Our episode topic this week comes to us from a listener and friend who has found himself in a bit of a predicament. Someone close to him is profoundly convinced that America is on the fast-track to becoming the next Venezuela because of our progressive (or to some, socialist)(haaaaaaa. This isn’t the episode for it, but… no. no.) government and through rapidly rising inflation.  This listener would love to be able to have a well-thought out conversation with their loved one, using facts and research to steer the ship, but they don’t even know where to start. 

 

And, that’s where we come in. That’s the whole purpose of this podcast! We take these big, complicated, hot-topic issues and help people come closer together through information. This problem was MADE for us. So today, we’re going to do our civic duty and walk you (and him) through the primary talking points of the argument, how Venezuela got into the mess they’re in, what history tells us about inflation in the US, and how we can tell if we’re on the same track.

 

I’m not going to lie, this may be the most intimidating topic we’ve taken on for me. Which sounds weird, because we’ve talked about systemic racism, for profit prisons, voting arguments. But, much like our listener, this topic seemed so massive to me that breaking it down was just… daunting. But I think we managed alright. So strap in and let us regale you with information about the most fascinating topic in the world:

Economics.

Quick definitions

Before we really dive into this, I want to take a moment to bring out some definitions that some may not have a working familiarity with. We’ve not been the best about remembering that not everyone has the same level of familiarity that we have after we’ve spent a couple dozen combined hours researching something. So real quick… relatively:

Inflation is best described as the decline of purchasing power of a given currency over time. This is most apparent to the average consumer in something like… the price of a cup of coffee. In fact, that’s a pretty common metric. As the purchasing power of the US dollar decreases, for example, this will be reflected as an increase in the cost of a cup of coffee. When the same 12 oz. cup of coffee goes from a buck to a buck fifty, that’s inflation. (Fernando, 2021)

 

A lot of people kinda fall into the trap that inflation is bad. But that’s not necessarily the case. It can be bad sometimes, yes, but at other times it’s not only good, it’s necessary. 

 

Most economists agree that steady, sustained inflation occurs when a nation’s money supply growth outpaces economic growth. Money supply is both the cash, as well as deposits that can be used as easily as cash, within a country. So when the Treasury is printing money faster than our country can produce goods and services that people are spending money on, we get inflation. To oversimplify things a bit, imagine you have a rock that weighs one pound. You’re the only person with a rock. We know that one pound rock is worth enough to buy one cup of coffee. But then you break that rock in half. You now have two, half pound rocks. You still call each rock a rock, but since each rock is physically smaller, they don’t have the same amount of real value. Now one rock is worth half a cup of coffee, so you need two rocks combined to equal the same value as one cup of coffee, because that cup of coffee is still worth the same amount. You can keep breaking that rock up as much as you’d like, but that cup of coffee is still going to need one pound of rock to pay for it. (Fernando, 2021)

 

Now, obviously this isn’t a perfect analogy for the modern economic world. Don’t hang your hat on that metaphor, I’m just trying to explain how money supply is related to inflation. There’s a lot more that goes into the calculations of value and money supply. I mean. People literally get degrees in this stuff, after all. For our purposes, though, I don’t think we need to go much deeper.

As we said earlier, inflation can be either good or bad, depending on who is talking and how they hold their wealth. For example, if you hold a lot of tangible assets (like property, or gold, or some other valuable thing that you can hold or feel), you would generally want to see some inflation, because as inflation goes up, so too does the price of whatever tangible thing you’re holding. Of course, on the flip side, those who are buying these goods will likely not be too pleased that inflation has caused the price to go up. (Fernando, 2021)

The counterpoint, then, is that holding your assets in currency of some sort, like cash or bonds, means you really aren’t a fan of inflation. (Fernando, 2021) The $100 you had in your bank account slowly loses buying power. $100 in 1950 went a lot farther than $100 in 2021. 

