Idiocracy Alert! OIl-rich Venezuela Hit by Power Blackouts

Socialism has a way of tearing down economies that have every reason to prosper. Despite enormous oil wealth, Hugo Chavez' Venezuela is on the brink of massive power blackouts. The government recently devalued the Venezuelan currency. The Venezuelan economy is undergoing significant contraction at the same time as inflation threatens to rocket out of control.

Venezuelans are already suffering widespread water rationing and increased power cuts and could punish the socialist president for the problems in September elections for lawmakers.


Chavez must navigate a number of issues, including price rises after a devaluation and high crime, if he is to maintain his approval ratings above 50 percent this year. _reuters

Venezuela appears to be following in the path of formerly wealthy Zimbabwe, which recently issued a $1 trillion bank note.

"The typical Venezuelan is saying, 'My savings are going to be worthless,' " said Robert Bottome, editor of the business newsletter Veneconomia in Caracas, the capital. "The store shelves are pretty much empty right now."


The energy shortage has affected industrial hubs and far-flung hamlets. On Tuesday, the government announced rolling blackouts in big cities to prevent what Electricity Minister Angel Rodríguez called "a total shutdown of the country." _WaPo

Meanwhile in the US, President Obama and Speaker Pelosi see much to admire in the ideas of social justice as practised by world leaders such as Robert Mugabe and Hugo Chavez. They intend to emulate the success of the two leaders, who were received with exceptional respect at the recent Copenhagen Conference on Climate Change.

Why Is Oil $70 a Barrel Rather than $50?

Oil stockpiles around the world are bursting at the seams, and energy demand is stalling with the choking economies. Oil production is already artificially cut back by the collapse of oil-producing infrastructure inside the inept national oil producers such as Venezuela, Iran, and Russia. OPEC has also cut way back on production in an attempt to bring prices back up to the $100 a barrel + range. Almost the only way to reduce production further, would be to start a middle-east war involving Iraq, Iran, Saudi Arabia, and the other gulf states.

So why is oil overpriced? You can trace the problem straight to Washington, DC, and the inflationary pursuit of the weak dollar.

A weaker dollar encourages producers to raise prices, or to consider pricing their output in a stronger, more stable currency. Meanwhile, non-US consumers experience stable or falling energy prices that encourage demand growth, which eventually leads to higher prices in all currencies. Either way, US consumers would see higher prices for petroleum products, though it's not clear how much further demand could fall in the near term, with US oil consumption already running 10% below 2007's, on a comparable year-to-date basis.

The dollar has already weakened by about 10% against the Euro and 5% vs. the Japanese Yen since March, as the resolution of the financial crisis and early signs of a global recovery have eased the fears that prompted a classic flight to dollar safety. This shift merely returns the exchange rate to roughly its level of pre-crisis 2008. Oil prices have risen by around 40% over the same interval, though how much of that is due to a weaker dollar is far from clear. However, from today's $70/bbl level, another 25% drop in the value of the dollar could return us to the threshold of $100 oil. _EnergyOutlook_via_NewEnergyandFuel

As the dollar plunges in value, world investors and large funds will chase value anywhere they can find it. As long as oil remains virtually irreplaceable in the economies of the world, oil will have value.

As Obama dollars keep dropping in value, Americans will find the cost of almost everything going up. Rising costs will outrace rising wages for everyone except government and quasi-government employees. The private sector will find itself choked, unemployment in the private sector will continue to lose millions more jobs, and mortgage foreclosures in both the residential and commercial markets will keep rising.

Peak oil? Yes, political peak oil. The only kind of peak oil you'll ever see. But worse than the high costs of energy will be all the economic blowback that comes with high costs, high unemployment, and continuing strain on the financial sector.

Meanwhile, that government and all its expenses just keep on growing. Who elected these clowns?

Obama's Coming Hyper-Inflation: What Will You Use For Money To Feed and Shelter Yourself?

If you are a government employee, with wage increases tied to inflation, you will do better than most. But unless you are paid increased wage paychecks every day, it will be easy to fall behind Obama's coming hyperinflationary expansion. Anyone living on a fixed income, or on savings, will have a very hard time of it.

The hyperinflation meme is rising on the Media-Attention-Meter. A lot of commenters treat hyperinflation as an event horizon, beyond which no information is available. That's not exactly true.

There is a pattern to hyperinflation, and while it can be really nasty, it is not the end of the world.

It could, however, be the end of your retirement account, assuming it consists of treasuries, mortgage-backed securities, derivatives, or other abstract financial instruments that are not based on anything real. U.S. Dollars fall squarely under that category.

