Best of the Week
Most Popular
1.The Gallery of Crowd Behavior: Goodbye Stock Market All Time Highs - Doug_Wakefieldth
2.Tesco Meltdown Debt Default Risk Could Trigger a Financial Crisis in Early 2015 - Nadeem_Walayat
3.The Trend Every Nation on Earth Is Pouring Money Into - Keith Fitz-Gerald
4.Do Tumbling Buybacks Signal Another Stock Market Crash? - 26Mike_Whitney
5.Could Tesco Go Bust? How to Save Tesco from Debt Bankruptcy Risk - Nadeem_Walayat
6.Gold And Silver Price - Respect The Trend But Prepare For A Reversal - Michael_Noonan
7.U.S. Economy Faltering Momentum, Debt and Asset Bubbles - Lacy Hunt
8.Bullish Silver Stealth Buying - Zeal_LLC
9.Euro, USD, Gold and Stocks According to Chartology - Rambus_Chartology
10.Evidence of Another Even More Sweeping U.S. Housing Market Bust Already Starting to Appear - EWI
Last 5 days
Pretium - Canadian Golden Elephant - 31st Oct 14
What USA Today Got Wrong About the Stock Market Fear Gauge - 31st Oct 14
Election Result - Labour Wins South Yorkshire Police and Crime Commissioner - 31st Oct 14
Gold Price Falls, Stocks Record Highs as Japan Goes ‘Weimar’ - 31st Oct 14
EUR/USD - Double Bottom Or New Lows? - 31st Oct 14
More Downside Ahead for Gold and Silver - 31st Oct 14
QE Is Dead, Now You Tell Me What You Know - 31st Oct 14
Welcome to the World of Volatility - 31st Oct 14
Stocks Bear Market Crash Towards New All Time Highs as QE3 End Awaits QE4 Start - 31st Oct 14
US Mortgages, Risky Bisiness "Easy Money" - 30th Oct 14
Gold, Silver and Currency Wars - 30th Oct 14
How to Recognize a Stock Market “Bear Raid” on Wall Street - 30th Oct 14
U.S. Midterm Elections: Would a Republican Win Be Bullish for the Stock Market? - 30th Oct 14
Stock Market S&P Index MAP Wave Analysis Forecast - 30th Oct 14
Gold Price Declines Once Again As Expected - 30th Oct 14
Depression and the Economy of a Country - 30th Oct 14
Fed Ends QE? Greenspan Says Gold “Measurably” “Higher” In 5 Years - 30th Oct 14
Apocalypse Now Or Nirvana Next Week? - 30th Oct 14
Understanding Gold's Massive Impact on Fed Maneuvering - 30th Oct 14
Europe: Building a Banking Union - 30th Oct 14
The Colder War: How the Global Energy Trade Slipped From America's Grasp - 30th Oct 14
Don't Get Ruined by These 10 Popular Investment Myths (Part VIII) - 29th Oct 14
Flock of Black Swans Points to Imminent Stock Market Crash - 29th Oct 14
Bank of America's Mortgage Headaches - 29th Oct 14
Risk Management - Why I Run “Ultimate Trailing Stops” on All My Investments - 29th Oct 14
As the Eurozone Economy Stalls, China Cuts the Red Tape - 29th Oct 14
Stock Market Bubble Goes Pop - 29th Oct 14
Gold's Obituary - 29th Oct 14
A Medical Breakthrough Creating Stock Profits - 29th Oct 14
Greenspan: Gold Price Will Rise - 29th Oct 14
The Most Important Stock Market Chart on the Planet - 29th Oct 14
Mysterious Death od CEO Who Went Against the Petrodollar - 29th Oct 14
Hillary Clinton Could Be One of the Best U.S. Presidents Ever - 29th Oct 14
The Worst Advice Wall Street Ever Gave - 29th Oct 14
Bitcoin Price Narrow Range, Might Not Be for Long - 29th Oct 14
UKIP South Yorkshire PCC Election Win is Just Not Going to Happen - 29th Oct 14
Evidence of New U.S. Housing Market Real Estate Bust Starting to Appear - 28th Oct 14
Principle, Rigor and Execution Matter in U.S. Foreign Policy - 28th Oct 14
This Little Piggy Bent The Market - 28th Oct 14
Global Housing Markets - Don’t Buy A Home, You’ll Get Burned! - 28th Oct 14
U.S. Economic Snapshot - Strong Dollar Eating into corporate Profits - 28th Oct 14
Oliver Gross Says Peak Gold Is Here to Stay - 28th Oct 14
The Hedge Fund Rich List Infographic - 28th Oct 14
Does Gold Price Always Respond to Real Interest Rates? - 28th Oct 14
When Will Central Bank Morons Ever Learn? asks Albert Edwards at Societe General - 28th Oct 14
Functional Economics - Getting Your House in Order - 28th Oct 14
Humanity Accelerating to What Exactly? - 27th Oct 14
A Scary Story for Emerging Markets - 27th Oct 14
Could Tesco Go Bust? How to Save Tesco from Debt Bankruptcy Risk - 27th Oct 14
Europe Redefines Bank Stress Tests - 27th Oct 14
Stock Market Intermediate Correction Underway - 27th Oct 14
Why Do Banks Want Our Deposits? Hint: It’s Not to Make Loans - 26th Oct 14
Obamacare Is Not a Revolution, It Is Mere Evolution - 26th Oct 14
Do Tumbling Buybacks Signal Another Stock Market Crash? - 26th Oct 14
Has the FTSE Stock Market Index Put in a Major Top? - 26th Oct 14
Christmas In October – Desperate Measures - 26th Oct 14
Stock Market Primary IV Continues - 26th Oct 14
Gold And Silver Price - Respect The Trend But Prepare For A Reversal - 25th Oct 14
Ebola Has Nothing To Do With The Stock Market - 25th Oct 14
The Gallery of Crowd Behavior: Goodbye Stock Market All Time Highs - 25th Oct 14
Japanese Style Deflation Coming? Where? Fed Falling Behind the Curve? Which Way? - 25th Oct 14
Gold Price Rebounds but Gold Miners Struggle - 25th Oct 14
Stock Market Buy the Dip or Sell the Rally - 25th Oct 14
Get Ready for “Stupid Cheap” Stock Prices - 25th Oct 14
The Trend Every Nation on Earth Is Pouring Money Into - 25th Oct 14 - Keith Fitz-Gerald
Bitcoin Price Decline Stopped, Possibly Temporarily - 25th Oct 14