 

Inflation plays an important role in the economy by promoting speculation by both businesses and individuals. Both groups are trying to get better returns than inflation. Therefore, there is a “just right” level of inflation promoted to encourage spending a little. Remember, with inflation, it’s better to buy tangible goods and let the value increase with inflation. So with a manageable level of inflation, money holders spend money, theorizing that it will be worth less to just hold it in cash. Conversely, with deflation, which is a general decline in prices for goods and services (or an increase in buying power), prices of goods go down, so purchasing power of currency increases with time. (The Investopedia Team, 2020) This would encourage people to basically just sit on their cash, effectively removing it from the economy. This is ultimately unsustainable, as it would eventually cause the economic output of a country to stall entirely, and potentially cause an economic crash. (Fernando, 2021)

 

Controlling inflation is a complex problem, and is done in the United States’ Federal Reserve (usually referred to as “the Fed”), which is our central bank. A central bank is basically the financial institution that has control over the production and distribution of money and credit for a nation (or sometimes, a group of nations). The Fed tries to lay out a plan for the future so businesses can plan for inflation. Businesses need to know roughly what to expect from inflation, or they won’t be able to accurately price their products and services. (Fernando, 2021)

 

In broad terms, the Fed tries to control inflation through moderate long-term interest rates, price stability, and maximum employment. Combined, these goals maximize stability in the financial world. Importantly, “maximum employment” doesn’t mean “zero unemployment.” That’s kinda impossible, really. It just means as many people employed as possible, and this is really based on employers’ evaluations. (Fernando, 2021)

 

The Fed has some “bigger guns” available when things really hit the fan. After the 2008 financial crisis, the US Fed lowered interests rates to near zero and started buying bonds. This is call quantitative easing, and you really don’t need to know much for our discussion about it other than it is an unconventional tactic, and it helps add new money to the economy. Combined, these two methods encourage more lending and borrowing, in turn meaning more money flowing through the economy, meaning more economic activity in general, which hopefully means a stimulated economy to combat the effects of a recession. (The Investopedia Team, 2021)

In the US, the Fed strives to keep the inflation rate at around 2% per year. Rapidly growing economies can handle more inflation, so some countries target 4% or more per year, if they’re experiencing an economic growth spurt. However, if the Fed (or whatever governing central bank is responsible for the country in question) isn’t careful, things like quantitative easing and low interest rates can lead to hyperinflation. This is when an economy experiences rapid, excessive, and out of control general price increases. Hyperinflation is typically described as an inflation rate of 50% per month (or more). (Kenton, 2020)

Let's go back to our coffee explanation. Imagine in January a cup of coffee costs $1. With a hyperinflation rate of 50%, by February that same cup of coffee will cost $1.50. By March we’re looking at $2.25. By December, that same cup of coffee will cost a whopping $86.50. And that’s assuming a constant 50% inflation rate. But the problem with hyperinflation is that it can cause a spiral. An inflation rate of 50% in January could skyrocket to 1000% by December. I am too terrified to find out what my daily coffee habit would cost me at those rates. Suffice it to say: it would be absurd. Jeff Bezos would struggle to afford it. 

 

I think this should set the scene for the following conversation. Let’s get out of the economics and into the history, shall we?

What’s the story

Alright, so what’s the story here? How did we get to a place where people are legitimately afraid that we’re on track for egg prices higher than a month’s wages?  Honestly, it all comes down to effective storytelling. We’ve talked before about the power of a narrative to drive a message deeper, and shortcut the rationality that we use to approach so many situations. It’s part of the reason that conspiracy theories are so effective, and it’s present in every successful marketing campaign you’ll ever encounter.  And this? This is a story Americans have been hearing for 100 years. At this point, it’s practically a part of the American mythos.

 

As early as 1917, in the wake of the Bolshevik Revolution, anti-communist activists in America were preying on the fears of average American and weaving tales that highlighted the potential dangers of allowing communists to function openly in American society. The U.S. was experiencing a wave of labor strikes (more than 3000 between April and October) and the press was quick to lay the blame on immigrants, accusing them of trying to undermine the American way of life.

