Archive for the ‘economics’ Category

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!

Is Venezuela dollarizing?

Thursday, May 28th, 2015

Officially, they won’t, but in practice, yes:

Venezuela Embraces the Dollar—Reluctantly
Increasing dollarization reflects doubt in President Maduro’s ability to boost a sclerotic economy and halt a plummeting currency

From real estate to cars to even some cheaper goods like health-care products, an increasing number of vendors demand dollars—or its black market equivalent in bolivars, now about 350, several times the official rate. That prices out most Venezuelans, who can’t get greenbacks because of complex currency controls the government uses to prevent capital flight.

Those controls have helped exacerbate class divisions between those who hold only bolivars and those with access to dollars, undermining Mr. Chávez’s so-called Bolivarian Revolution, the social movement embraced by his successor, President Nicolás Maduro, which aims to equitably distribute wealth.

Steve Hanke saw it coming.

Worthless bolivar, replaced by hard currency, ought to not surprise anyone, or, as Capt. Louie said, “I’m shocked, shocked, there’s gambling going on in here.”

I wonder what became of my former friend, the liberal, who told me that Chávez had improved the economy. She’ll blame Maduro for not getting Communism straight, unlike Hugo.

——————————–

Additionally, just because you have dollars doesn’t mean you can get necessities.

For example, buying car tires: A contrast between a command economy, and a consumer-oriented economy.

At the command economy: Where gasoline is almost free, but two months go by and you can’t get tires for your car.

Gustavo Hernandez Acevedo describes Chavismo on wheels,

In early April, a close relative of mine was looking everywhere for new tires. He hasn’t found anything yet.

. . .

The root of the problem is (as expected) the fall in domestic production and the lack of currency to either reactivate local factories or bring enough imports to satisfy demand. Representatives of three major tire brands have met with government representatives, but they didn’t get any specifics about when they will get the resources to keep working.

But another factor is affecting the vehicle tire market: Proveeduria (Procurement)

What’s that?

It’s a state-led initiative thought up the central government back in 2013 to directly provide spare parts and tires to public and cargo transportation drivers, under the control of the Transportation Ministry. At the beginning, those State procurement stores got their tires from illegal units that were seized by the authorities.

But in March of this year, Land Transportation Minister Haiman El Troudi published an administrative order in which tiremakers are forced to sell 20% of production to proveedurias in order to keep public transportation up and running.

At the consumer-oriented economy: Tires replaced, car serviced, in less than three hours.

The other day I needed tires. I drove to the local service station, talked to the gentleman at the desk, and dropped off my car.
About an hour later, they called me back, we discussed price and what was needed.
Two hours later, the car was ready, I went, paid, and happily drove off.

———————————–

According to this official website of the Venezuelan government (link in Spanish), the Tower of David has been evacuated and its squatters placed in government housing. The structure will be used as an Emergency Coordination Center – hopefully after a great deal of refurbishing.

Previous reports mentioned that the Bank of China would be using “La Torre de David” as its South American HQ.

What works

Friday, May 1st, 2015

Readers of this blog are familiar with my nagging asserting repeatedly that Communism doesn’t work. John Mauldin and Stephen Moore have come up with A Six-Point Plan To Restore Economic Growth And Prosperity. In brief, the 6 are:

  1. Streamline the federal bureaucracy.
  2. Simplify and flatten the income tax.
  3. Replace the payroll tax with a business transfer tax of 15%, which will give lower-income workers a big raise.
  4. Provide certainty by keeping tax rates low through a tax-limitation constitutional amendment that would require future tax increases to be passed by 60% of the Congress, in combination with a balanced-budget amendment.
  5. Roll back the regulatory state.
  6. Drill for America’s domestic energy and use the royalties on federal lands to retire the debt and/or fund needed infrastructure repair instead of raising taxes.

While these are specific to America, countries in our hemisphere would benefit from similar incentive structure measures, if their institutions would also ensure a framework of rule of law and true commitment to ending corruption.

Mauldin and Moore address the real source of economic progress: the incentive structure. Read their full article here.

Latin America: Why there’s no light at the end of the tunnel

Tuesday, April 28th, 2015

Vast natural resources, great human capital, and yet, LatAm wallows in corruption and crime. This is not likely to change for the foreseeable future.

