How Much Socialism Does It Take to Collapse An Economy?

How Much Socialism Does It Take to Collapse An Economy? Part 1

Economic and societal collapse in any nation is a tragedy. Inflation at 700% (expected to reach 2000% by 2018) devours the life savings of every Venezuelan. Food shortages along with high food prices caused the average poor Venezuelan to lose 19 pounds last year. Violent protests wrack Venezuela leaving some no choice but to flee their homes hoping to find a better life in a neighboring country. Others, with medical or engineering degrees in hand, have fled to Columbia but have found no work except as prostitutes. Economic sanctions squeeze Venezuela, restricting its ability to borrow money, though some nations, for political reasons, may lend at punitive rates. Meanwhile, President Maduro apparently has no intention of stepping down or declaring bankruptcy.

We might not give this situation much thought because 1) we can’t seem to do much about it and 2) we cannot imagine ourselves in Venezuelan’s shoes because we think this kind of economic collapse only happens in socialist/communist nations headed by a dictator. We may even look at Venezuela’s plight and say, “they’re getting what they deserve.”

It seems preposterous to think the United States could ever experience such a fate, but is it really? Can the havoc wreaked by socialist dictators be replicated in a capitalist democracy?

Common Threads

To answer these questions we ought to look for similarities in our economies.

For example, though we don’t have a dictatorship, state-owned enterprise or central government planning of the economy like Venezuela has, we have a central bank that wields enormous influence over our economy and free enterprise. Artificially low interest rates, induced by the Federal Reserve, direct capital from where it would naturally flow into wasteful endeavors much in the same way a socialist government directs its citizens into endeavors they would normally not engage in.

We also share a system of unsustainable wealth transfers.

Unsustainable Wealth Transfers in Venezuela

Venezuela’s leaders wanted to decrease inequality and increase the size of its middle class. But, instead of investing in a diversified economy and paying for social programs via taxes, Venezuela nationalized its oil industry, and used oil revenues to purchase foreign goods and to pay for social programs. When oil prices plummeted, Venezuela’s economy could neither pay for imports nor produce the goods required to sustain its people.

Not only had Venezuela failed to invest capital in productive endeavors, it hadn’t even attempted to move its poor workers into more productive enterprises. Venezuela’s leaders chose instead to feed its social programs with proceeds from a finite natural resource (oil) whose price they could not control.

The result was predictable. When oil revenues fell, the government started printing money to pay for social services. As inflation increased and the nation destabilized, even more foreign capital fled the country.

Unable to provide for its own needs, Venezuela must buy what it needs from other nations. As their currency devalues in relation to other currencies, the price of foreign goods increases. Since the only thing they have to offer is their currency, they print more which only makes it less valuable. This downward spiral of inflation and currency devaluation usually ends in hyperinflation if that nation has, for reasons of war or economic neglect, lost the ability to produce its own necessities.

Most instances of hyperinflation have occurred in nations that have lost a war that destroyed much of their infrastructure and capital equipment. War reparations and debt exacerbate the situation. Venezuela is heavily in debt, doesn’t pay its bills and its Socialist leaders have destroyed their economy from within. Even with a reversal of course, Venezuela faces a grim future.

Unsustainable Wealth Transfers in the United States

The United States has a much stronger, larger and more diversified economy than Venezuela, so it would seem we do not face the same dangers. But we too have reduced our capacity to produce what we need, relying on cheap imports for many of our basic goods while increasingly selling services to the world.

Instead of exporting oil, we export dollars to fund our social programs and purchase foreign goods. Because the dollar is the world’s reserve currency, our trade deficit provides a seemingly never-ending supply of foreign-owned dollars ready to purchase our debt (Treasuries). We then use those dollars to fund our ever-increasing social programs, thus decreasing the burden of American taxpayers and placing it, in part, on the shoulders of our trading partners.

The contentious narrative in America concerning social programs stems, in part, from the belief on one side that all social spending comes directly out of their pockets via taxation and the conviction on the other side that we need social safety nets because the economy isn’t generating growth for everyone. Few voices point out that there is little incentive for either political party to make unpopular decisions to decrease spending on social programs as long as the U. S. dollar remains the world’s reserve currency.

Just as contentious is the subject of inequality. Some are convinced it only occurs because of differences in ability and effort while others insist it mainly results from oppression and/or crony capitalism. Lost is the fact that, like Venezuela, we have failed to invest capital properly. Because of artificially low interest rates, large quantities of capital have been diverted from productive investment into asset bubbles that mostly benefit the wealthy.

Will our large and diverse economy shield us from calamity even though we, like Venezuela, have funded our social programs from an unsustainable source and have neglected our economy so that more people are dependent on social programs?

To complete the comparison of the U.S with Venezuela we need to determine if the path we are on predictably and inexorably leads to a currency collapse. Part 2 in this series discusses that and more.

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