 

After the United States entered World War I, legal means became available to discourage this Anti-American ideology. The 1918 Sedition Act criminalized socialists, pacifists and other anti-war activists by imposing harsh penalties on anyone found guilty of making false statements that interfered with the prosecution of the war; insulting or abusing the U.S. government, the flag, the Constitution or the military; agitating against the production of necessary war materials; or advocating, teaching or defending any of these acts (History).  

 

By the end of World War II, a distinct story pattern had emerged:  We cannot allow communism any space, or the horrors our men in uniform witnessed in their foreign fight for democracy will happen to us. Propaganda, like the comic book Is This Tomorrow, were published by activist organizations warning unsuspecting patriots that,

 

 “These people are working day and night - laying the groundwork to overthrow YOUR GOVERNMENT!

 

The average American is prone to say, "It Can't Happen Here."  Millions of people in other countries used to say the same thing.

 

Today, they are dead - or living in Communist slavery.  IT MUST NOT HAPPEN HERE!”

 

And this refrain has been on constant repeat for the last 75 years. Anyone of a certain age will remember the videos of elderly women in the USSR, standing in breadlines 50 people deep. This, we were taught, would be us if we let communist ideas take hold. Though the countries we use to warn each other of the imminent danger shift, the narrative remains the same. 

 

Venezuela is just the latest in the list of examples of what not to do. It was used as a talking point by President Trump throughout the 2020 presidential campaign. He warned voters that choosing a Democratic President would certainly lead to the economic downfall of America, saying: 

 

“This will be the most dangerous election we’ve ever had. I used to say it lightly, but now I say it very strongly, because it’s a similar ideology: this will be a large-scale, very large-scale, Venezuela if they win.” (Herald) 

 

And, that has remained a talking point for Conservative pundits ever since. 

Let’s talk about Venezuela

So, we’ve established the background for this doomsday tale. But why is Venezuela even a relevant example to use here? What about their politics or economy serves as a cautionary tale for Americans?

 

Let’s hop in the time machine and head to the not so distant past, shall we? We’re headed to February, 1999.  That’s when President Hugo Chavez took office and completely changed the way Venezuela’s economic system functioned.  Rather than a free-market ideology, Venezuela under Chavez embraced a model focused on state-led redistributive development. They more than doubled state spending on healthcare and education, poverty and unemployment were cut in half, and healthy oil-driven economic growth helped fund their social progress. 

 

During the first 4 years of his presidency, the Venezuelan economy was threatened by a labor strike at the state-owned oil producer, the PDVSA. During the first quarter of 2003, the country’s GDP fell 27%. Determined not to let the same thing happen again, Chavez instituted a series of measures to stop the bleeding - fixing the exchange rate to the US Dollar, implementing import controls, nationalizing other important industries, and heavy subsidization of food and consumer goods (Friesen)

 

The people were happy with this democratic-socialist approach, too.  Chavez’s party won 16 of 17 elections held between 1998 and 2012 - many of them by large margin, and without any apparent tampering (it’s like we read your mind, isn’t it). Even Former President Carter, who apparently had some street cred in election monitoring, called their election process the best in the world. During this time, electoral participation in the country actually increased significantly! (Hetland)

 

*NOW this is where we pop in and say, YES we know that there are very many people in the world who consider Hugo Chavez to be a dictator. Possibly even an evil dictator.  But we are not here today to discuss his personality as a leader. And, we’re only talking about their democratic process as it’s relevant to comparisons between the US and Venezuela. 

 

Right. There is an argument to be made that during his time as president, Chavez helped bring Latin America to a place of greater independence than they had previously enjoyed. And, he also did quite a bit to popularize the idea of socialism.

 

But after Hugo Chavez died in 2013, something went really, obviously wrong and Venezuela found itself in an acute economic crisis that had people waiting in hours-long lines to pay grotesquely inflated prices for essential goods. 

