over 25 years.

The other half - 1.2 million barrels per day - goes to America, Venezuela's only genuinely paying customer.

Meanwhile,
Mr Chavez has given PDVSA countless new tasks. "The new PDVSA is
central to the social battle for the advance of our country," said
Rafael Ramirez, the company's president and the minister for petroleum.
"We have worked to convert PDVSA into a key element for the social
battle."

The company now grows food after Mr Chavez's price
controls emptied supermarket shelves of products like milk and eggs.
Another branch produces furniture and domestic appliances in an effort
to stem the flow of imports. What PDVSA seems unable to do is produce
more oil.

Venezuela has proven reserves of 80 billion barrels,
but estimates suggest that it may possess 142 billion barrels - more
than anywhere else except Saudi Arabia....

All
this means that Venezuela has missed much of the benefit from the oil
boom and, now that prices are falling, Mr Chavez faces huge financial
problems. Nobody is sure at what point his government would be unable
to pay its bills, but most sources consulted believe this would
probably happen if oil falls to $80 a barrel. Yesterday, oil was
trading at $79.80.

More on "peak oil" being at least partially a function of state mis-management of promising oil reserves here.  Jim Kingsdale estimated last year, when prices were over $100 for oil, that oil prices would probably trade under $50 if the reserves were controlled by private companies rather than government buffoons.

Oil Prices and State-Run Corporate Incompetence

Over the last year or so, I have been relatively optimistic for a relatively significant drop in oil prices over the next 2-4 years followed by a number of years of price stability at this lower level.  This would be a direct analog to what happened in the 80's after the 1978 oil price spike.

One argument readers have made against this scenario is that a much larger percentage of the world's oil potential is controlled by lumbering state oil companies than was the case in 1978, particularly given the US Congress's continued cooperation with OPEC in keeping US oil reserves off-limits to drilling.  The theory runs that these state run oil companies have a number of problems:

  • they move and react very slowly
  • they don't have the technical competence to develop more difficult  reserves
  • they don't have the political will to divert oil profits from social programs (including oil industry over-employment and patrimony) to capital spending

This latter issue is a big one - even keeping current fields running at a level rate requires constant capital and technological infusions.  I have written about this issue before, and I am sympathetic to this argument.  Here is Jim Kingsdale on this issue:

Events in Iran since the Revolution are an eery echo of what has
happened in Venezuela since the advent of Chavez.  Skilled workers and
foreign capital and technology have fled.  Corruption has become
rampant  along with incompetence.  Production of over 6 mb/d fell to
below 3 mb/d after the Revolution and is currently about 3.8 mb/d.  The
pre-revolutionary head count of 32,000 employees has grown to 112,000.

Since the Revolution Iran has exported $801.2 billion of oil but
nobody knows where that money has gone.  "Certainly none of it was
invested in Iranian oil infrastructure which badly needs renovation and
repair, upstream and downstream."  The author claims the Iranian
petro-industry is "on the brink of bankruptcy" although such a claim is
not documented.

It is clear that Iran, Venezuela, Mexico, Nigeria, and Iraq together
represent an enormous percentage of the world's oil deposits and
production that is being mismanaged.  The political and management
dysfunctions in all of these countries simultaneously is a major reason
for the world's current energy crisis.  If these countries all operated
in a standard capitalist mode, I suspect oil would be below $50 a
barrel and the ultimate supply crisis might be five or ten or even
fifteen years beyond when we will see it fairly soon
.  There seems to
be little hope that any of these countries will make a dramatic change
in their oil productivity soon.

I am coming around to this argument.  I still think that oil prices are set for a fall, but lower prices may not last long if this analysis is correct.

Update: Of course Maxine Waters would like to add the United States to this list of countries with incompetent government management of oil reserves.

The World's Safe Haven

We have rising oil prices and falling housing prices.  Mortgages are defaulting and stocks have been falling of late.  The dollar is in the tank.  But at the end of the day, the world still sees the US as the safest and most productive place to invest its money:
Fdi2

Its odd to me that from time to time we go through periods of angst (e.g. the late 1980s panic that the Japanese were "buying up America") about this effect, but we should instead be assured by this vote of confidence from the rest of the world.  One might argue that folks are simply buying US assets today because they are cheap, and certainly the dollar's fall makes US assets relatively less expensive.  But assets are cheap in Russia and Nigeria and Venezuela too, and you don't see the world rushing to invest a few trillion dollars in those locales. 

