Archive for the ‘economics’ Category

Brazil and other fallen BRICs

Friday, August 28th, 2015

All in all you’re just another brick in the wall.
Pink Floyd

Brazil never learns from its boom-to-bust cycles, which are tied to commodity cycles. John Lyons and Paul Kiernan of the WSJ write,
How Brazil’s China-Driven Commodities Boom Went Bust

Developing nation’s big bet on China turns sour as China’s appetite for exports dims; ‘looking at a lost decade’ As the title explains, the phenomenon is not exclusive to Brazil, but repeats itself in the whole of Latin America.

Brazil fell under what some economists call the “resource curse,” a theory describing how countries with abundant natural resources sometimes do worse than countries without them. The idea is that the money from commodity sales can lead to overvalued currencies and shortsighted policy-making, leaving such countries badly exposed when the resource boom finally ends.

Read the whole sad story, which ends with,

Even now, Brazil is looking to China for help.

In that, again, the hemisphere is never learning. Even Chile, Colombia and Peru, who have free-trade deals with the U.S. and EU, are now looking at moves that hinder their economies.

Sing it, guys!

Venezuela: Food riots

Friday, August 7th, 2015

Food lines in Venezuela are getting worse

Shortages have reached the point where people are rioting for food. Here’s a roundup:

Looting Sweeps Venezuela as Hunger Takes Over132 Incidents Tell of “Desperation and Discomfort” Sinking In

During the first half of 2015, the Venezuelan Observatory for Social Conflict (OVCS) registered no fewer than 132 incidents of looting or attempted looting at various stores throughout the country. In addition, Venezuelan consumers staged over 500 protests that condemned the lack of available products at state-run grocery stores, markets, and pharmacies

Death In Venezuela: Food Fights

Food riots and looting in Venezuela Friday left one person dead and exposed the combustible nature of the country’s imploding economy.

Bloomberg News

Venezuelan soldiers seized a food distribution center in Caracas, Venezuela, July 30 rented by global companies including Nestle, PepsiCo and Empresas Polar.

A day earlier, Venezuelan soldiers took over a food distribution center in Caracas, rented by companies including Empresas Polar, Nestle(NSRGY) and PepsiCo (PEP), Bloombergreports. The industrial real estate is to be converted to subsidized housing — a crowd-pleasing government effort ahead of December elections. But the move followed months of accusations by President Nicolas Maduro that Polar, Venezuela’s largest private employer, is working to sabotage the economy. The company denies this, Voice of America reports. Maduro claims the U.S. is to blame for food shortages and warehouse looting, Al Jazeera reports.

A Not So Subtle Change In Venezuela

. . . the two most significant factors are the rate at which prices are moving up (previous post) and the ease with which angry mobs (above) have decided to loot and riot at the smallest excuse. Yes, the problem is the Government controls the media and few people see what is going on, but the looting is taking place in traditional Chavista strongholds. And they don’t occur because people are fed up of lining up to get something, they take place because people are fed up of standing in line and getting nothing: Neither bread, nor Harina Pan, nor diapers, nor contraceptives. It used to be a moment of triumph to find something, now the moments of victory are few and far between.

And every day, there is a new item that can´t be found, last week, as I was visiting, it was bread and toothpaste. Great for my diet, no sandwiches for the Devil! Nor Cachitos, nor bombas, nor palmeras.

We are talking serious scarcity here!

Like there are also no Bills to pay things for. Despite an 80% increase in monetary liquidity (M2), the largest Bill is still Bs. 100, US$ 15.9 at the official rate, 50 cents at the Simadi official rate, but a scant 14 cents at the parallel rate.

These days, if you’re looking for reasons to be alarmed about Venezuela you’re spoilt for choice. But if I had to pick one, just one signal that’s freaking me the hell out right now, it has to be the government’s dogged refusal to issue larger denomination bank notes.

Reinforcing Failure

Venezuela should have been rich what with being the “12th largest oil producer in the world … and a beneficiary of the most sustained oil price boom in history”. Instead it is flat broke. It’s currency, the Bolivar is worth 1% of its official rate on the black market and 1/1000th of what it was before Hugo Chavez assumed power.

