In a normal economy, people use their time and resources carefully… knowing that they will be rewarded in proportion to how well they are able to improve the lives of others.
Bakers get up at 4 a.m. to light their ovens so customers will have fresh, warm bread for breakfast. Heart surgeons spend years in training so they will be able to replace valves without killing the patient. Roofers risk their lives on steep inclines so your house will be dry.
In the Soviet Union, win-win deals between consenting adults were illegal. And the incentives had been twisted and perverted.
Taxi drivers, for example, were rationed gasoline according to how many miles they had logged. They soon found that they could make more money by selling their fuel on the black market than by carrying passengers.
So they jacked up their cars… turned on the motor… and let the odometer spin, recording all the miles that the taxi had taken no passengers nowhere.
That’s a way to destroy wealth, not create it. And 15 years later, in 1989, the elite had squeezed just about all the juice out of that lemon that they could; they gave up.
America won’t be the first nation ruined by a corrupt elite, runaway spending, and a too-powerful military. The formula is classic.
From ancient Rome to modern Venezuela, the path is clearly marked, well lit, and well-trodden.
You just spend more than you can afford, year after year… and build up the military; it may be useless overseas, but sooner or later you’ll need it at home – after you default on your promises.
Then, you call in the army… not to protect you from foreigners, but to protect you from the people you’re supposed to represent.
Most likely, America’s coming default will be disguised as largesse. The feds will give out more money – perhaps a guaranteed income.
The effect will be to increase the supply of money in the consumer economy… leading to much higher levels of inflation.
That is the beast that now devours Venezuela. The latest estimates put the level of price increases at 10 million percent.
Naturally, support for the government has fallen to historic lows. But Presidente Maduro holds on to power… largely because he still has the support of the army.
Venezuela became a major oil producer in 1922. By the second half of the 20th century, the black goo had turned it into the fourth-richest country in the world.
But easy money is always a curse. It made the Venezuelan elite very rich. But it left a huge population of relatively poor people who were readily manipulated.
Inflation was already hitting triple digits in the 1990s, with oil prices falling below $10 a barrel. The poverty rate had doubled to 60%, and the government had made huge promises and found itself unable to keep them.
“Austerity” was the sermon the IMF preached at the time. But cutbacks were deeply unpopular with the masses. And Hugo Chávez, a military man, saw his opportunity; he was elected in 1999. (Now dead, he is still regarded as a hero by many Venezuelans.)
Price controls, giveaways, crony deals, free money – as one flimflam fails, another is added. Eventually, taxi wheels are turning all over town – and the people walk.
And as corruption, incompetence, and central planning fail, the army becomes more important, and the fight over the spoils intensifies.
The Juiciest Plum
The Roman Empire came into being when a general “crossed the Rubicon” and seized power. Then, the pattern was set. And in 238, it reached what must have been its apogee.
Gordian II was killed in battle (against a rival emperor). Gordian I, his father, hanged himself. Emperor Maximinus Thrax and his son both preceded and succeeded the Gordians… and went more or less the same way. They were killed by their own soldiers, beheaded… with their heads sent to the Senate.
Later that same year, co-emperors Pupienus and Balbinus were seized by their own Praetorian Guards… stripped… tortured… dragged through the streets… and killed.
In Venezuela, Chávez bought off the generals by giving them the juiciest plum in South America – control over Venezuela’s oil. Bungling and amateurism have since cut into their revenues… but they are apparently determined to stick with the system as long as the oil money comes their way.
The end must be coming soon, however. With hyperinflation… empty shelves… and a disappearing population, Venezuela’s descent into Hell should be just about over.
America’s is just beginning.
Chairman, Bonner & Partners
Chaka’s Note: From Wall Street to Washington, Bill leaves no idol unbusted and no stone unturned. If you’d like to read more of his contrarian thoughts – and gain insights you won’t find anywhere else – click here to automatically sign up for Bill Bonner’s Diary.