Blogs: Kathleen M. Packard
It is hard to be more Bolivarian than Leopoldo Lopez. The 42-year-old politician is one of the rare direct descendants of the sister of Simon Bolivar – the idol of Venezuelan presidents Hugo Chavez and Nicolas Maduro.
One might think it might be somewhat embarrassing to put Lopez in jail given his family lineage, but nothing seems too embarrassing for Nicolas Maduro, a onetime bus driver. Lopez has a bachelor’s degree from Kenyon University and a master’s in public policy from Harvard University.
Lopez also is one canny politician. You have to admire a man who can turn his own arrest into a political rally. As the New York Times’ William Neuman reported, Lopez faked out Caracas authorities and held a major rally in a different location than he announced. “Suddenly a shout went up from the crowd and Mr. Lopez appeared in the midst of the throng, wearing bluejeans and a long-sleeve T-Shirt with a connect-the-dots map of Venezuela on the front. Supporters jammed around him, and he made his way to the Martí statue. After a short speech, he climbed down, and in a press of supporters and news photographers, reporters and camera operators, he made his way to a waiting line of riot police officers, holding four white daisies above his head.
But the crowd surged through and carried Mr. López for several more blocks, until he finally arrived at a white armored police vehicle. After turning to the crowd and holding the flowers and a small Venezuelan flag over his head in a gesture of defiance, he climbed into the vehicle.
On a building behind him were posters from last year’s presidential election, with Mr. Maduro’s mustached face looking placidly down on the scene.
Maduro is on a downward economic political spiral. You have to question a government that turn an oil-rich economy into supermarkets with empty shelves.
You have to doubt a president who seeks to demonize his unhappy constituents by called them “fascists.” Meanwhile, the murder rate in Venezuela has been steadily rising along with inflation and media censorship.
You have to wonder about Latin American leaders who remain conveniently silent while law-abiding protests are squashed and law-abiding politicians arrested.
You have to pit a country whose citizens face a deteriorating economy. AEI’s Roger Noriega has written: “According to a source in Venezuela’s Central Bank, the country’s international reserves have dwindled to $21 billion — less than half the reserves of Colombia, an economy of the same size. Worse yet, $12 billion of Venezuela’s dwindling reserves is in the form of gold that is claimed by China as security for more than $30 billion in loans made in the last two years. Because Venezuela is not keeping up with oil deliveries to service that Chinese debt, the gold cannot be touched.
Another $7.5 billion of the reserves is in the form of bonds issued by Argentina, Bolivia, Cuba, and Nicaragua, a source in the Central Bank told me. Apparently that amount used to be held in U.S. Treasury bonds, but the regime traded these for useless paper from some of the region’s most insolvent countries. These bonds cannot be liquidated for cash because they are worth less than their face value, making their sale illegal under Venezuelan law. Thus, what is left in the bank is less than a half-billion dollars, which would cover the cost of about two weeks worth of imports. So shortages of essential goods will worsen in the days ahead.
Venezuela is falling apart. Simon Bolivar would not approve.
When Goldilocks came across an open cottage in the woods, she found three bowls of porridge. "This porridge is too hot!" she exclaimed. So, she tasted the porridge from the second bowl. "This porridge is too cold," she said. So, she tasted the last bowl of porridge. "Ahhh, this porridge is just right," she said happily and she ate it all up.
How hot is the porridge is the question facing new Fed chairman Janet Yellen. Suddenly, inflation seems friendly. “One of Janet Yellen’s first challenges as Federal Reserve chairman is generating enough inflation to meet the central bank’s target of 2 percent,” reported Bloomberg’s Caroline Salas Gage. “Policy makers have failed to attain their goal for almost two years and now are paring the pace of their bond buying. Inflation rose at a 0.9 percent rate for the 12 months ending in November, according to the central bank’s preferred measure. The last time prices were climbing at or above 2 percent was in April 2012.”
But the Fed is in uncharted territory. Balancing the accelerator and the brake will be Yellen’s challenge. Slate’s Matthew Yglesias has argued: “As long as inflation is low and stable, we can be sure the economy isn’t out of slack, regardless of what happens with headline unemployment. Throughout 2013, the inflation rate was very low—driven down by falling domestic energy costs thanks to the oil and gas boom. And in the couple of years before that, inflation was generally below the Fed’s 2 percent target.”