And I've been meaning to post something at least a little positive for once: On the plus side, if you can maintain income increases through the hyperinflation phase, you could possibly pay off your debts really quickly. _Hyperinflation-Watch_via_PowerandControl

If you have a large debt, and have an income linked to inflation rates, you may be able to pay a huge debt off very rapidly, as Zendraken mentions above. Otherwise, you may be in a heap of trouble. What will you use for money when Obama hits the fan?

It is neither too late nor too early to think about items of barter and exchange that might be widely in demand under an Obama hyper-inflationary reich. Old-fashioned barter markets are likely to spring up in towns, cities, and neighborhoods of all sizes. What could you offer in such a market to keep your children and yourself clean, dry, warm, safe, and well-fed?

This is not a theoretical discussion. Obama is doing his part to bring on this scenario. Now you must think about what you need to do about it.

More interesting thoughts here and here. Update: A look at Obama's tax pains.

Obama / Pelosi : Pissing Away the Tax Revenues of Future Generations On Short-term Bandaids That Don't Solve Our Problems

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The problem with this country is we spent all of our time and resources creating money out of thin air using leverage and smoke and mirrors or serving each other lattes. America needs to produce actual stuff in order to get back on our feet. The government can spend money wisely to steer us down that path...or it can continue to piss away the tax revenue of future generations on short term Band-Aids that don't solve our problems. _MotleyFool

The US is poised on the brink of a disastrous monetary and budgetary policy that will destroy the surviving financial infrastructure of the country, along with any reasonable prospects for an early recovery. We are being given a gargantuan "recovery bill" that is all about political retrenchment for democratic party supporters. Not a recovery bill at all, but rather a wealth transfer bill from producers to political hacks, financial vultures, and non-producers.

If you have worked hard, followed the rules, paid your bills and taxes -- too bad. Unless you are politically well-placed to benefit under the Obama / Pelosi reich, you are only the main course. By the time this financial wrecking ball has done its demolition, your hard-earned assets will be worth a fraction of their current value, unless you make timely preparations.

It is thus almost a dead certainty that the combination of wasteful Keynesian spending (if you will ignore the tautology) and supply-side effects would produce a sharp spike in inflation that is designed to buttress the ability of borrowers to repay their obligations while rendering the value of their payments almost moot for lenders.

Asians [ed: and others] have saved a lot since the end of the Asian financial crisis, but will find an acceleration of wealth diminution upon them in months to come. Their only defense against this course of action that the G-7 countries have embarked on would be to boycott all debt issuances from the US and Europe over the near-term until yields rise fast and far enough to compensate for inflationary risks. Unless this can be pushed through, the only safe assets would be those that can hold a degree of their purchasing power,namely physical commodities and, of course, precious metals such as gold. _AsiaTimes

Inflation makes it easier for debtors to repay their debts. Since the US government is the big daddy of debtors, it makes sense for Obama and Pelosi to flush the dollar's value down the toilet. They can run the printing presses all night long. When will they start printing a $1 Billion bank note? Give them time.

During the stock panic, central banks around the world panicked. They fear deflation too, so they started cranking up the printing presses at phenomenal rates. The epic deluge of money they unleashed is going to filter into the real economy and drive up general price levels.

You can see this above in MZM growth. The US economy is shrinking thanks to the panic, there are less goods and services on which to spend money. Yet simultaneously the Fed is recklessly ramping broad money at double-digit rates. Sooner or later relatively more money will be bidding for relatively less goods and services, which will drive up prices. You simply can’t have 10%+ MZM growth without seeing big inflation eventually. _SeekingAlpha

Economists and bankers have leveraged themselves up into the stratosphere. Without hyper-leverage buoying them up, they get a strong sinking feeling in their stomachs. The world economy lost a lot of leverage when the commodities boom busted,and home price drops triggering the sub-prime bubble burst. A lot of big-money shops had to close their doors or get bought out. Nowhere to run, hide, shelter, or hedge. The ivy league whizzards [sic-pun] on Wall Street ran out of government sanctioned magic wands.

The direct result was the election of Obama-Messiah, Saviour to the world. Everything the Obama / Pelosi reich is doing now is for short term advantage. Empower the get out the vote for 2010 by giving billions to ACORN. Firm up the DP alliance with the public employees unions, trial lawyers, news media, and low income voters. First assure the retention of power. Then if anything is left over, perhaps you should try to help the economy.

Unfortunately, by the time the reich gets around to constructive purposes, the foundations will have been undermined -- perhaps beyond repair. Take care of your own future, the O / P reich only looks out for its own.

