Venezuela is like a surreal field experiment of failing economic policies. But sometimes the macroeconomic figures we read about deceive us; they show the harsh reality intellectually, but the human suffering behind those numbers is never revealed to us on an emotional level. Even Joseph Stalin apprehended this asymmetry when he said: “The death of one man is a tragedy; the death of millions
Venezuela is like a surreal field experiment of failing economic policies. But sometimes the macroeconomic figures we read about deceive us; they show the harsh reality intellectually, but the human suffering behind those numbers is never revealed to us on an emotional level. Even Joseph Stalin apprehended this asymmetry when he said: “The death of one man is a tragedy; the death of millions is a statistic.”
This is a testament to how bad economic policies wreck the lives of millions and how buying physical gold would have saved many an ugly finale. But such “banana republican” economic policies are not peculiar to Venezuela alone. Are we at risk of the same mental trap? Do we remain inert in face of economic disaster because we fail to understand the consequences emotionally?
My mother-in-law always had a ho-hum attitude to anything (potentially) damaging, especially when it concerns personal finance. When things were still looking better (less bad) in Venezuela, she wouldn’t pay much attention to what could happen in the longer run. She’s not alone; perhaps the great majority of Western civilization can be characterized as such: heedlessly living in the illusion that Big Daddy government will take care of them indefinitely. Not carefree, but careless.
Ironically, her state pension was denominated in ‘bolivares fuertes’, or ‘strong bolivares’, which replaced the already hyperinflated bolivares that were used before. It amounts to a living standard of average European pensioners; it buys you food, shelter and occasional leisure. It would permit your parents to take you out for dinner at least once a month.
Yet estimated annual inflation for 2014 in Venezuela is 80%. That means that $1 will be worth only $0.56 in the course of a single year. Worse still, since Chavez’s death on March 5, 2013 the bolivar has already lost over 62% of its value.
This means that the state pension of my mother-in-law in a mere twelve months wouldn’t be enough to take her daughter out for dinner for the rest of her life, as she would blow her entire income on dinner and no money would remain to eat, dress, and shower for the rest of the month! She will become entirely dependent on the financial wellbeing (and moral pliability) of her only daughter, as the government defaults on its promise.
Many have heard about “blowback”. Blowback is CIA slang for the unintended consequences of a covert operation. Consequently, economic blowback is the unintended consequences of bad economic policy. Venezuela has been setting itself up for disaster for years, akin to how the entire Western world (Europe, U.S. & Japan) has been setting themselves up for disaster for quite a while now.
Was the economic blowback in Venezuela unforeseeable? Not at all; any slightly clever person could have foreseen what was coming. It was just a question of a fair value judgment and mere preparation. No surprise here: the “smart money” has left Venezuela many years ago.
Similarly, anyone with some common sense can conclude that our countries are not in good shape. We’ve never seen such enormous indebtedness of governments and household before, and whenever in the entire history we would come close, the outcome was not pretty. Despite what our “monetary maestro’s” (Greenspan, Bernanke, Yellen & Draghi) say, it’s not “all right” because “we can always print the money”.
So why don’t people act now? Is it because they understand it’s not going well at an intellectual level, but fail to grasp it on an emotional level?
Let’s assume, however, that my mother-in-law would have changed her savings from bolivares to physical gold. What would have happened then?
Let’s not forget that the gold price dropped heavily in 2013 in terms of euro’s and dollars. However, we get a whole other story when we take the perspective of a Venezuelan. On 1/1/2013 the gold price in Venezuelan bolivares equalled Bs.F. 28,924. Yet at time of writing, over the course of a year, the gold price increased to over Bs.F. 100,000. That’s an increase of 246%. In 2015 the gold price might as well be Bs.F. 500,000 if we can rely on inflation estimates.
Is high inflation or a currency crisis a phenomenon that plagues only Latin-American and African nations? A majority seems to think so; but reality is different. Given the current levels of debt, both scenarios are increasingly more likely.
A better case cannot be made for gold. Would my mother-in-law have put her precious savings into physical gold, she would have been able to protect her capital — and take her daughter out to dinner. Now, she is dependent on her daughter, with savings and a pension that buys close to nothing, and with little to show for after years of hard work as an accountant. The lesson is plain and simple: protect yourself against currency turmoil and inflation as long as it's still possible and profitable, or you will be simply to late and suffer the consequences of inertia in face of trouble.