Fiddling with the economic chemistry experiment it has constructed risks unforeseen consequences. TIME’s Rana Foroohar has written: “ Yellen, a 36-year veteran of the Fed, embarks on her new job at a precarious moment. Unemployment is receding, and the recovery is building, but the Fed must now unwind the unprecedented quantitative-easing program. Taper off the $75 billion-a-month purchase of Treasury bonds and mortgage-backed assets too quickly, and the recovery could stall. But wean the economy too slowly, and the risks of asset bubbles and longer-term inflation, which critics like eminent Fed historian Allan Meltzer believe are already a huge issue, could increase further – with consequences that nobody can really predict since there’s no road map for where we are now and no precedent for the policy decisions of the past few years.”
Obviously there is slack in the economy. The hot economic air has been blown into the markets, which react nervously when there is any sign that the Fed’s hot air machine will be turned off. The economy is hovering. Where it comes down is still in doubt.
“Parastic bourgeois” are to blame for Venezuela’s current economic troubles, according to President Nicolas Maduro. “They blackmail and cry, saying if you don’t give me money there will be shortages – there won’t be,” Maduro has declared.
Inflation is up – to 56% in 2013. Capital flight is also on the increase. “Whether Maduro's failing policies or the so-called ‘economic war’ Maduro is accusing his opposition of waging are to blame, Venezuela entered a recession in 2013. GDP suffered a 0.4 percent contraction this year, according to estimates by Trading Economics. This, in a year when Venezuela dealt with 42 percent inflation, and the Venezuelan bolívar dropped 32 percent against the U.S. dollar,” wrote Patricia Rey Mallén in the International Business Times.
Maduro has ordered that corporate profits be capped at 30%. Reuters has reported that Maduro’s “Fair Price Law, which carries out many of the same functions as the almost identically-named Fair Price and Cost Law of 2011, appears to unify a disparate set of controls that were first created by Chavez in 2003....The law carries prison sentences of up to 14 years for crimes including hoarding, "destabilizing the economy" and food trafficking, which refers to people buying subsidized goods and reselling them mainly in neighboring Colombia.”
Of course, in Maduro’s Macondo, some things are subject to magical realism. One is the price of gas – just six cents a gallon. The New York Times’ William Neuman reported: “With their country holding the world’s largest estimated oil reserves, many Venezuelans consider cheap gas almost an inalienable right of citizenship — a coveted remnant of the boom days when Venezuela saw itself riding its oil riches to a first world dream of wealth and status.
But the illusion of inexhaustible wealth that every citizen can effortlessly tap into at the nearest gas station may finally crash into hard reality. President Nicolás Maduro has called for what was once unthinkable: It is time, he has said, to raise the price at the pump.
Maduro has shifted his economic team to deal with the crisis, but shuffling the chairs on the Titanic won’t stop it from sinking. Or put planes in the sky. International airlines are revolting at the $3.3 billion owed them – and demanding payment in dollars rather than bolivares.
Optimistic international forecasts for the Venezuelan economy stop at one percent increase in GDP for 2014 but the ever-unrealistic Venezuelan government predicts four percent. Reality suggests that Venezuelan economy will continue to sink slowly into the Caribbean as Maduro bravely stands at the helm, condemning parasites.
Federal Reserve Ben S. Bernanke is now gone, but the havoc of quantitative easing may just be beginning. The impact, as often happens, is first being felt in emerging markets.
“The long-running boom in emerging markets came to be identified, if not propped up, by wide acceptance of the term BRICs, shorthand for the fast-growing countries Brazil, Russia, India and China. Recent turmoil in these and similar markets has produced a rival expression: the Fragile Five,” wrote Landon Thomas Jr. in the New York Times. The new trendy name is “Fragile Five.”
The new name, as coined by a little-known research analyst at Morgan Stanley last summer, identifies Turkey, Brazil, India, South Africa and Indonesia as economies that have become too dependent on skittish foreign investment to finance their growth ambitions.
The term has caught on in large degree because it highlights the strains that occur when countries place too much emphasis on stoking fast rates of economic growth. The new catchphrase also raises pressing questions about not just the BRICs but about emerging markets in general.
The economic slide is more than economic crisis. In many countries like Argentina, Turkey and Brazil, it is also a political crisis. In another New York Times article focused on Turkey’s problem, Tim Arango wrote; First, Prime Minister Recep Tayyip Erdogan criticized the bold move by Turkey’s central bank this week to raise interest rates sharply to halt the decline in the country’s currency, telling reporters that higher borrowing costs would lead to inflation — an argument that contravenes accepted economic logic.