Obama's Hyper-Inflationary Gotterdammerung

Obama himself is incredibly insubstantial in terms of knowledge, experience, and competence. He can best be viewed as a potent symbol and flashpoint for multiple dynamic and powerful social, political, ideological, cultural, and economic forces on the national and international levels. As a figurehead and facade, therefore, Obama is quite effective. It is only when wise and competent action is called for, that figureheads begin to show their core inadequacy.

Most members of the general and voting public have a caricatured view of how the world works and what is involved in administering a gigantic national phenomenon like the 21st century US. For many younger and less intelligent voters, a symbolic figurehead may seem the appropriate type of person to serve as head of state. But in the absence of decisive and informed decision-making from the top of the hierarchy, a multitude of competing bureaucratic kingpins will create an unholy cacophony of governmental destruction.

The current credit crunch and deflationary cycle we are experiencing can be written off to a number of factors, many of which were described by Kondratieff and others (via Dennis Mangan). But whether a timely recovery from this long-expected deflation will occur depends largely on economic decisions that will be made by the incoming Obama reich.

Here are a few of the shoes yet to drop:

1) Commercial Real Estate is going to face the same challenges that the residential housing market went through and continues to go through - except it will be worse. This shoe has implications for banks and insurance companies as well as the commercial real estate developers, both public and private.

2) There will be at least one automobile manufacturer (GM) bankruptcy by early spring. If this shoe drops, a second automobile bankruptcy (Chrysler) should follow shortly thereafter. And, a European automobile manufacturer could also go into Administration as well.

3) Corporate pension plans will show a big problem. Specifically, most, if not all, corporate pension funds are significantly underfunded and will require companies to shore up those pensions using up vitally needed cash.

4) Private Equity will suffer severely as funding continues to be very difficult and operations of the businesses will be impacted by the recession and will require capital. In addition, the IPO market will provide no relief for P/E to monetize investments and exit businesses.

5) Hedge Funds will continue to face redemptions and underwhelming performance. This will continue to pressure the markets and reduce liquidity. It will also impact the brokerage industry.

6) Municipalities all across the country will face huge budget deficits and will be forced to cut services and raise taxes. A major municipal default will occur before year end.

7) More small and mid-sized bank failures will occur...these will be the flip flops of the shoe storm.

8) The housing depression will continue as prices continue to fall and demand for homes does not materialize even with all the government programs being put forth. Housing inventory will rise to historic levels. at least one major homebuilder will go bankrupt.

9) There will be at least one, more likely many, major retail bankrupcty and at least one major commercial retail landlord, REIT, will go bankrupt.

10) Warren Buffets Berkshire Hathaway (BRK.A) will face the slings and arrows of the ongoing economic weakness and financial crisis. The stock will be cut down to size - maybe $50,000/share or so. Having just won the CEO of the Year award for 2008, which he probably deserved many years ago, it would only be fit for the company to show its vulnerabilities, which believe it or not it has, and succumb to the forces that have impacted every company in every business that Berkshire Hathaway owns or operates. _SeekingAlpha

I don't know about Buffet's company being re-valued, but I wouldn't be surprised. I don't really care. There are worse problems on the backburner. Bubbles within bubbles, threatening to burst.

The Obama phenomenon is clearly a hyper-inflated bubble, aided by Oprah and the national and international news and entertainment media. But the Obama bubble is riding on a much more ominous bubble, the bubble of the US Treasury. The deflationary risk posed by the impending bursting of the latter bubble puts all of the plans of the Obama / Pelosi monetary hyper-inflationary plans at risk. There is no simple formula for balancing catastrophic deflationary processes with deranged hyper-inflationary budgetary policies.

Obama and Pelosi appear to favour the hyper-inflationary approach of recovering from a recession, credit crunch, and de-leveraging of the financial system. They are in the company of a large number of academic, governmental, media and think tank economists in promoting a huge injection of liquidity into the the monetary system. It is an opportunity to spend into the trillions, that they have been waiting for all their lives. They simply cannot bring themselves to walk away. They believe they have Keynes on their side.

For Al Fin readers who want to have some sort of wealth at the end of this government-amplified and prolonged destructive process, think outside of normal investments. Some businesses will do very well if they are not nationalised or otherwise confiscated, hamstrung by regulations, or taxed to death by increasingly desperate governments at the local, state, and national levels. More on those businesses later.

