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How Venezuela Got Here

From 4th richest to the edge of chaos...
OUR delightful sojourn in the USA amongst kith and kin is coming to a rapid end, writes Bill Bonner in his Diary of a Rogue Economist.
Soon we take off for Florida and Nicaragua.
The latter has its own busted dream, with the Ortega government holding on to power against widespread opposition. What the country doesn't have is runaway inflation.
Curiously, it was an effort to protect the currency and the economy that touched off the current cycle of discontent. The Nicaraguan feds raised taxes!
Or, to be more precise, they upped contributions to the Social Security system in order to protect it from insolvency.
Which goes to show something. We're just not sure what.
But we'll give you a report from Nicaragua when we get there. The country has the most beautiful coast, and some of the friendliest people, in the world.
We've invested millions...and nearly a quarter of a century...developing a coastal enclave there, helping to make it a comfortable, modern, and agreeable place to live. It would be a shame to see it blow up.
But we don't pretend to control events. We just watch...wait...and try to understand.
Which is why we're watching the action in Venezuela with keen interest. It's not every day that we see a fake money system get what it deserves!
Here was a rich country...the fourth-richest in the world in 1950. Now, it is on the edge of chaos, civil war, and starvation. How did that happen?
Are the Venezuelans stupid? Are they shiftless? Why did they allow a crackpot politician to ruin the country?
As for Mr.Chávez himself, now deceased, he was lively, intelligent, and charming, with a few quirky ideas...such as his belief that the moon landing never happened...and that 9/11 was an inside job (a view shared by many, both north and south of the Rio Grande).
But he was neither crazy nor dim.
As for the rest of the Venezuelans, the few we've known personally were among the smartest, best-educated, and most industrious people we've ever met.
Now, they are living in Spain or Miami...forced to flee Caracas to avoid either the politics of it or the poverty.
So what gives? And what can we learn from it?
Rushing ahead: Watch out for fake money. First, it distorts prices, misleads investors, and lowers output.
Second, sharing it out among themselves and their cronies, the insiders use it to transfer wealth from those who earn it to those who steal it.
Third, fake money funds the expansion of government itself – bending more and more real resources towards unproductive government activities.
Finally, when the crisis comes, property remains...corporations may or may not survive...and real money is still valuable. But fake money becomes worthless.
Almost all Latin American countries have similar demographics; typically, they have a wide gap between rich and poor. The chasm is not merely financial. It is racial and social.
The upper classes are usually more "European" than the masses. This is a source of tension, of course. And mischief.
"Populist" leaders, such as Cuba's Fidel Castro, Bolivia's Evo Morales, Nicaragua's Daniel Ortega...and even Argentina's Juan Perón...go for the gap.
They speak to the poor and middle classes and use them to get control of their governments. Then, they reward the little guys with free housing, free food, free education, free medical care, or subsidized fuel. The big guys get contracts, bribes, and payoffs.
First, the populist leader comes into office promising to rob the rich. But after a few years, he and his friends are the rich. And the rest of the wealthy have either cozied up to them or fled the country.
Then, they turn to credit. But who would lend to a Latin American, socialist government? Most countries are protected, most of the time, by their own poverty. They just can't afford too many giveaways.
But Venezuela had something the rest of them didn't: collateral.
Venezuela floats on a sea of oil. It was the world's fifth-largest oil exporter in 2000. The price was only $30 a barrel, but oil made up 85% of the country's exports. And over the next seven years, the country was to enjoy a bonanza, as the price of oil rose nearly five times.
Then, in one especially knuckleheaded move, Chávez put a leftist professor in charge of the oil industry. And then, in 2015, the price of oil collapsed.
Now, the dream is busted. Chávez is gone. Maduro may be gone soon, too. It may not be the end of the Bolivarian Revolution. But the end can't be too long in coming.

New York Times best-selling finance author Bill Bonner founded The Agora, a worldwide community for private researchers and publishers, in 1979. Financial analysts within the group exposed and predicted some of the world's biggest shifts since, starting with the fall of the Soviet Union back in the late 1980s, to the collapse of the Dot Com (2000) and then mortgage finance (2008) bubbles, and the election of President Trump (2016). Sharing his personal thoughts and opinions each day from 1999 in the globally successful Daily Reckoning and then his Diary of a Rogue Economist, Bonner now makes his views and ideas available alongside analysis from a small hand-picked team of specialists through Bonner Private Research.

See full archive of Bill Bonner articles

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