- the source for market opinions


November 14, 2017 | One of the Funniest Shows in Modern Capitalism

Is an American author of books and articles on economic and financial subjects. He is the founder and president of Agora Publishing, and author of the daily financial column, Diary of a Rogue Economist.

BALTIMORE – On Monday, Caracas rolled out the red carpet – literally.

In one of the funniest shows in modern capitalism, bondholders were invited to a special meeting in the Venezuelan capital.

A few turned up. They wanted to know what to expect.

The country is going broke – fast. Oil output is at a 28-year low… cash is disappearing… chaos is spreading. When would Venezuela default on its bonds?

The meeting lasted 30 minutes. No questions were allowed. And then, less than 24 hours later, investors got their answer: today!



Rendezvous With Glory

Hold on…

We’re back in good ol’ Baltimore. There’s nothing quite like it.

Thank God.

Every place has its own character, its own style, and its own life cycle. Baltimore peaked out in the 19th century, when it was the richest city in the United States.

It has been downhill ever since.

An hour to the south of the city is Washington, D.C., with a different culture… a different economy… and a different rendezvous with glory.

Baltimore depended on trade and manufacturing for its wealth. It lost market share when shipping began using New York’s harbor and manufacturing decamped for what is today the old industrial heartland – Ohio, Indiana, and Illinois.

Washington was always a parasitic town. It was small and relatively modest when government was restrained. But as the feds grow bolder, Washington grows richer.

Corporations move their headquarters to nearby Maryland or Virginia, where they will be close to their lobbyists.

The “defense” industry has practically taken over northern Virginia, where it is in position to suborn lawmakers and bribe generals. And law firms perch in downtown towers, like buzzards in a dead tree.

Peak Baltimore may be long past; Peak Washington is still ahead.

Big-Personality “Leaderismo”

No matter what kind of political system you have, as Italian sociologist and economist Vilfredo Pareto noted in the early 1900s, the insiders always figure out how to game it.

In Washington, Deep State insiders now control the White House, both houses of Congress, the Pentagon, and the bureaucracy.

President Trump brought in a new team a year ago. Some thought he would run the Old Establishment out of Washington.

Like Jesus chasing the moneylenders out of the temple, they expected him to turn the tables on the insiders… and Make America Great Again.

It didn’t happen.

Instead, Mr. Trump joined the Deep State so fast, it looked like the fix was in from the get-go.

And now, the insiders have the perfect combination – a White House that claims to be their enemy while enabling and abetting everything they want to do. For example:

  • Trump, Pelosi, and Schumer crashed through the debt ceiling.
  • The president installed a new Fed chief who is a swamp rat, just like the old Fed chief.
  • No cuts to the Pentagon budget… no reduction in America’s goofy “wars” in the Middle East… no change to the cozy relationships with Israel and Saudi Arabia.
  • No cuts to the welfare state budget… Obamacare is eternal… bankruptcy is guaranteed.

In short, it’s business as usual… but with a big-personality “leaderismo” who has bluffed and bullied the conservative opposition.



Systemic Corruption

Former Venezuelan president Hugo Chávez achieved much the same thing.

But rather than pretending to be a conservative like Trump, he pretended to put “the people” in charge. And rather than turn the country into a socialist paradise, the Chavistas did what insiders always do: They looted the place.

As Maggie Thatcher put it back in the 1970s, “The trouble with socialism is that eventually you run out of other people’s money.”

Venezuela is running out of other people’s money – fast. And with the economy badly mismanaged… and the end coming, the insiders are getting while the gettin’s good.

In the U.S. and Europe, the corruption was widespread, systemic, and subtle.

Big financial players knew (did European Central Bank president and former Goldman boy Mario Draghi tell them?) that the fix was in.

They could buy speculative bonds without risk. Central banks made sure they didn’t go down. (Lower bond prices would mean higher yields, and higher borrowing costs, which central banks were determined to avoid.)

Instead, bond prices went up. Yields went down. And sharp traders made as much as 1,000% profit.

In Venezuela, government bond prices plunged – and yields, along with borrowing costs, spiked – as it became obvious that the country was going broke.

The economy is down 30%. The rate of annual inflation is running at 2,300%, according to the International Monetary Fund. Stores are out of food. Pharmacies have no more medicines. Hospitals can’t put clean sheets on the beds.



Plugged In

But somehow… the “socialist” government kept paying the interest on its bonds.

The people may suffer and even die… but the capitalists still made money.

Why would a “socialist” government favor rich lenders over poor citizens?

Do you have to ask?

Here’s the Miami Herald:

…an open secret among U.S. traders, is that most buyers of Venezuelan bonds have been the so-called “enchufados,” or “plugged in” members of Maduro’s ruling elite and their business cronies.

Whenever Venezuelan bonds plunged amid international expectations that Maduro would default on the country’s debts rather than cancel all food imports, Venezuelan officials and their cronies in the business world would buy PDVSA [Venezuela’s state-run oil company] bonds for 20 or 30 cents to the dollar, with inside information that Maduro would not declare a default.

The fix was in. It always is.

And the gettin’ is always good until it isn’t.

This morning, credit ratings agency Standard & Poor’s declared Venezuela in default.




STAY INFORMED! Receive our Weekly Recap of thought provoking articles, podcasts, and radio delivered to your inbox for FREE! Sign up here for the Weekly Recap.

November 14th, 2017

Posted In: Bill Bonner's Diary

Post a Comment:

Your email address will not be published.

All Comments are moderated before appearing on the site


This site uses Akismet to reduce spam. Learn how your comment data is processed.