Think about the various systems of barter and off the books trade that may be available. Think about precious metals in various forms. Think about necessities for you, for your neighbors, for society at large. Consider the cascading dynamics of failure as they will play out in your community. Remember, we are a few generations away from the tough people who survived the 1930's Keynes/Roosevelt-prolonged depression. People are much softer now, less competent in basic skills, and far more dependent on governments for even simple things, and soon to become even more dependent on governments under Obama / Pelosi.

But America in 2008 was not the America of 1930. There was never any danger of mass runs on the banks. The vast majority of Americans are of the opinion, rightly in my view, that the fed would not allow the banking system to collapse, an opinion that Bernanke's monetary policy has strongly reinforced. The danger is that by flooding the system with money, Bernanke will trigger a wave of inflation. Considering his unwavering devotion to the Keynesian faith, I think this is a highly likely outcome. To top it off, the crisis was the outcome of Keynesian policies that have given Obama the excuse to massively increase government spending. I think the results are going to be pretty ugly. _SeekingAlpha

This is not climate catastrophe, although if the world cools as recent data suggests it might, climate will make things worse. This is not peak oil, although under Obama / Pelosi, "political peak oil" is highly likely. This is not some obscure Mayan prophecy or other hocus pocus. It is the combination of incompetent people ( who happen to possess the hubris of deities) in places of power, with influence over a cyclic economic process that requires a deft yet delicate hand at the wheel.

Be prepared.

The US Spending That's Breaking the Bank

US federal government spending is spiraling upward. Which part of federal expenditures are taking the heaviest toll in terms of hurting the economy?

The federal deficit is expected to hit $407 billion for fiscal 2008 (which ends at the end of this month) and $438 billion next year. Still, the deficit is expected to be only 3% of GDP, which is in line with the average of the last 30 years. We hope Congress and the Presidential candidates don't obsess over the deficit per se, because the real fiscal drag from government comes from how much it spends, not how much it borrows.

The Bush tax cuts also aren't the budget problem. Until this year federal tax collections have been surging. In the four years after the 2003 tax cuts become law, tax receipts exploded by $785 billion. This year revenues have declined by 0.8%, but a major reason is the $150 billion bipartisan tax rebate that has hit the Treasury without spurring the economy. Without these nonstimulating rebates, federal tax payments would have climbed another 2.5%, according to CBO. Revenue is expected to be a healthy 18.5% of GDP next year without any tax increase.

Another myth is that the war on terror has busted the budget. While operations in Iraq and Afghanistan are expensive, defense spending is $605 billion this year, or about 4.5% of GDP. That only seems large by comparison to the holiday from history of the 1990s, when defense fell to 3% of GDP. As recently as 1986, defense spending was 6.2% of GDP.

The real runaway train is what CBO calls a "substantial increase in spending" that is "on an unsustainable path." That's for sure. The nearby chart shows how much some federal accounts have expanded since 2001, and in inflation-adjusted dollars. This year alone, federal agencies have lifted their spending by 8.1%, with another 7% raise expected for 2009. There's certainly no recession in Washington. The CBO says that, merely in the two years that Democrats have run Congress, federal expenditures are up $429 billion -- to $3.158 trillion.

....Meanwhile, remember that "pay as you go" spending promise that Speaker Nancy Pelosi made in 2006? We called it a ruse at the time, and the last two years have proved it. Senator Judd Gregg (R., N.H.) has tallied up at least $398 billion in "paygo" violations so far. Earmarks were also supposed to be cut in half by this Congress. In 2008 there were some 11,000 at a cost of $17 billion, the second most ever, and far more than half the peak of 14,000 in 2006.

The point to keep in mind is that this big spending blitz is coming even before a new President and Congress arrive next year with far more spending promises in tow. As they contemplate their choice for President, voters might want to consider which of the candidates is likely to be a check on Congressional appetites, rather than a facilitator. _WSJ

And that is actually the point, isn't it? While Obama has promised $1 trillion in new spending (!), McCain is not the stingiest of spenders in Congress, either. Biden's record offers little hope for fiscal restraint. Only Governor Palin of Alaska has shown the fiscal discipline that this building budgetary catastrophe demands.

Politicians in Washington DC do not answer to the voters, they answer to the special interests who financed their elections. There is a big difference. Perhaps no one is deeper in hoc to corrupt political machines than Senator Obama. Certainly no one has shown more eagerness to hobnob with truly despicable characters.

Voters need to be extremely careful this year, and every election year thereafter. Much of the fiscal disaster that is building, is enshrined in future promises and mandates. It will be imperative that many of the "social contracts" that have been legislated into government be re-negotiated. The current trajectory is unsustainable over the next couple of decades.