Postscript:  This foreign ownership of US assets also makes the world a more stable place.  I am always stunned when people argue that Chinese ownership of a trillion dollars of US debt securities gives them power over us.  Huh?  Since when does holding someone's debt give you power?  I don't think Countrywide Mortgage is feeling too powerful today.  The fact is that holding our debt and owning US assets gives China (and other nations) a huge shared interest in our stbility and continued prosperity.

Will Mexico Follow Chavez?

As in Venezuela, the Mexican government is facing the problem of declining oil production in a state whose national government relies on oil revenues for much of its operating funds.  And, like Venezuela, this is a problem that is self-imposed. 

The ignorance with which most of the media writes about oil reserves is staggering.  Most writers fall in the trap of talking about oil reserves as if they are big pools underground that will eventually be sucked dry and have a fixed recoverable size.  The reality is that the amount of oil that can be pumped from any field depends greatly on how much capital investment one puts into the field.  In the short term, wells even in perfectly viable fields will start to fall off in production unless they are reworked every so often.  Longer term, addition of pumps, water/steam/CO2 injection, drilling deeper, etc. all can greatly extend the life of fields.  There are fields in Texas just as old as those in Mexico which continue to be reinvigorated by investment.  And we continue to find new fields in the US through exploration investment, and would find more if the government did not restrict the most promising areas from exploration.  (by the way, this is why much of the peak oil analysis is BS)

The problem, then, is not that Mexican oil reservoirs are going dry but that the amount of investment required to keep them producing is rising as they age (the converse of the law of diminishing returns is the law of increasing capital investment requirement).  And the Mexican government, like that in Venezuela, is committed to siphoning off oil revenues for short term political spending and to provide gas at below-market pricing rather than reinvest the money in the fields.  In this context, the Mexican government is seeking foreign investment to help bail them out of this problem, while the socialist elements want to keep foreign corporations out.

For once, I agree with the socialists.  I see no reason why US oil companies should venture back into a country that still celebrates as a holiday the day in 1938 when the Mexican government stole the assets of US oil companies.

Postscript: 
special recognition to the AZ Republic writer who gratuitously tried to justify nationalization of assets owned by US citizens by claiming that the US oil companies essentially asked for it by "evading Mexican taxes and paying meager salaries."  The entire history of the third world oil industry can be written as follows:
1.  US companies invest huge amounts of capital and know-how to build oil industry
2.  Once things are producing, local government steals it all
3.  Oil fields go into extended decline due to short-term focused and incompetent government management
4.  US companies invited back int to invest huge amounts of know-how and capital
5. repeat

Update: Here is a great example of why peak oil analysis is probably flawed -- such analysis assumes that the size of reserves are static.  But in fact they are not.  They can vary greatly with the price of oil, because the size of the recoverable reserves, as discussed above, depends on how much one is willing to invest in recovering them and that depends on price.

In the next 30 days the USGS (U.S. Geological Survey) will release
a new report giving an accurate resource assessment of the Bakken Oil
Formation that covers North Dakota and portions of South Dakota and
Montana. With new horizontal drilling technology it is believed that
from 175 to 500 billion barrels of recoverable oil are held in this
200,000 square mile reserve that was initially discovered in 1951. The
USGS did an initial study back in 1999 that estimated 400 billion
recoverable barrels were present but with prices bottoming out at $10 a
barrel back then the report was dismissed because of the higher cost of
horizontal drilling techniques that would be needed, estimated at
$20-$40 a barrel.

How I Stopped Demagoguing and Learned To Love The Oil Companies

I am on the road this week, and still do not have time to write the post I want to write about Obama demagoguing against oil companies.  Fortunately, I do not have to, because Q&O has this post.

