Tuesday, December 14, 2010

A Victory for Freedom! Pondering Relative Wealth in The Plurinational State of Bolivia

12/14/2010 Cochabamba, Bolivia – Pop in your mints

A quick glance at the news today reveals that a Judge in Virginia finally decided to read the constitution.  He has in essence ruled, in a matter that will certainly end up in the Supreme Court of the land, that Americans cannot be compelled to purchase something.  In this case, it is health insurance.  In 2014, if you do not purchase health insurance, then you have to pay a fine.  The requirement to purchase health insurance is logical if you want to make health care reform work.  Unfortunately, making health care reform “work” requires surrendering liberties to the government that we reckon a majority of gringos are not willing to let go of.

At The Mint we believe that Freedom is more important than universal health care and hope that this provision is struck down.  It is one thing to give incentives to purchase something, which the government shamelessly does as a backdoor subsidy to many industries via the tax code.  It is quite another to require the purchase of something and impose a penalty if you do not purchase it.  The latter reeks of totalitarian desperation to support a broken industry.

So chalk up one minor victory for Freedom!  Now on to our musing of the day…

We are relaxing down here in the southern hemisphere in what, in economic terms, may be one of the poorest countries on the planet.  How do you define poor?  It is all relative, of course.  If you are defining wealth in terms of an increase of US dollars or their equivalent that are traded in exchange for goods and services, then yes, you could call Bolivia poor.

But if you stop to think about it, as we often do to our detriment here at The Mint, this definition may only account for how much wealth is being consumed in a region while ignoring the all important production component of the economic equation.  To understand how much a country is producing and selling relative to how much it is purchasing and consuming, the best indicator would be the country’s current account balance, commonly known as the balance of trade.

To look at the world in terms of the balance of trade in table format, as the Wikipedia allows us to do, is truly eye opening.  Please click here for the table to see what we mean.  Now, defining wealth in terms of a nation’s current account balance and placing the data on a world map, one gets a truly shocking picture of the world such as this one which is based on IMF data from 1980 to 2008:
Cummulative Trade Surplus (Green) or Deficit (Red) 1980 - 2008
While these compilations are just numbers based on trade in currencies that can be created on a whim and are hurtling towards obsolescence, the dramatic relative swing is worth noting.  It is also worth noting that, technically, running a consistently negative current account balance would leave a country bankrupt after a period of time

Back to our question, does one define poor?  In 2009, Bolivia, where we are, had a trade surplus of just $1.7 billion.  Compared to China who had a whopping surplus of $296 billion, it would appear extremely poor.  Now look at the bottom of the list and you will see the USA, digging itself a $380 billion trade deficit in 2009 alone, far outpacing any other country on the planet.  So last year, on a net basis, Bolivians added to their net worth while the Americans continued to torpedo theirs.  But on the ground here in the Plurinational State of Bolivia, this analysis just doesn't seem to add up.  What gives?

What gives is that in our crazy world where down is up and up is down there is always something more to consider.  Precisely because the currencies used to measure the balance of trade can be created out of thin air, the above map and linked table may be looked at upside down, if you will, to get a picture of where physical wealth is really accumulating.  Standing on our heads, we would see that the USA has received $380 billion worth of goods and services more than it has produced and has given in return only a paper promise to pay it back with something real.  Probably more paper currency!  Meanwhile China and Bolivia and any other country with a positive current account balance have essentially sent away their excess physical production in exchange for this same paper promise.

So who is rich and who is poor?  At the end of the day, one may be best off in Kyrgyzstan, who came the closest to clocking a $-0- current account balance at the end of 2009.  As the Polonius said to Laertes in Hamlet:

Neither a borrower nor a lender be;
For loan oft loses both itself and friend,
And borrowing dulls the edge of husbandry.
Trade imbalances between nations have a tendency to cause friction.  With tensions high on the Korean peninsula, the nations would to wise to heed Polonius’ advice.

Stay Fresh!

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Key Indicators for Tuesday, December 14th, 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.