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VENEZUELA’S INFLATION PROBLEM

VENEZUELA’S INFLATION PROBLEM

HUGO CHAVEZ HAS AN INFLATION PROBLEM, AND IS BECOMING INCREASINGLY AUTOCRATIC

Last year, Venezuela’s inflation rate was 17%.  This has of course been expected and is what happens when you nationalize a lot of industries.  Nationalizations, on a global basis, have historically caused corporate efficiency and productivity to decrease as unsophisticated and unmotivated, politically appointed bureaucrats replace seasoned professionals as the managers of the nationalized companies and industries.

Production slows, costs rise and the profit motive is replaced with the "do less, but still collect the pay" motive.  For example, since the nationalization of the Venezuelan oil company a few years ago, oil production in Venezuela has fallen substantially.  Many experienced Venezuelan petroleum engineers and geologist have left the inefficient, bureaucratic and corrupt Venezuelan national oil company and moved to jobs in Canada, the U.S., Europe and elsewhere in the oil producing regions of the world.
Hugo Chavez has wasted Venezuela’s money in the form of handouts to foreign countries to buy political power and influence in Latin American politics.  Now, he is slowly strangling the economic base of his country by nationalizing and threatening nationalizations of many industries including steel, cement and others.

WILL THE LATIN PATTERN REPEAT ITSELF IN VENEZUELA?  WE THINK IT PROBABLY WILL
Outside of having natural resources, Venezuela is competitive in nothing.  If Venezuela follows the pattern that has been exhibited by other formerly prosperous Latin American countries once they fell into the hands of a demagogue, the outcome will look something like this:
            1. Inflation will continue to rise.
            2. Chavez will blame the companies who are passing along cost increases, he will nationalize them taking over the assets for a fraction of their true value.
            3. He will operate them inefficiently which will lead to further inflation and more shortages.
            4. Eventually, the poor who elected Chavez will realize that he did not keep his promises.  They will bring in another strong man, who will offer new, but similar programs.
            5. The country will careen from one egomaniac dictator to another until all of their natural resources have been eaten up, and their business infrastructure damaged.
            6. They will look back in a few decades and see the same type of destruction that has been visited on so many formerly strong Latin nations before them.  It is a cycle of power and prosperity to poverty and second class status.
SUMMARY
With Venezuela’s recent expropriation of all foreign oil companies’ fields, we look for oil production in Venezuela to continue to decline.  Inflation will drive the standard of living down.  The educated will continue to leave the country.  Therefore, we would avoid all investments in Venezuela.

In a global environment of tight energy supplies and increasing energy demand, we expect oil prices to continue to rise due to Venezuela’s declining production.  Also, high inflation anywhere means higher gold demand and higher gold prices, especially in that country.