Here is the short answer:  companies like ExxonMobil, even in the best of times (or most rapacious, as your perspective might be), makes 9-10% pre-tax profit on sales.  They make something like 5-6% when things are not so good.  This means that if gas prices are $3, when you take out the 45 cents or so of tax, Exxon is making between 13 and 25 cents a gallon profit.  Call it 20 cents on average.  So, wiping out profits completely with various ill-advised taxes or regulations would achieve the substantial goal of ... cutting about twenty cents off the price of gas, or about $2.50 off the price of a fill-up.  Of course, that is at the cost of eliminating all investment incentives in the world's most capital intensive resource extraction business.  Which in turn will mean that that price cut will last for about 2 years, and then be swamped by price increases from disappearing gas supplies  (exactly what happened in the late 1970s). 

Part of the problem is that most people do not understand the supply chain in crude oil.  It would seem logical that if the price of oil rises form $30 to $100, then all that $70 price increase is pure profit to Exxon.  That would have been true in 1905, but is not true today.  Exxon, even when it does the exploration and drilling, gets its oil via complicated agreements with state-owned corporations which in the main are structured so that the country in question, and not Exxon, gets windfall.  This means that if Obama wants to tax windfall profits, he needs to seek out Venezuela and China and Saudi Arabia.

The article covers all this and more.

Aren't These the Same?

I saw these two posts one after the other on Q&O.  One is about Chavez's food regulations in Venezuela, the other is about a government health care plan in California.  One is about government takeover of a critical industry, price controls, supply rationing, and demonizing large private corporations, and the other is about the same thing, but in Venezuela.  Since Chavez is further along with his program, we might see how things are working out for him:

Venezuela's top food company has accused troops of illegally seizing
more than 500 tonnes of food from its trucks as part of President Hugo
Chavez's campaign to stem shortages.

The leftist Chavez this
week created a state food distributor and loosened some price controls,
seeking to end months of shortages for staples like milk and eggs that
have caused long lines and upset his supporters in the OPEC nation.

The
highly publicised campaign has also included government crackdowns on
accused smuggling, with the military seizing 1,600 tonnes of food and
sending 1,200 troops to the border with Colombia....

He also threatened to expropriate companies selling food above regulated prices.

"Anyone
who is distributing food ... and is speculating, we must intervene and
we must expropriate (the business) and put it in the hands of the state
and the communities," Chavez said during the inauguration of a new
state-run market in Caracas.

Yep, sounds about the same.  Fortunately, people in the West can still travel across borders to get health care when government rationed and price-controlled services are not available, as many Canadians and British do. So in the US, when we implement all these same steps, we'll be able to travel to..., travel to...  Where will we be able to go?

Cargo Cult Economics

From Venezuela:  (via Mises)

Venezuela launched a new currency with the new year, lopping off three
zeros from denominations in a bid to simplify finances and boost
confidence in a money that has been losing value due to high inflation....

"We're ending a historical cycle of ... instability in prices,"
Finance Minister Rodrigo Cabezas said Monday, adding that the change
aims to "recover a bolivar that has significant buying capacity."

Prices have risen as Chavez has pumped increased amounts of the
country's oil income into social programs, reinforcing his support
among the poor and helping to drive 8.4 percent economic growth in 2007.

The Central Bank is promoting the new monetary unit with an ad
campaign and the slogan: "A strong economy, a strong bolivar, a strong
country." Officials, however, have yet to clearly spell out their
anti-inflationary measures.

Good to see the government taking meaningful steps.  Next up will be "Whip Inflation Now" buttons. 

The 8.4 percent growth cited above may be illusory, given this:

Venezuela has had a fixed exchange rate since February 2003, when
Chavez imposed currency and price controls. The government has said it
is not considering a devaluation any time soon.

But while the strong bolivar's official exchange rate will be fixed
as 2.15 to $1, the black market rate has hovered around the equivalent
of 5.60 to $1 recently.

Does Anyone Really Believe This?

James Pethokoukis argues that we might have spent a lot of the $1.3 trillion cost of the Iraq war on containment of Iraq had we fought the war.