 

The stories out of Venezuela in the last 5 years have been harrowing: patients dying in hospitals completely devoid of medicines, protestors rioting in the streets demanding food, and people rooting through the garbage for scraps of food because grocery stores are empty. Millions have fled the poverty and violence.  Really, the idea that America could find itself in a similar situation is terrifying. But to know whether that’s a reality for us, we have to understand how they got there. 

 

So what happened? Well, a few things, actually. But a lot of the crisis can be tied back in one way or another to one key factor: Oil. 

 

Venezuela has a butt ton of oil. Or, to be more precise, the world’s largest oil reserves. And they have long relied on that oil as their primary - well, really only - export. Now, Venezuela’s oil is on the thicker side and it’s pretty expensive to refine, but in the late 2000’s when Chavez’s policies (collectively called Chavismo in some circles) were in full swing the oil market was booming and even their more expensive to refine oil was insanely profitable. Like a GDP of $371B in 2013. $482B in 2014. In comparison, the GDP for `99, when Chavez took office, was just under $100B. (World Bank)

 

And what better to do with a ton of oil money than spend it, right?  Most of Venezuela’s oil is produced by a state-owned oil company called PDVSA, and so when the windfall came the government remained in firm control of the money. They spent it on their social programs, but they also borrowed heavily from lenders overseas. Really, really heavily. Like $120B of foreign debt in 2016 (Cui and Munoz).  Which means that both the government and the economy were heavily dependent on maintaining those profits to keep paying for their plans. 

 

But then, oil prices tanked. They dropped from more than $100 a barrel in mid-2014 to less than $30 a barrel in mid-2016. Oil and gas accounted for more than 95% of Venezuela’s export revenue in 2016, and the country didn’t really produce much else. So, when the revenue they were generating from their oil-based goods fell through the floor, the country didn’t have another reliable way to generate the money it needed to import ALL THE THINGS the Venezuelan people needed, like food and medicine.  AND, they had to try to stay on top of their debt repayments or they risked losing control of essential PDVSA assets to foreign debtors. (Casselman)

 

So, the government was broke. And all those measures Chavez had implemented in 2003 made it nearly impossible for the economy to recover well. And then, to add another layer of mess, Venezuela ALSO found itself in a political crisis. Well, technically the political problems came first, but they didn’t cause the humanitarian crisis we’re talking about. They just make it a lot more complicated. 

When Chavez died in March 2013, his handpicked successor Nicolas Maduro stood poised to take the reins of government as head of the United Socialist Party of Venezuela. And he did, but just barely.  And, when he eeked out that win, the opposition party began protesting (sometimes violently) his win and the ruling party. And then when the Socialist Party won victory in late 2013’s municipal elections, the opposition was spurred to new vigor. Protests disrupted the country for months, and those in opposition to Maduro and the United Socialist Party continued fighting for years. (Hetland) 

 

When the economy began to decline many Venezuelans blamed Maduro and his government, and the opposing parties grew in popularity. The opposition party won control of the Venezuelan National Assembly, 109 to 54, in 2016 marking the first time in 16 years that the Assembly had not been in pro-government control (BBC News).  

 

When Maduro stood for re-election in 2018, the process was regarded as “highly controversial”. Opposition candidates had been barred from running, or jailed, or had even fled the country for fear of being imprisoned.  The National Assembly refused to consider the election legitimate, and many opposition parties boycotted the process.  After Maduro claimed victory, the Assembly refused to recognize him as president. Instead, they suggested that because the election was illegitimate the presidency was vacant. 

 

And that’s where a man named Juan Guaido comes in. Citing articles in the Venezuelan constitution that call for the leader of the National Assembly to step in when the presidency is vacant, and so Guaido declared himself acting president. More than 50 countries, including the United States recognized him as the legitimate president of Venezuela and refused to engage in diplomatic conversation with Maduro’s government. (Venezuela Crisis)

 

And again, this is where we pause to interject that we are not here to comment on the legitimacy of Maduro’s election or Guaido’s claim to power. We’re here to talk about how this unrest has led to the significant quality of life crisis in Venezuela. 

