About This Blog

Ludwig von Mises (1881-1973) was the greatest economist of my time. His greatest works can be accessed here at no charge.

Mises believed that property, freedom and peace are and should be the hallmarks of a satisfying and prosperous society. I agree. Mises proved beyond a shadow of a doubt that the prospect for general and individual prosperity is maximized, indeed, is only possible, if the principle of private property reigns supreme. What's yours is yours. What's mine is mine. When the line between yours and mine is smudged, the door to conflict opens. Without freedom (individual liberty of action) the principle of private property is neutered and the free market, which is the child of property and freedom and the mother of prosperity and satisfaction, cannot exist. Peace is the goal of a prosperous and satisfying society of free individuals, not peace which is purchased by submission to the enemies of property and freedom, but peace which results from the unyielding defense of these principles against all who challenge them.

In this blog I measure American society against the metrics of property, freedom and peace.

Wednesday, January 22, 2014

Do As I Say, Not As I Do

I've written here frequently on what's happening in Venezuela. The country is being destroyed by leftist policies and a tyrannical leader. It's come to my attention that back in November of 2013 the staff at Global Public Square, an organization at CNN run by Fareed Zakaria, weighed in on the Venezuelan situation with an article entitled: "Five ways to ruin an economy."

What are the five ways? Maru Angarita summarizes them:
Rule #1. Attack big business.
Rule #2. Create hyperinflation.
Rule #3. Induce a currency crisis. 
Rule #4. Subsidize, subsidize, subsidize
Rule #5 Become a dictatorship
The rules are self-explanatory except for Rule #3. Here's how the staff at Global Public Square explains it:
Rule #3. Induce a currency crisis. The easiest way to curb inflation is to increase the value of your currency. Basically, print less money. But it turns out Caracas actually has a cash crunch, so it actually needs to do the opposite. Meanwhile, the black market for American dollars is thriving. The official exchange rate is 6.3 Bolivars for every greenback. In reality, the black market rate is 7 to 10 times that amount. For a country which imports 70 percent of its basic goods, this is a big problem. You may remember recently that Venezuela ran out of toilet paper. Why? Well, it's running out of a different kind of paper – the money to pay for it.  [Italics are mine]
This explanation is bogus for a couple of reasons. First, the prescription to print more money (Bolivars) is the last thing the government of Venezuela needs to do. How do the authors of this article think their Rule #2 was accomplished? In fact, the Venezuelan government created hyperinflation by printing more Bolivars -- much too many Bolivars! Printing more now would not solve the problem, only exasperate it.

Second, the reason there is a "cash crunch" in Venezuela is because of Gresham's law -- good money drives out bad money. The black market for American dollars is thriving in Venezuela because American dollars are driving out the greatly depreciated Bolivars. In contrast to the Bolivar, US dollars are widely accepted in exchange for hotly demanded goods and services. The problem is that openly shopping with US dollars is illegal. Hence, the supply of goods and services is driven underground where the black market US dollar thrives.

The black market and the Bolivar's depreciation will continue so long as the central Venezuelan authority keeps printing the currency in massive quantities. 

Leftist ignorance of basic economics is astounding. Not only do the authors misunderstand the cause of inflation, they don't seem to realize the affect of government spending. In the paragraph under Rule #4 they write:
If Caracas is running out of money, the government doesn't seem to know. Just last month, President Maduro raised public sector salaries by 10 percent across the board. This comes after two recent elections, where the government lavished subsidies to win votes.
Question: If there is a "cash crunch" in Venezuela, how does the government find cash to pay salary raises and subsidies to their crony friends? I think it's obvious: they print it. But, as the authors seem to realize, such printing has no positive effect on the country's "currency crisis."

Another thing that struck me about the CNN article was that the authors' "five ways to ruin an economy" is the exact political policy and economic plan of the Obama administration for the US!

Could it be that the Global Policy Square staff believes that economic laws apply to banana republics like Venezuela but not to reserve currency empires like the US?

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