Venezuela is basically bankrupt again, and will continue being,

. . .the government doesn’t just decide who gets cheap dollars, but also how much they and everyone else can charge. Companies that don’t get dollars at the official exchange rate would lose money selling at the official prices, so they don’t—they leave their stores empty. But even ones that do get low-cost dollars would make more money selling them in the black market than using them to sell goods at the official prices, so they don’t as well—their stores stay just as barren. In other words, it’s not profitable for unsubsidized companies to stock their shelves, but not profitable enough for subsidized ones to do so, either. That’s why Venezuela’s supermarkets don’t have enough food, its breweries don’t have enough hops to keep making beer, and its factories don’t have enough pulp to produce toilet paper. That’s left Venezuela well-supplied with only one thing: lines.

SOCIALISM CRUMBLES IN VENEZUELA, BUT DEMOCRATS THINK IT’S A GREAT IDEA

LatAm currencies slide

Tuesday, July 21st, 2015

The WSJ reports,
Latin American Currencies Hurt by Commodities’ Drop, U.S. Fed ExpectationsMexico’s peso at new low against dollar, though nation may benefit from weakness

While the economic factors vary from country to country, most are suffering from lower global growth, loss of export revenue from falling commodities prices, and a rising dollar that is making emerging-market yields less attractive to portfolio investors anticipating that the U.S. Federal Reserve will start raising interest rates soon.

Latin American countries never seem to get out of the extractive economic model set under the Spanish and Portuguese empires; add to that the end of quantitative easing and of zero interest rates in the U.S., and the prospect is glum.

Mexico’s recent public auction of shallow-water exploration blocks in the Gulf of Mexico failed to attract international bidders:

The private sector often has a better understanding of subsea prospects than the public sector, but Mexico’s wariness about fully ceding control may have prevented the government from understanding the true value of the blocks. “They are still having trouble letting go of the old mindset of full control, rather than letting the market decide,” says one industry executive. One of the two blocks awarded to the winning consortium (comprising Mexico Sierra Oil and Gas, Dallas-based Talos Energy and London-based Premier Oil) was more hotly contested than the government expected; four groups offered well above the government-mandated minimum.

Because of historical sensitivities, Mexico awarded rare profit-sharing contracts between the state and private firms, rather than fully confer ownership of oil reserves to the private sector. It also required a level of corporate guarantee to cover spillages that went beyond international norms. Its potential ability to rescind contracts has alarmed some oil companies, too, lest their wells be expropriated without compensation in the future.

Once you factor in those risks vs current oil prices, the real story here is simpler: the financial arithmetic facing a potential investor has been totally upended by the collapse of oil prices.

And let’s not forget the batshit-crazy approach to debt.

Venezuela: Just how bad are things?

Thursday, July 16th, 2015

Michael Johnston has A Visual Guide to Venezuela’s Failed Economy

Venezuela’s economy is in shambles, with runaway inflation and a massive budget deficit leading to food shortages and frequent violence. Ten (US) dollars for a gallon of milk, an economy nearly fully dependent on oil, ballooning budget deficits, and a stock market worth slightly more than . . . Chipotle.

Hold the guac!

Juan Cristobal Nagel posts about Economists as detectives

Daniel Duquenal looks at Chavistas or Greeks: eat shit and die

And the Santero Economics Will Not End In Venezuela With The Upcoming Elections

Related:
The Multi-Trillion Dollar Oil Market Swindle



Puerto Rico: A few thoughts on the economic crisis

Wednesday, July 1st, 2015

As you already know, Puerto Rico has run up enough debt to become the Greecespot of the Caribbean, which could have been averted, as former governor Luis Fortuño explained yesterday,

Fortuño was governor from 2008 to 2012, and lost since he insisted on doing what needed to be done. Listen to this 2011 interview with John Stossel,

The debt is only part of the problem,

and includes the staggering failure to adequately account for revenues and expenditures

which points to serious structural problems the current governor, Alejandro García Padilla, is not addressing, asking instead bondholders to “share the sacrifices.”

Here’s the situation as I see it:

It is not in García Padilla’s interest to improve the economy

García Padilla’s administration relies heavily on a large bureaucracy, and he knows his predecessor was voted out of office for trying to reduce it. Estimates show that the government of Puerto Rico has 160,000 employees too many. That’s enough of a voter base to keep him in office.

If the U.S. refills the ATM, García Padilla will claim credit for it; if the U.S. doesn’t, he has someone to blame.

And don’t forget that García Padilla and other commonwealth supporters lost miserably during the last plebiscite, when statehood won by approx. 60%. For as long as Puerto Rico remains in a financial swamp, García Padilla knows the question of statehood will be dismissed with “And They Want to Be a State?”
(Or as Ed Koch put it, “The People have spoken … and they must be punished.”)