 

The two governments have been at odds for more than 2 years, and the people of Venezuela have been caught in the cross-fire.  Because of the political situation, the United States imposed sanctions on Maduro’s government restricting their access to US financial markets. And, they insisted on working with Guaido to provide what little humanitarian aid they deemed appropriate. But Maduro, being concerned with maintaining his power, has worked to block Guaido’s efforts and along with it any aid that may be provided through him. 

Now let’s talk about inflation

The United States

Venezuela isn’t the only country to struggle with hyperinflation. Shoot, it’s not even the worst example. And the US has its own pretty wild history with inflation.

 

Between 1775 and 1913, the US economy grew... unpredictably. In 1776, the inflation rate was a whopping 29.78%. By 1913, the US experienced four more periods of double digit inflation. So the powers that be thought it would be best to address it. Thus, The Federal Reserve act of 1913 established the Federal Reserve System as the central bank of the United States, with the end goal of forming a safe, more flexible, more stable monetary and financial system. (Beers, 2019; The Board of Governors of the Federal Reserve System, 2017) The law essentially gives the Federal Reserve the power to set monetary policy, so that a central authority can plan for, and control, things like inflation. (The Board of Governors of the Federal Reserve System, 2017)

 

Even more importantly, the Fed is mandated to act to moderate inflation by intervening in matters of currency, debt, and equity markets. (Beers, 2019) Prices in the US throughout history were linked to whether the value of the dollar was fixed in terms of gold and/or silver. This is called a “gold standard” (if backed by gold) or a “silver standard.” And basically it means that, for each dollar in circulation, the US had a reserve of gold or silver that matched that value. Think of a dollar as an… IOU from the government to the person holding it. At any time, the person could go to the government and trade in their dollar for an equivalent amount of gold or silver. From 1775 - 1833, the US was effectively on the silver standard. In 1834 the US switched to a gold standard. (Martin, 2017)

 

The gold standard broke down globally during World War I, when it was replaced by the Gold Exchange Standard, which lasted from 1925 to 1931. After World War II, we adopted the Bretton Woods System, which basically fixed the price of gold for the central banks. That is, they would only pay a specified amount, even if the open market prices were higher. (Martin, 2017) Now, I’m not going to pretend to fully understand Bretton Woods, but I know that its collapse in 1971 reverberated throughout the world; the impacts can still be felt today. After Bretton Woods, the dollar (and most currencies) are fiat money. Which basically means “it’s valuable because we say it is.” Kinda like loyalty points at Starbucks. They have no monetary value, but if you have enough of them, you can exchange them for a cup of coffee. Because Starbucks said so.

Yeah don’t think too deeply about that I’m just trying to give some US history here.

 

So prior to WWII, periods of high inflation were followed by periods of deflation. Basically, in the periods of high inflation, the US said, “Yeah so we’re just going to stop allowing you to convert your dollars to gold,” allowing the government to meet the need for increased revenue to pay for… well mainly to pay for wars. (Martin, 2017)  Shocking. 

 

WWII saw inflation going up again to pay for the war, and then after the war to pay for the debt accrued to pay for the war. In the 1970s, we had a combination of high inflation and low output, mainly due to the oil market. But, real life American hero (maybe) and Federal reserve chairman (definitely) Paul Volcker managed to effectively counter the inflation, and the US inflation rate has been relatively low and stable ever since. (Martin, 2017)

 

However, there is a fairly significant change in inflation patterns since we departed from the gold standard. Previously, since the value of the dollar was tied to the value of a metal, when inflation went up, it would eventually drop back down, because the value of the backing metal didn’t appreciate as fast as inflation. This is why we saw periods of deflation after the Civil War and WWI. Now, however, price level increases are… well, relatively permanent. There is a tradeoff, though! Inflation volatility has decreased significantly, which is good in the long term for our businesses and industry. (Martin, 2017)

 

So the US is familiar with some pretty wild fluctuations in inflation, but the existence of the Federal Reserve has, so far, managed to keep things in check and on a healthy course. 

