The Caracas Course

Want to be a Venezuelan millionaire? Just bend over!

(Source: Getty Images)

Bill Bonner, reckoning today from Youghal, Ireland...

It’s the “Decision of the Century.”  

Like the decision to get married, start a business, or rob a bank, it will affect our quality of life for decades to come.

The decision to go to war in 1914 set the stage for the Russian Revolution, the Nazis in Germany, WWII, the rise of Mao in China… and 100 million deaths. This, too, is likely to be regretted for generations.   

Mathematically, the US deciders have a 50% chance of getting it right. It’s either yea or nay… up or down… now or never. But politically, the odds heavily favor the wrong choice.    

Either they voluntarily abandon their inflation policy… or let it run its course. The pain will be severe, one way or the other. Stopping inflation now will mean huge losses on stocks, bonds, and real estate. Businesses will go broke. Millions will lose their jobs as the economy corrects two decades of Fed mischief.  

But sticking with the inflation policy will be much worse. The longer it goes on the more distorted, indebted and fragile the economy becomes. “When the money goes, everything goes” – including the political system… and the social norms that a civilized society depends on.

Today, we look at the past in order to guess about the future. And let’s begin with the ‘forgotten depression of 1920.’

Hard and Fast

US consumer prices were rising at a 1% to 2% rate as the war began. By its end, they were going up at a nearly 15% annual rate. Then, in 1919, came the correction. The troops came home and looked for jobs… the wartime spending came to a halt… and the economy went into recession. US stocks lost half their value. Corporate profits dropped by 90%. Business failures tripled. And consumer prices fell 18%.

This pain came on hard and fast. But the dollar was still as good as gold. And the newly-hatched Fed did not intervene. Capitalism had been wounded in the trenches, but less than 24 months after the armistice was signed it had recovered completely. And not for nothing was the period that came next called the “Roaring Twenties.” The depression of 1920 had cleared out the wartime distortions, leaving the economy ready for strong consumer-focused growth.      

An intentional, government-policy inflation is a very different thing. For one thing, it can last much, much longer – about 16 years on average. But it too eventually comes to an end.    

The most recent example comes from Venezuela. Bloomberg this week:

More than two dozen office towers are rising from the narrow lanes of Las Mercedes. On the ground level of the 15-story Jalisco Tower, passersby can marvel at three red Ferraris on display at a dealership. The four-seater Portofino convertible, the cheapest, retails for more than $200,000, which equals the annual pay of 590 entry-level public employees. Across the street, an apartment building is under construction. A brochure advertises a rooftop pool, game salon, gym, and co-working space. Stores sell Hermès and Pronovias clothing around the corner. Not far away, a shop displays $1,000 stilettos from Gianvito Rossi, the Milan designer. 

What happened?  

Did the Venezuelan feds confess that they had failed? Did they apologize, forswear their inflation policy, vow to balance the budget and back the bolivar with gold?

Nope… they kept inflating as long as they could.

Dollarize This!

Venezuela had a longstanding practice of spending more than it could afford… and papering over the difference with ‘printing press money.’ Sixteen years ago, the inflation rate was already in double digits. Then, it took years more for the rate to get into the triple digits. During those years – from 2006 to 2011 – an observer might have concluded that consumer price inflation was more or less ‘stable’ in the 20 – 30 percent range.

But then, in 2015, the inflation rate hit 256%. Three years later, it was almost a million percent (based on IMF data) and the Venezuelan economy made Mariupol look like a model of peace and prosperity.

It was easy to become a bolivar billionaire, overnight. You only had to go to Caracas and bend over. There were billions of them lying in the street… not worth the trouble it took to pick them up. By then, the national currency had become so worthless that people used it to light fires or as packing material.

The country was a catastrophe. Five million desperate people left – many with little more than the clothes on their backs. Inflation reached nearly 3 million percent. The shelves were bare and stomachs were empty.

The Venezuelan feds could still add zeros to their notes. But who would take them? Their ‘inflation tax’ collected nothing. And their regular taxes brought in only more worthless bolivars. (The Romans once devalued their own currency so much that they refused to accept it for tax payments.)

In other words, for the country’s rulers, inflation no longer paid off. By 2018, there was nothing more to be gained by devaluing the currency. There was no value left in it. So, the Venezuelan feds allowed people to use a different currency – the dollar. 

Bloomberg again:

Most significant, in late 2018, Maduro let the US dollar circulate legally. Everyone, from executives to street vendors, now carries greenbacks, which could have led to jail time under Chávez. 

And now, with a new far more stable currency available, the economy begins to recover.  

We, The Mob

In the US meanwhile, the inflation cycle is just beginning. The CPI is still under 10% (officially). The ruling deciders can still boost their stock and bond prices by printing up more money. They can still placate the mob, too, with gimmie/stimmie checks. And they can still pursue their favorite hustles –  setting the earth’s thermostat,  ‘equality,’ un-ending war with designated enemies abroad… and social control at home, made necessary by ‘terrorists’ in the ‘homeland.’  

But wait. “The people” hate rising prices. They won’t look too kindly on politicians that allow it. Won’t that be incentive enough for the Biden Team to turn away from inflation now?

We’ll look at that on Monday.

Regards,

Bill Bonner

Joel’s Note: A few questions coming in from dear readers of late – the best way to own (physical) gold, preferred stop loss strategies, pricing the Dow in the Midas Metal, etc.

As such, we thought it might be time to conduct a little Mailbag Session this coming Sunday. If you’ve got a query, either drop it in the comments section below or write to us at bonnerprivateresearch@gmail.com

Tom Dyson and Dan Denning have kindly offered to field your questions, as appropriate. Just remember, we can’t offer personal investment advice, so please keep ‘em general. And look out this Sunday for some Q & A action. Cheers!