Again, it is not in García Padilla’s interest to improve the economy.

Puerto Rico: Countdown to the Greecespot

Tuesday, June 30th, 2015

If you didn’t see this coming, you haven’t been paying attention.

From Drudge:

NEXT GREECE MAY BE IN USA…

Lurking debt threatens cities, states…

Reality hits San Juan streets amid Puerto Rico debt woes…

Businesses shuttered…

Residents living day to day…

Fallout Will Hit Florida…

Investors scramble to avoid losses…

Can’t say we didn’t see it coming: From the October 26, 2013 Economist, Puerto Rico
Greece in the Caribbean
Stuck with a real debt crisis in its back yard, America can learn from Europe’s Aegean follies

Like Greece, Puerto Rico is a chronically uncompetitive place locked in a currency union with a richer, more productive neighbour. The island’s economy is also dominated by a vast, inefficient near-Athenian public sector. And, as with Greece, there are fears that a chaotic default could precipitate a far bigger crisis by driving away investors, and pushing up borrowing costs in America’s near-$4-trillion market for state and local bonds.

I have yet to find any moves by the Puerto Rican government towards structural reforms that would stimulate economic growth, reduce bureaucracy (and the accompanying red tape), and foster a business-friendly environment. Instead, the governor tells bondholders to “share the sacrifices.”

Welcome to the Greecespot.

Puerto Rico: the Greece of the Caribbean UPDATED

Monday, June 29th, 2015

Puerto Rico joins other defaulting Caribbean spots, and goes from Pearl of the Caribbean to Greecespot.

Why the hey is this man smiling?

Governor: Puerto Rico near ‘death spiral’

Puerto Rico can no longer make payments on its $73 billion in debt, according to Governor Alejandro Garcia Padilla, who warns the island is perilously close to entering a “death spiral””The debt is not payable … there is no other option. This is not politics, this is math,” Garcia Padilla told the New York Times in an interview published Sunday evening. “But we have to make the economy grow. If not, we will be in a death spiral.”
. . .
Puerto Rico’s economy has been in hot water for years, due to government overspending, high energy costs and dependence on debt.

That’s an understatement; Puerto Rico has piled on more municipal bond debt per capita than any American state, however,

Puerto Rico, as a commonwealth, does not have the option of bankruptcy. A default on its debts would most likely leave the island, its creditors and its residents in a legal and financial limbo that, like the debt crisis in Greece, could take years to sort out.

Like Greece, instead of pension cuts and reducing the size of the government payroll, García Padilla wants to leave creditors holding the bag, or, as he put it, to “share the sacrifices.”

Meanwhile, Puerto Ricans are leaving in droves.

UPDATE
Commenter Kermit is really on the money:

A lot of Puerto Rico’s problems have to do with government screwing with the marketplace. While I don’t have particulars, the refining/petrochemical complex just west of Ponce ended up closing due the commonwealth owned utility company raising rates on industrial consumers rather than other customers back around 1980.

For those unaware, fully integrated refineries exist in a symbiotic relationship with petrochemical companies. There was a nice complex which included CARCO refinery (and its petrochemicals plant) along with PPG and Union Carbide, and a few others. PPG closed its olefins cracker when the government owned utility raised the rates for industrial consumers. It was no longer viable economically to operate the large electric motors required for the ethylene and propylene compressors. This initiated a domino effect. Union Carbide had to close it’s largest complex without the olefins feedstock, CARCO had to close its refinery without the economic advantage of sale of this naphtha and other product streams to adjacent petrochemical manufacturers.

In market research for a project involving removal and refurbishing of a refinery from Puerto Rico several years ago, I found that Puerto Rico has an excellent and hardworking skilled labor force, as well as excellent machine shop repair facilities.

Government owned business needs to privatize, also hip slick and cool new technology does NOT need to be utilized at the expense of rate payers. Economically feasible technology does.

Uruguay: De facto dollarization

Saturday, June 6th, 2015

When currencies plummet, people are turning to the dollar. It’s happening in Venezuela, and it’s happening in Uruguay.