Why?

Belen Marty writes about one reason why:
LatAm’s Socialist Countries Rival World’s Worst in Institutional Quality
Zimbabwe, Libya Outrank Venezuela in Dismal Scoresheet for Bolivarian Republics

Latin-American countries with governments that claim to be pursuing a “socialist” agenda come out the worst in the latest Institutional Quality Index published by Argentina’s Freedom and Progress Foundation, with several regional nations ranking alongside countries such as South Sudan, Zimbabwe, Eritrea, and Gabon.

Argentina, governed between 2003 and 2007 by the late former President Néstor Kirchner, and by his spouse President Cristina Kirchner since 2007, has fallen the most in the rankings over the last 10 years, dropping 50 places to occupy position 137 out of 193 surveyed nations. In 2014 alone, Argentina fell several places to be rated worse than China, Uganda, and Lebanon.

Hugo Chavez’s legacy lives on,

Taking the same long-term view, the index shows how other regional countries have slid dramatically in the quality of their public institutions. Bolivia is down 99 places, Argentina by 33, Ecuador by 81, Venezuela by 75, and Paraguay fell by 61 positions, all since 1996.

Communism doesn’t work: Cuba takes the cake at 192, one notch above bottom-ranked North Korea, even after US$300million and 3 million tourists last year alone. Let’s pause for a Capt. Louis Renault moment.

The report, authored by academic Martín Krause, takes an average of eight indicators used by recognized international organizations. Among them are the Index of Economic Freedom (Compiled by the Fraser Institute and the Heritage Foundation), Doing Business, the Rule of Law (the World Bank), and Corruption Perceptions (Transparency International).

The report, which you can read here in Spanish, concludes,

En definitiva, aquellos países que tienen una buena calidad institucional o aquellos que la han mejorado, en particular en relación a las instituciones de mercado, y dentro de ellas aquellas que protegen la inversión y la actividad emprendedora, muestran un mejor desempeño económico y, con ello, ofrecen más oportunidades de progreso a sus habitantes.

[My translation:]
Definitely, the countries with good institutional quality or those which have improved it, especially in regards to market institutions, and within those, the ones that protect investment and enterprise, show better economic performance, and, along with it, offer their citizens more opportunities for progress.

Would Peru go for Chavismo?

Monday, March 30th, 2015

Mary O’Grady writes about the reasons behind Peru’s recent economic success: A market model that allows for

  • a vibrant consumer class that is entrepreneurial and creative
  • openness to imports
  • structural reforms that included ending a punishing system of import tariffs and quotas
  • fiscally conservative governance.

However,

Still, the downturn in commodity prices is eating into growth and the slowdown that began last year continues. Market forecasts for GDP growth are in the 3% range for 2015. Peru’s economy is performing far better than most in the region, but lackluster is not what Peruvians have come to expect.

The obvious answer to this lethargy is more aggressive trade opening on key products like sugar and corn, more tax cutting and deregulation. But Mr. Humala’s popularity is sagging and he is unlikely to do anything bold. Meanwhile, opponents of economic freedom will turn slower growth into opportunity by linking stagnant incomes in the market economy and corruption.

As O’Grady points out, this means Peru Is Chavismo’s Next American Target
Corruption scandals give the left an opening in the 2016 presidential election.

On a seemingly unrelated topic,
The Obama administration insists on easing restrictions on Cuba’s merciless Communist dictatorship while Cuba’s dependence on Venezuelan oil goes bust. Once Cuba’s economy improves cosmetically (because you can bet those in power will not give up their acquisitiveness), the Cuban propaganda machine will use this as another tool in its propaganda arsenal against market economies.

No matter how ruinous Cuban-driven Chavismo is in real life; propaganda is the only thing Cuba’s regime is good at, and it is particularly effective in Latin America.

Face it: The fact that the article talks about Chavismo – instead of Castrocommunism – itself is a success for the Cuban propaganda machine; in reality, “The Venezuelan regime is a puppet controlled by the Cubans.”

—————————————

Related reading:
Hernando de Soto’s excellent book, The Other Path, available on Kindle for under $10, and Ian Bremmer’s The End of the Free Market: Who Wins the War Between States and Corporations?