April 11, 2016

By: Bobby Casey, Managing Director GWP

Economic collapse is not pretty. It is, in fact, devastating. I once wished with all my heart that the US would find a way to turn herself around and get off her destructive course. Now I see the inevitability of collapse and spend most of my time trying to warn and rescue people before the sinkhole comes for them. I’m not stopping this event from happening.

America is dying a very slow and painful death. Her lungs will fill with water and give the feeling of drowning, and just as we think she’s taken her last breath, they will drain. And she has been doing this for decades. Whatever life support system is keeping her going, won’t last. It can’t.

I used to look at places like Venezuela, Brazil, and Argentina and fear for the US. We even wrote about it a few times here at GWP. But I think my perspective is changing. Death is a part of life. And people like myself have desperately tried to keep America alive, never once thinking of the potential behind just letting her go.

Is that mean? Or is that merciful? Whatever it is, it is practical. I hardly know what I’m trying to save other than some vestige of long lost idealism.

The shift in my perspective came as I continued to watch South America. Imagine watching a movie up to the halfway point. Everyone is in peril. The end is nigh. The villains have the upper hand. All is certainly lost. Well, if you stop the movie there, then yes. That’s where I was with South America. And then something happened. The film kept playing. The story kept unfolding. The plot started righting itself. I dare not avert my eyes even for a second.

Dismal as things have been and become, you can’t fall any further than rock bottom.  South America is at or very near that point and capitalism finally has the space to work. It is sad that societies have to get to the point of death and destruction before they change their ways, but that plot has been playing on a loop since the beginning of human civilization.

South America has been mired up to the gills in socialism. But all that has come to a recent head, and people have had enough. Apparently, the people aren’t particularly excited about the latest Venezuelan cuisine: Rocas Fritas, or “fried rocks”. While mineral rich, I’m sure, the people instead have turned to the black market. Smuggling has escalated and you’d be surprised what is considered contraband. Goods such as powered milk and toilet paper are now black market provisions. Some are selling off their state sponsored rations all over the region. They get oil for pennies, and sell it for dollars off the northeastern sea. What the US dollar’s official trading value is and what it is on the black market are entirely different as well. The official exchange is 6.3 bolivars per dollar but on the black market the dollar sells for around 900 bolivars (Source: Reuters).

This sounds really sad. It’s not. They are healing themselves of the government imposed wounds. Desperate people scrambling around to survive, resorting the smuggling and illicit activity sounds tragic, but it’s not. Capitalism is the one system no one has to wait for. It’s always just there. There’s no lines, no paperwork, no bureaucrats. It’s just there. And they are tapping into it. BUT for capitalism these people would be dead in the streets. Simple as that.

There’s more to this, however. It isn’t just about what desperate people will do to sustain themselves. If it was JUST desperation, you’d see theft until everything disappeared… and eventually death. Theft isn’t sustainable. Instead, you see markets and commerce. People are buying things… not stealing. (That’s not to say there’s NO thieves in Venezuela. Of course there are. But the black market is doing more to sustain life than take it.) People are actually taking action against their governments and respective despots.

“Yet, the black market, while imperfect, is offering an escape valve for the economy, a means for the poor by whatever means to obtain goods they would otherwise have to do without. ‘Repressing the black market rate, smuggling or trading is going to deteriorate the economic picture even further,’ said Alberto Ramos, a senior analyst at Goldman Sachs in New York. ‘It will lead to even high inflation and higher levels of goods’ scarcity. The unofficial foreign exchange market and smuggling are to a large extent economic escape valves.’” (Source: The Guardian)

While the US holds $5 billion presidential campaigns where protesters are hired to instigate against one or the other; while the American youth are sobbing in the halls of the student centers for their “safe spaces”; and while the American voter is groveling at the feet of government for free healthcare, college, and $15 minimum wages, South American countries are doing without and turning toward markets.

Chile has been on a steady climb as being one of the most economically free countries not just in South America, but the world! It’s high time there was some competition in that region for that honorable spot.

Argentina

Mauricio Macri beat Cristina Fernandez de Kirchner in last year’s Argentinean presidential elections.

We talked about Kirchner’s failures in managing this resource-rich and once strong market player. The people got pushed against the wall, and when put to them chose freer markets. Macri didn’t barely drew his first breath in office before he took radical action.

“On December 14th he scrapped export taxes on agricultural products such as wheat, beef and corn and reduced them on soybeans, the biggest export. Two days later Alfonso Prat-Gay, the new finance minister, lifted currency controls, allowing the peso to float freely. A team from the new government then met the mediator in a dispute with foreign bondholders in an attempt to end Argentina’s isolation from the international credit markets.” (Source: The Economist)

He has the sad displeasure of having the Argentinean peso catch up to its black market counterpart. Kirchner was largely sustaining the economy under price and monetary controls. Nothing is priced at its true market value. So, between austerity measures to cut subsidies, and price adjustments in the form of increases on public utilities, some painful times are ahead. But better now than later… and better late than never.

This comes with good times and tough times. On the one hand, people aren’t hoarding anymore for fear of shortages or the cost of export.

“Farmers who had hoarded grain in the hope that the tariffs would be lifted are now selling, replenishing foreign-exchange reserves that had been drained to defend the artificially strong peso. The newly freed currency fell by more than 30%, a further boost to exporters. It has stabilized at around 13 pesos to the dollar.” (Source: The Economist)

And on the other hand you have even more inflation. But this only demonstrates how far off course the previous administrations were economically. That the pendulum must swing so violently and the numbers must peak and valley so much is evidence of market correction and the turbulence that bears.

“[T]he devaluation has pushed up the inflation rate, already more than 25% when Mr. Macri took office. To rein it back, on December 15th the central bank raised interest rates on short-term fixed deposits by eight percentage points to 38%.”

After nearly a decade and a half of resisting, President Macri has the courage to face down the country’s debt. Difficult as it will be, he is leading Argentina down the arduously slow path of honoring its debts. No more fringe left isolationism. Argentina will earn its place in the global market.

There are other South American countries and signs of their turn-arounds (Source: Panam Post):

Venezuela

Suffering for about as long as Argentina, Venezuela has had enough too. In addition to implementing constitutional measures to oust current president Maduro, the people turned out in incredible numbers to switch up their legislative body.

“Last December and for the first time in 17 years, on the election with higher voter turnout, Venezuelans chose an opposition-controlled National Assembly, removing the Socialist Party control of the legislative branch.”

Brazil

The streets of Brazil have been teaming with people demanding the resignation of President Dilma Rousseff. She is eyeballs deep in allegations of corruption, and Brazil’s congress is preparing impeachment proceedings against her.

Bolivia

President Evo Morales – the same one who was held hostage by the US government in Switzerland a few years ago – imposed limits on social media blaming that medium for misinformation that can lead to government overthrows.

However, Bolivians in a referendum defeated Morales’ ambitions at a fourth term, which also means his mandate will be allowed to expire in 2020.

It’s a beautiful restorative mess in South America! They have hit rock bottom and they are ready to take control of their own lives. The healing process is slow and understandably frustrating for the citizenry. Right now all we see are little buds of revolution.

Once again, we put it to South America: open your borders. Give a path to residency or second citizenship to your friends from the disenfranchised north. There are people from the US who can be both market benefactors, and subsequent beneficiaries of the free market systems being embraced by South America. I hope it doesn’t take what South American has endured to get America to wake up, but sadly I think it will. Why we insist upon dragging out the inevitable, I do not know. It’s cruel.

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