La “dolarización cultural” de Uruguay
La debilidad del peso no permite dejar atrás la tradición de comerciar con la moneda estadounidense
(Uruguay’s “cultural dollarization”
The peso’s weakness doesn’t allow leaving behind the tradition of trading in U.S. currency
)

Magdalena Martinez’s report lays it on the line:

En realidad, el billete verde sigue siendo una protección contra la inflación, un mal endémico para muchas economías latinoamericanas. Cada mes, a un ritmo del 7% u 8%, el avance de los precios se come el poder adquisitivo en pesos de los uruguayos.

My translation, emphasis added:

In practice, the greenback continues to be a safeguard against inflation, an endemic ailment of many Latin American economies. Every month, at a rate of 7% or 8%, the rise in prices eats away the Uruguayans’ peso purchasing power.

Martinez’s article quotes an economist who says that back in the bad old days inflation was 100%. I don’t know if he meant 100% per month, but if he can’t figure out that a monthly inflation rate of 7% to 8% compounds to an annual rate well exceeding 100%, maybe he ought to go back to school.

Steve Hanke has pointed out that dollarization allowed Ecuadorians

to import a vital element of the rule of law — one that protects them from the grabbing hand of the State.

Not surprisingly, Uruguayans took notice.



Venezuela: Maradona for FIFA president!

Wednesday, June 3rd, 2015

Before we get to Maradona, this:
Venezuela’s currency isn’t worth a penny

Just a month ago, $1 was worth 279 bolivars. That was already pretty dismal for Venezuela. Now $1 equals 408 bolivars, according to the unofficial exchange rate, which most Venezuelans get when they try to trade currency.

Put another way, one bolivar equals $0.002 — less than a penny. The country’s currency has lost nearly half its value since the beginning of May, according to dolartoday.com, a website that tracks the unofficial exchange rate.

It’s another sign that Venezuela is arguably the world’s worst economy.

Elsewhere in the nuthouse,
Diego Maradona backed for FIFA presidency by Venezuela’s Maduro

Speaking on his national television program, Maduro said Argentine football legend Maradona had been calling out FIFA for decades, only to be laughed at. Maradona has been a high-profile supporter of the 16-year-old socialist revolution launched in Venezuela by late President Hugo Chavez.

Just weeks ago, the 1986 World Cup winner wrote a column in The Telegraphnewspaper in England blasting Blatter as a “dictator for life,” while calling FIFA “a disgrace.”

Maradona has exhibited disgraceful behavior of other sorts over the years, but I’m inclined to agree with him on FIFA.

Heck, things are so crazy Maradona may even get the job.

We’ll talk about this in tonight’s podcast at 8PM Eastern.



Ecuador: Hasta la vista, dollars!

Tuesday, June 2nd, 2015

Dollarization brought great benefits to the Ecuadorian people, as Steve Hanke (who 14 years ago was the chief intellectual architect of Ecuador’s switch to the dollar) points out,

Ecuadorians know that dollarization has allowed them to import a vital element of the rule of law — one that protects them from the grabbing hand of the State. That’s why recent polling results show that dollarization is embraced by 85% of the population.

Prof. Hanke also knows that going off the dollar will have dire consequences for Ecuador’s economy:

“If you go off, the fiscal deficit gets bigger, the level of debt gets bigger, inflation goes up and economic growth goes down. All the economic indicators just go south.”

So pres. Rafael Correa is attempting to de-dollarize, but not blatantly. How so?

Ecuador Mandates Bank Participation in National E-Money Initiative

Ecuador’s e-money initiative, which kicked off earlier this year after the country outlawed bitcoin, is about to see wider institutional involvement following a government directive.

The country’s banks were ordered late last month to adopt the payment system within the next year, according to a report by Pan-Am Post’s Belén Marty. The pace at which the banks are required to add support for the initiative, which is a digital representation of the US dollar – Ecuador’s official currency – depends on their size.

So it’s not even bit-coin, but it’s compulsory:

The nation’s central bank has given them 360 days to get on board, with a mandate inResolution 064-2015-M, released on May 25 in the official register.
. . .
The resolution gives a sweeping and vague definition of “macroagents” for adoption: “companies, organizations, and public or private institutions; financial institutions of the popular and cooperative system; that maintain a network of establishments available for clients and are capable of acquiring mobile money, distributing it, or converting it into varieties of money.”

Additionally, the Central Bank of Ecuador (BCE)’s crypto-currency transactions carry no privacy.

The dollar is taken out of the picture, and protection from “the grabbing hand of the State” is erased. Hasta la vista, baby!