Mr. Erdogan’s economic adviser, Yigit Bulut, then did little to reassure skittish investors, suggesting that the prime minister would do something that would be “very positive for the markets,” but did not say exactly what Mr. Erdogan’s plans were.
The remarks only added to jitters in financial markets, which have battered the Turkish stock market and in recent weeks sent the currency, the lira, to historic lows. While Turkey has suffered along with other developing nations from the “tapering” of bond purchases by the United States Federal Reserve and the threat of rising global interest rates, its problems go beyond that to basic questions about the stability of the government and its ability to grapple with the economy’s problems.
The Wall Street Journal’s Joe Parkinson observed: “Amid a precipitous slide in the lira and investor confidence—which prompted the central bank on Wednesday to double its key interest rate to 10%—a Thursday poll suggests growing political and economic turbulence is starting to chip at the premier's support.
Popular backing for Mr. Erdogan's leadership fell to 39% in January from 48% in December, according to a survey of 1,000 people from pollster Metropol. That marks one of his lowest popularity ratings since his ruling Justice and Development Party, or AKP, swept to power in 2002. Though Mr. Erdogan remains one of the country's most popular politicians in decades—and far more popular than his rivals in opposition parties—the survey reflects a bigger erosion of support than in other recent polls.
Brazil’s government budget gap grew to its widest in four years in 2013, underscoring a failing of many big emerging-market countries in recent years: They didn't use the good times to save for the bad times,” noted the Wall Street Journal’s Paul Trevisani.
The deficit widened to 3.28% of annual economic output in 2013 from 2.48% in 2012, as slower growth hit tax revenue and higher interest rates increased debt payments, the central bank said Friday.
The deficit is expected to grow even more this year, reaching 3.7% of gross domestic product, according to a central-bank estimate, which would be the biggest since 2003.
The shortfall highlights the challenges faced by President Dilma Rousseff now that the eras of supercharged growth in China, rising global commodity prices and easy money in the U.S. seem to be over. A big budget deficit makes it harder to increase government spending to counter the economic slowdown. Brazil's economy is slated to grow just 2% this year, a repeat of similar slow growth in 2013 and a far cry from the 7.5% growth in 2010.
“Goldman Sachs has faced plenty of unsavoury claims in recent years – from accusations about its role in the global financial crisis to suggestions it helped the Greek government massage its figures. Now it can be said to have nearly brought down the Danish government,” wrote Richard Milne in the Financial Times.
“Denmark has a largely state-owned company called Dong Energy (which evidently is not a funny name in Danish) that its center-left government wants to partially sell to Goldman Sachs. This is prompting a massive popular and political backlash that's threatening to bring the governing coalition down,” wrote Mathew Yglesias on Slate. The perhaps of the sale was to raise capital for Dong.
According to International Business Times, “Much of the public rage over the Goldman-Dong deal is over the bank's plans to take its holding offshore to tax havens such as Luxembourg and the Cayman Islands. Goldman says it is abiding by all national and international tax laws.”
The result of selling nearly one-fifth of Dong Energy has been the decimation of the three-party coalition government of Prime Minister Helle Thorning-Schmidt, a Social Democrat, and controversy about whether the Goldman bid was actually the best bid for the country.
“Dong and Goldman say that the sale (including Goldman’s 8 billion kroner, or $1.45 billion) will help the utility invest in new capacity and green energy as well as oil and gas exploration,” reported the Economist. “But Goldman’s reputation as a cutthroat international investment bank caused an overnight political furore. Protesters draped a flag featuring an image of a vampire squid (as one American journalist dubbed Goldman for its role in the financial crisis) over the statue of a former king outside parliament. Angry Danes have criticised a lack of transparency, and terms that gave Goldman vetoes over major decisions such as a change in Dong’s chief executive.”
The Socialist Party has now left the governing coalition and its leader has resigned. Bloomberg reported: “The Socialist People’s Party will continue to support the government from outside the coalition, according to Annette Vilhelmsen, who said today she will step down as party leader. At least two of the Social Democrats’ 45 members in parliament had said publicly the government should postpone the Goldman deal.”
The net impact of the Dong deal has been, ironically, to help build the popularity of out-of-government conservatives. Prime Minister Helle Thorning-Schmidt apparently failed to anticipate how angry Danes could get about Dong.
BY KATHLEEN M. PACKARD: