Tuesday, January 11, 2011

The Problem with Socialism, A Bank Run, and Bolivia Retains its Cheap Gas

1/11/2011 Portland, Oregon – Pop in your mints

The final week of our stay in Bolivia was marked by the government doing an about face in their attempt to raise gas prices and a good old fashioned bank run.  Not exactly the relaxing vacation we had expected but in Bolivia, things are nothing if not interesting.

First, the about face in gas prices.  As you will recall, the government surprised nearly everybody by announcing that they were no longer going to subsidize the domestic fuel market, a move which meant an immediate 80% increase in the price of gasoline and diesel fuel.  Even the spineless neo-liberal governments that Evo Morales, the current President, had marched to overthrow did not have the chutzpah to try such a feat.  This was truly rare.

What was not rare was the typically Bolivian response to such government insanity.  While Evo's supporters attempted to downplay the move as "bueno para el Pais" (good for the country), the rest of the country did the sensible thing and went on strike.  All transport Bolivian transport workers, who make up for what they lack in equipment by their ability to organize and party, set a 24 hour strike for Tuesday, December 28th.  To boot they increased fares for all types transit in the country.  The bakers, then, set a strike of their own, we were to go three days without and on the fourth day we would pay 40% more than before for our daily bread.

While the transit workers and bakers were causing a raucus, the President was unwavering.  If prices were to rise, they must rise.  He went on TV with his brilliant counter-proposal.  To increase the pay of the military, police, teachers, and health care workers and to double the bonuses of the rest of the public work force.  This seemed sensible given that the government would need protection in the coming days if it were to stick to its guns.

While Evo's economics would make Lenin blush, he is at least an honest man.  He knows that Bolivia has a problem.  This problem is a problem that takes many forms and is common to Socialism.  In this particular case, Bolivia has a nearly unbreakable social contract with its citizens to sell them oil for $30 per barrel.  It can get this oil in one of two ways, it can produce it for $60 per barrel or import it for $90+ per barrel.  Either way, the government is losing a ton of money.  It cannot attract foreign investment in its oilfields because of its crazy Socialist habit of nationalizing industries.  On top of it all, its ungrateful citizens take this gift of cheap oil and sell it to neighboring countries on a black market for a tidy profit.  The only decent way out of this insane arrangement is to end the subsidy.

On Wednesday the 29th, Evo Morales was to fly to the Chapare region to explain this move to the "cocaleros" (cocaine farmers who form Evo's most solid political support base) who rely heavily on cheap gas and cocaine being a banned substance in the developed world to keep thier profit margins high.  We are not sure what happened deep in the Chapare that day but two days later on New Year's Eve, Evo Morales retracted the decree and Bolivia retained its cheap gas.  For a recap of these events in Spanish see the following news clip.  Even if you don't speak Spanish, you can get a feel for the events by simply watching the first part:



At the same time that all of this was occurring, there was a rumor in Cochabamba of an impending "corralito", which in Spanish has come to mean that the government takes the money out of everyone's bank accounts in the national banks and leaves "I.O.U.s" in its place.  This happened in neighboring Argentina in 2002 and decimated the life savings of many.  The logic for the impending "corralito" was simple from the people's standpoint.  Evo's bankrupt Socialist government has no money, hence it must:

1) End the gas subsidy
2) Rob all private citizen bank accounts and
3) Forcefully appreciate its national currency against the dollar

All this must be done so that Bolivia can pay its US dollar denominated debts.  Action number two on the list above led to a series of events which involved your author riding into downtown Cochabamba with his Brother in law armed with pistols and stun guns should we need to accompany my Father in law with a large sum of money out of the bank.  The whole affair never got farther than the would-be body guards sipping coffee overlooking the plaza waiting for a phone call.  The bank ran out of cash before the need for us to brandish our arms ever arose.

We relate these experiences to you because they are both strange and all too familiar to a society stumbling its way towards Socialism.  Government action in the economy almost exclusively means great harm to its citizens and general unrest.  This week we get word that Bolivians now need to wait in line for sugar and rice.  Chavez is beaming and Castro would be proud, but the people of Bolivia are fed up.

Could this occur here?  Anything is possible.  But our money is on America waking up to the Socialist menace on its own shores before it is too late.  Americans are an impatient bunch and the grocery checkout line is frustrating enough!

Stay Fresh!



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Key Indicators for Tuesday, January 11th, 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.
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