I will admit I have not seen the studies, but I declare right now that there is NO WAY.  If we really would have spent $150 billion a year containing Iraq in absence of a war, we should be spending similar magnitudes today on other similar regimes on which we have chosen not to declare war, like Iran, North Korea, Venezuela, etc.  But demonstrably we are not.  One might argue that oil prices would be lower, I guess, but one could also argue that the post-9/11 recession would not have been as deep without a war.  I am sure there is a broken window fallacy in here somewhere.  This reminds me nothing so much as the tortured economic studies that purport to show a gullible populace that it makes sense to build a billion dollar stadium for the hapless Arizona Cardinals because the city will make it all back in future revenues.  Sure.

I am not going to argue the justifications for the Iraq war here.  What I will say is that folks who have enthusiastically supported the war should understand that the war is going to have the following consequences:

  1. In 2009 we will have a Democratic Congress and President for the first time since 1994.
  2. The next President will use the deficits from the $1.3 trillion in Iraq war spending to justify a lot of new taxes
  3. These new taxes, once the war spending is over, will not be used for deficit reduction but for new programs that, once established, will be nearly impossible to eliminate
  4. No matter what the next president promises to the electorate, they are not going to reverse precedents for presidential power and secrecy that GWB has established.  Politicians never give up power voluntarily.  [if the next president is Hillary, she is likely to push the envelope even further].  Republicans are not going to like these things as much when someone of the other party is using them.

Dispatches from Zimbabwe

Here are a few scenes from Zimbabwe, stitched together form several posts by Cathy Buckle.  For all of those who support Hugo Chavez, and there are a surprising number in this country, this is exactly where Venezuela would be in a year if it wasn't for its oil.  And it may get there none-the-less (hat tip Q&O):

After three months of price controls the food situation in the country is
perilous and even those who were able to stock their pantries and cupboards are
now in trouble. In a main supermarket in my home town this week there was air
freshener, window cleaner, some vegetables, Indonesian toothpaste and imported
cornflakes from South Africa - one single packet costing more than half of a
teachers monthly salary.  There was also milk being sold from a bulk tank to
people who bring their own bottles and the queue went through the empty shop,
out the door and along the pavement. The line broke up suddenly before 10am when
the milk ran out and the huge shop was suddenly completely empty - nothing left
to sell, no more customers. This situation was a mirror image of conditions at
three other major supermarkets in the town and so we look desperately into
another week of struggle, praying for relief....

Milk is like gold in our town, as it is almost all over the country. When you
appreciate that the shops are empty and there is no food to buy, no protein, no
meat or eggs and now not even bread, you understand that people are desperate
for nourishment. A phone call to the local bulk dairy marketing outlet this week
went as follows:

Q: Hello, Do you have milk please?
A: Nothing.
Q: What about lacto (sour milk)?
A: Nothing.
Q: Any cheese?
A: (Bored) Nothing
Q: Ice Cream! ?
A: (Slightly annoyed) No, we have nothing. We are playing football in the car
park!
...

Standing outside over yet another smoky fire late one afternoon this week, a
Go-Away bird chastised me from a nearby tree. I'm sure this Grey Lourie is as
fed up of me intruding into its territory as I am of  being there - trying to
get a hot meal for supper. For five of the last six days the electricity has
gone off before 5 in the morning and only come back 16 or 17 hours later a
little before midnight. "Go Away! Go Away!" the Grey Lourie called out
repeatedly as my eyes streamed from the smoke and I stirred my little pot. My
hair and clothes stink of smoke, fingers are yellow and sooty but this is what
we've all been reduced to in Zimbabwe. Our government don't talk about the power
cuts anymore and don't even try and feed us with lame excuses about how the
power is being used to irrigate non-existent crops. We all know it's not true
and the proof is there in the empty fields for all to see.

Something else our government aren't talking about  anymore is the nationwide
non availability of bread and the  empty shops in all our towns and cities.
Everywhere you go people are struggling almost beyond description to try and
survive and yet the country's MP's, both from the ruling party and the
opposition, do nothing to put an end to this time of  horror. I have lost count
of how many weeks this has been going on for but it must be around three months.
None of the basics needed for daily survival are available to buy. There is no
flour to bake with, no pasta, rice, lentils, dried beans or canned goods. People
everywhere are hungry, not for luxuries like  biscuits or snack food but for the
staples  that fill your stomach. When you ask people nowadays how they are
coping, mostly they say that they are not, they say they are hungry, tired and
have little energy. This is a national crisis almost beyond description and
people say they are alive only because of " the hand of God."