Either face the music now, or face it later when it's too late to mitigate disaster for over half the population.

Bimbo Money and Economic Volatility

The US Dollar, the basis for much of the economy of the world, has become a bimbo. A skank, a tramp, a slut. Easily manipulated, swayed, and counterfeited. Would you want to marry a slut? Then why would you put a slut in your wallet or bank account? High oil prices and food prices that are pushing the global economy toward dangerous inflation, are just a part of the mounting misery that a bimbo dollar can cause.

Aschwin de Wolf of Depressed Metabolism blog looks at the huge problem of "fiat currency" and suggests possible solutions.

During the 20th century, government has acquired almost unlimited power over money. This coincided with a move from a commodity based currency to a fiat currency with no underlying intrinsic value. As humans evolve, it is questionable if such a currency will be sustainable...The most obvious alternative for a government-controlled fiat currency is a commodity based currency. For such a commodity to be used as money it should be homogeneous, easy to subdivide, and have a high value to weight ratio...

A major advantage of using such a commodity bundle instead of a single commodity is that changes in monetary and non-monetary demand for a single commodity in the bundle (for example, gold) will only have a small effect on the bundle as a whole. In the context of advanced nanotechnology, commodities that can be produced by physical arrangement of common atoms may need to be excluded from such a commodity bundle to increase stability. Therefore, the most plausible candidate to be used as the standard for money would be a bundle of commodities that cannot be created by advanced molecular technology...The most important feature of a future money is that it should “not rely upon legalistic governmental imprimatur” and be immune to advanced molecular technologies. __DepressedMetabolism

This is a very important issue. The well-being of a society depends upon the stability of its economic system. Take a look at Zimbabwe or North Korea to understand the problem in extreme form.

The global economy is staring the possiblity of hyper-inflation in the face--largely due to the lack of any firm currency base. The US dollar has slipped badly due to irresponsible US government policies, contributing to the global commodities price runup.

Here is a short excerpt from Robert Freitas' "Tangible Nanomoney" (via Aschwin de Wolf):

What Is Money?
Assuming some form of physical specie will still be useful in a nanotechnology-rich society, what form should it take? We recognize that money generally serves two well-known primary functions: A store of value, and a medium of transaction. As a result, we can postulate that in the ideal form:

1. Money should be an efficient store of value, having high value per unit volume or per unit mass.
2. Money should be available in small enough physical sizes to be readily portable, even in the largest denominations, by human users, thus facilitating exchange transactions and specie warehousing.
3. Money should be physically stable for a duration of time spanning at least the maximum intended period of transactions and/or the maximum value storage horizon.
4. Money should not be inherently physically dangerous to its owner (e.g. radioactive, poisonous, explosive, etc.).

But money must also be trustworthy, which has several additional implications:

5. Money should be difficult to counterfeit.
6. Money should be difficult or impossible to replicate at a cost less than its cost of manufacture even by the most efficient means possible. That is, production costs (aka "intrinsic value") should approximate face value; seigniorage should be minimal to nil.
7. Money should be immediately recognizable as the intended denomination of the intended specie. Once revealed, the intrinsic value of the specie should be difficult to disguise. If unrevealed, the specie should still be compact enough to hide (from thieves or tax authorities) on one's person or elsewhere; see (2) above.
8. Money should be self-validating by its own physical form, and not rely upon any legalistic governmental imprimatur, easily-altered surface stamping, or monopoly minting authority to partake of value (e.g., no "fiat" specie).

It is easy to see that modern currencies including the US Dollar, all fail to satisfy the minimal criteria for "good money." Freitas then goes on to explore the topic of "nano-money" more fully.

As global markets become more critically volatile--due to several factors including fiat currencies, and the extreme complexity of the markets and their derivatives--the need for a tangible form of currency becomes rapidly more important.

Update: Aschwin de Wolf also wants to know what the impact of singularity induced widespread abundance will have on current economic systems--based as they are on fiat currencies, and the economics of scarcity.

Commenter Will Brown published a piece two years ago on that very topic, titled "Strategy of the Singularity Model of Economics". Discussion of this post can be found in the main postings and comments at Event Horizon and The Speculist. Robin Hanson's piece "Singularity Economics" also deals with the issue and contains useful links. Fiat currencies are already under significant stress now. As the extreme economic turbulence of singularity technologies begin to hit the global economic system, all bets are off, economically. I do not expect to see rampant catastrophe and doom when the technologies of abundance collide with the economics of scarcity, except in the parts of the third world that are typically prone to such--and in top-heavy anti-democracies such as China and Russia.