 

So what does all of this have to do with Venezuela? Well… remember that theory from the political right about how socialism and hyperinflation have turned Venezuela into a modern dystopia? That general belief has led to this perception that the real and primary cause of the humanitarian crisis in Venezuela is inflation by way of socialism.  And, to be fair, the levels of inflation the country has seen are mind-blowingly high.  But there is a lot more to the conversation about why most Venezuelans can’t afford a gallon of milk than a standard “inflation is high” response. 

The collapse of America: A Checklist

And so we’ve come to the crux of this conversation: Is America on its way to becoming the next Venezuela. Are we on the brink of profound economic collapse? Let’s take a look at the boxes we’d have to check to find ourselves in the same situation.

 

First, the federal government would need to have control of the country’s primary revenue source.  In the story of Venezuela, Chavez’s government took control of the nation’s primary export - oil. In the US, refined petroleum and crude petroleum are also our biggest exports earning about $147B in 2019. But we also export cars ($57B in 2019), Circuits ($41B), and vehicle parts ($41B).  In order for the United States to find itself in a similar position of economic volatility, the federal government would have to have primary controlling interest in those industries and control the profits from their exports. 

 

And then, the federal government would need to rely on those profits to fund social programs (and use those assets as collateral for significant debt to further fund social programs) and pay for essential imports. Right now, the United States federal government - and all of our state governments - rely on tax revenue to fund everything from infrastructure to welfare programs.  In 2018, tax revenue equaled 24% of the US GDP.  For those safety nets to be compromised, tax revenue would have to essentially disappear either because the government stopped collecting it, or because people and businesses stopped paying it.  But the push from the current administration is to collect more taxes from the very wealthy and from businesses to help fund the programs we currently have and accomplish new goals. 

 

Ok, if we checked those first two things off the list, next we would proceed to a limited ability to provide essential goods for Americans. One significant factor in the struggles Venezuela has faced is their reliance on imports to support the population. One United Nations report noted that in 2017 Venezuela was only capable of producing food for 30% of the population (FAO).  And, while it’s true that the US imports about half of fresh fruits and vegetables; a third of its wine and sugar; and even 95% of coffee, cocoa, and spices (USDA) the general consensus is that US farmers are capable of producing enough food to feed Americans should we have to stop importing food. We likely wouldn’t even experience significant medication shortages, as 75% of spending on medication in the US is on domestically manufactured drugs (Altstedter). 

 

Oh yeah, and the checks and balances that govern US inflation would have to break down completely. 

 

At this point, we really don’t even need to continue this checklist. It’s pretty evident that the claim of a Biden presidency ushering in imminent collapse in a way that mirrors the crisis in Venezuela is just not sound.  It requires so many prerequisites, so many caveats, and so many fundamental changes to the way that our government and economy operates, that the urgency toward action just isn’t rational.  

 

Now, does this administration, and progressive politics in general, have the aim of moving us closer to a system of broader social programs?  Sure. But we are far from the Chavismo that set the stage for Venezuela’s story.  

Plug

Good News

Continuing in our efforts to focus our good news on real issues facing the LGBTQ community, today we have a study that brings us some common sense results, but could go a long way in furthering the normalization of gender affirming care for transgender adults.

 

A report published in JAMA Surgery compared the psychological distress levels, suicide risk and substance use in trans and gender-diverse people who had undergone gender-affirming surgery with those who wanted such procedures but had not yet had them. 

 

Overall, gender affirming surgery was associated with a 42% reduction in psychological distress, a 44% reduction in suicidal thoughts, and a 35% reduction in tobacco smoking. And, while it feels like the outcome of this study is exactly what is to be expected, there is hope that having numbers associated with these outcomes will help pave the way for more affirming care in the future. 

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