Introducing Obama to Capitalism

Via TJIC:

In his commencement speech at Southern New Hampshire University
this morning, Obama - like most commencement speakers - delivered a
call to public service; unlike many, however, he also warned against
the charms of doing what most college graduates set out to do: Make
money.

"In a few minutes, you can take your diploma, walk off this
stage and go chasing after the big house and the large salary and the
nice suits and all the other things that our money culture says you
should buy.

"But I hope you don't. Focusing your life solely on making a
buck shows a poverty of ambition. It asks too little of yourself. And
it will leave you unfulfilled," he told the crowd.

This statement would certainly be true in 18th century European monarchies, in Soviet Russia, in third world Kleptocracies, in Cuba, and in Chavez's Venezuela.  Because making money in these environments is a zero-sum game, and the only way to get rich is to loot it from some poor schmuck who is actually creating the value.

But here in America, we (mostly) have this cool system called capitalism.  In capitalism, all interactions are based on the voluntary self-interest of the parties involved.  This means that one only can "make a buck" by doing something or making something that is of value to another person.  And only by successfully serving the needs of a LOT of people does one get really rich. 

TJIC's conclusion is wonderful:

Far better that they spend their life

  • majoring in political "science"
  • working for a meaningless non-profit
  • trying to register more people to vote so that the negative-sum game of politics can have more credibility
  • helping political partisans redrawn electoral district boundaries in the same negative-sum game of politics
  • being a senator, pushing for more regulations and tax increases

That, clearly, is a fulfilling life.

Let the suckers create value.

The best and brightest should just steal it, and move it around
(while taking some portion of it for themselves, and destroying another
portion of it).

Beware of people who try to demonstrate how much they "care" using other peoples' money.

Moratorium on Brains

For years, socialists (and some sloppy capitalists) have operated under the assumption that production only requires labor and capital.  Socialists assume that if a government steals both, it can produce just as well as any of those greedy private companies.  Hugo Chavez has been operating under this assumption, but he has run into a problem:

The companies ceding control included BP Plc,
ConocoPhillips, Exxon Mobil Corp, Chevron Corp, France's Total SA and
Norway's Statoil ASA. All but ConocoPhillips signed agreements last
week agreeing in principle to state control, and ConocoPhillips said
Tuesday that it too was cooperating.

While the state takeover was planned well ahead of time, the oil
companies remain locked in a behind-the-scenes struggle with the
government.

Chavez says the state is taking a minimum 60 per cent stake in the
Orinoco operations, but he is urging foreign companies to stay and help
develop the fields.

They have until June 26 to negotiate the terms.

The companies have leverage with Chavez because experts agree that
Venezuela's state oil company, Petroleos de Venezuela SA, cannot
transform the Orinoco's tar-like crude into marketable oil without
their investment and experience.

In other words, beyond their workers and plant and equipment, he needs their brains.  And I hope the American companies refuse to give in to him.

I made this point earlier in this critique of socialism:

Hanging out at
the beach one day with a distant family member, we got into a
discussion about capitalism and socialism.  In particular, we were
arguing about whether brute labor, as socialism teaches, is the source
of all wealth (which, socialism further argues, is in turn stolen by
the capitalist masters).  The young woman, as were most people her age,
was taught mainly by the socialists who dominate college academia
nowadays.  I was trying to find a way to connect with her, to get her
to question her assumptions, but was struggling because she really had
not been taught many of the fundamental building blocks of either
philosophy or economics, but rather a mish-mash of politically correct
points of view that seem to substitute nowadays for both....

I
picked up a handful of sand, and said "this is almost pure silicon,
virtually identical to what powers a computer.  Take as much labor as
you want, and build me a computer with it -- the only limitation is you
can only have true manual laborers - no engineers or managers or other
capitalist lackeys"....

She
replied that my request was BS, that it took a lot of money to build an
electronics plant, and her group of laborers didn't have any and
bankers would never lend them any....

I
told her - assume for our discussion that I have tons of money, and I
will give you and your laborers as much as you need.  The only
restriction I put on it is that you may only buy raw materials - steel,
land, silicon - in their crudest forms.  It is up to you to assemble
these raw materials, with your laborers, to build the factory and make
me my computer.

