Monday, December 27, 2010

Gas Prices Rise in Bolivia by Decree, Estonia to Enter the Euro, Will China’s Grand Experiment End with Runaway Inflation?

12/27/2010 Cochabamba, Bolivia Pop in your mints

We are back here at The Mint to ponder what is and what may be as the Gregorian calendar turns another year older.  We can be certain of two things for 2011.  Both Bonds and Fiat currencies (the most prominent of them the US Dollar) will decline in value.  Whether or not the decline will be severe is open to debate but every passing day under current circumstances and accompanying monetary and fiscal policy lead them ever closer to tumbling off a cliff.

What catches our attention today is that, last night here in Bolivia, the Vice President, Álvaro García Linera, who greatly admires and in appearance closely resembles the founder of Wikileaks, Julian Assange, came on TV to announce that the price of gasoline and diesel fuel, which are completely controlled via subsidies by the government, would go up 72% and 82% respectively effective immediately.  This takes the price from roughly $2.12 per gallon to roughly $3.66 per gallon.

Assange and Linera, seperated at birth?
The reasoning for the move, as explained by the government, is to kill the trafficking of “contraband” gasoline from Bolivia to, most notably, Chile.  The government’s continued suppression of gas prices over the years has birthed an industry entirely dedicated to filling up with gas in Bolivia and selling it in Chile.  This measure aims to kill this industry.

But the Bolivian people have become extremely accustomed to gas at well below market prices and don’t take price increases lying down.  What do they do?  Typically, they blockade roads, airports, and generally make transportation impossible until they get their way, or get bored, or an excuse to party comes along.  The only thing more coveted here than cheap gas is an excuse to party, which is coming up in about a week.  Will the protestors hold their discipline?  We have our doubts.  So far the only noticeable effect has been that supermarket shelves are empty as people anticipate strikes from transport operators of all stripes.

In other news, Estonia will be the next country to surrender its sovereignty to the almighty Euro on January 1, 2011.  To surrender control of the currency is, in effect, to surrender sovereignty.  The infamous financier Mayer Amschel Rothschild once said “Give me control of a nation’s money supply, and I care not who makes its laws.”  Estonia will soon go from being a Russian satellite state to a Euro satellite state.  With Russia pondering adoption of the Euro, one has to wonder where it will end.  The Euro, being nothing more than another faith based fiat currency, will eventually self destruct, as will the dollar.  Why Estonia and Russia would want to go along for the ride is a mystery to us but certainly not without precedent.

It is a mystery to us because a fiat currency, one that can be created on a whim by the authorities, is by definition unstable.  Instability of the currency is especially dangerous because it directly effects the allocation of scarce resources and often leads to gross imbalances in supply and demand.  These imbalances lead to social instability, the kind that overthrows governments.  News from China shows that Premier Wen Jiabao is trying to convince the Chinese public that the government has a “handle” on the inflation that is currently taking place there.  We find this amusing because nothing could be farther from the truth.  The fact that Premier Wen has to go on TV to state that inflation is “under control” is evidence that it is not. 

Why?  The government cannot control inflation any more than you, I, or the Bolivian government can control gas prices.  Prices, including that of money, are set by hard facts, not government decrees or wishful thinking.  Government action is simply another data point that the market must take into account when setting the final price of an item.  The wishes of the majority combined with current supply and demand data will always overwhelm government attempts to control the market.

With this knowledge, we can relax and invest accordingly.

Stay Fresh!



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Key Indicators for Monday, December 27th, 2010


*See FED Perceived Economic Effect Rate Chart at bottom of blog.  This rate is the FED Target rate with a 39 month lag, representing the time it takes for the FED Target rate changes to affect the real economy.  This is a 39 months head start that the FED member banks have on the rest of us on using the new money that is created.