She thought for a few seconds, and responded "but I can't - I don't know how.  I need someone to tell me how to do it"

And
that is the heart of socialism's failure.  For the true source of
wealth is not brute labor, or even what you might call brute capital,
but the mind.  The mind creates new technologies, new products, new
business models, new productivity enhancements, in short, everything
that creates wealth.  Labor or capital without a mind behind it is
useless.

I offered more critiques of state-run companies here and here.  My more complete post on this topic his called wealth creation and the zero-sum fallacy.

A Quick Thought Experiment

Which country has more power over us?  Is it China, who could suddenly try to sell our assets back to us at cut rate prices, thereby, uh, taking a huge financial loss for themselves to temporarily roil our markets.  Or is it Venezuela, who can (and has) simply seized all the assets in their country owned by Americans and repudiated its debts?

Not clear enough?  OK, lets go back to the cold war.  Let's say the USSR had lent our government a trillion dollars or so, thereby holding lots of dollar denominated US government debt.  Let's say they also made massive investments in US land and buildings.  Would we have said, "boy, they have us now?"  No.  I mean, hell no!  We'd have their money, they'd just hold our paper.  If the Russki's got adventurous in Afghanistan, we could just say, sorry, we are going to stop paying on all those bonds you hold until you get out.  This situation is so clear that in fact it was the USSR's strategy to do just the opposite, ie to borrow as much as possible from the west, taking western money to fund their economy while creating a threat of loan default they could use strategically.  American hawks argued that it was insane to lend to the USSR, because this gave them leverage over us. 

State-Run Companies and Investment, Part 2

In my earlier post, I commented that one reason a number of foreign oil fields may be "peaking" is not necesarily because they are hitting their production limits, ala "peak oil theory," but because state run companies tend to be terrible at making the intelligent long-term investments that are needed to maintain oil production in aging fields.  I observed:

There are a lot of things you can do to an aging oil field,
particularly with $60 prices to justify the effort, to increase or
maintain production.  In accordance with the laws of diminishing
returns, all of them require increasing amounts of capital and
intelligent management.

Unfortunately, state owned oil companies like Pemex (whose assets,
by the way, were stolen years ago from US owners) are run terribly,
like every other state-owned company in the world.  And, when
politicians in Mexico are faced with a choice between making capital
available for long-term investment in the fields or dropping it into
yet another silly government program or transfer payment scheme, they
do the latter.  And when politicians have a choice between running an
employment meritocracy or creating a huge bureaucracy of jobs for life
for their cronies they choose the latter. 

So today, via Hit and Run, we see this exact same effect in Venezuela:

No one sees an immediate crisis at Petróleos de Venezuela. But its
windfall from high oil prices masks the devilish complexity and rising
costs of producing heavy oil. Meanwhile, the company acknowledged last
month that spending on "social development" almost doubled in 2006, to
$13.3 billion, while its spending on exploration badly trailed its
global peers. And Petróleos de Venezuela's work force has ballooned to
89,450, up 29 percent since 2001 even as production declined
...
Petróleos
de Venezuela's cash is said to be running short as Mr. Chávez uses its
revenue to cement political alliances with Bolivia, Cuba and Nicaragua.
The company has borrowed more than $11 billion since the start of the
year, a rapid debt buildup that reflects a wager by Mr. Chávez that oil
prices will remain high indefinitely.

Time for Francisco d'Anconia

Update from Venezuela:

Even Chavez's own energy officials are getting nervous "¦

Last week, for the 10th time, Chavez announced his plan to
confiscate four Orinoco Belt extra-heavy-oil projects run by six
Western companies"¦

Rather than allow Chavez's state oil company to become the
majority partner in its investment, Exxon could"¦ just walk away - a
possibility that's keeping Venezuelan energy officials up at night.

Rather than let its Cerro Negro operation be turned into a
Chavista workers collective, with Exxon there to pay the bills and
provide the technology and its workers suddenly state employees, Exxon
could just pull out"¦

Courtesy of TJIC, who suggests a similar approach but from a different fiction source.