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Stocks Epic Bear Market

Venezuela vs. Argentina, Which Will Run Out of Money First?

Politics / Emerging Markets Oct 17, 2012 - 01:12 PM GMT

By: Money_Morning

Politics

Best Financial Markets Analysis ArticleMartin Hutchinson writes: After a surprisingly comfortable re-election, Venezuela has decided to stick with Hugo Chavez and all that comes with him.

That has prompted The Wall Street Journal and other pundits to forecast nothing less than economic doom for Venezuela in 2013.


But when it comes to poorly run South American countries, Cristina Fernandez de Kirchner is someone that could easily give Chavez a run for his money.

As Argentina's president, Fernandez de Kirchner is a master of economically inept policies in her own right.

So who will win this race to the bottom?

Let's examine which one of these losers will run out of money first, starting with Venezuela's Chavez.

After all, when it comes to wealth destruction, Chavez has had a pretty big head start. He was elected in 1998, while Fernandez's husband was first elected president in 2003 (she succeeded him as president in 2007; he died in 2009.)

What's more, the wealth destruction in Venezuela did not begin with Chavez. The Conference Board Total Economy Database shows that Venezuelan productivity was more than 20% lower in 1998 than it had been in 1970.

In fact, I did a study on the potential for Venezuelan corporate finance for a client bank back in 1990 and came to the conclusion that there was very little potential for it.

Other than the oil company PdVSA, there were very few corporations in Venezuela for which one could imagine doing corporate finance deals of any substance. There were a few local monopolies like the tobacco company, but essentially all business activity beyond the mom-and-pop store level centered round the oil sector.

That same thing was not true in Argentina.

Venezuela vs. Argentina
Argentina was genuinely rich in 1929, and its minerals and commodities business was sufficiently diversified that even when I was there in the 1980s - a low point - there was obviously lots of locally owned stuff going on.

What's more, the Argentine economy was decently run in the 1990s, with the currency pegged to the dollar. At the time, free market policies were basically in force and the level of corruption was reduced to a manageable level under President Carlos Menem.

However, commodity prices were low throughout the 1990s, so the budget and balance of payments ran into difficulties. That resulted in a default on debt and a sudden devaluation of the peso from parity against the dollar to 4 to 1, wiping out many middle class savings which were forcibly "pesified."

The skills needed to run a decent economy in the two countries thus are different.

In Argentina, while commodity prices are high, you just need to run a free market system and keep the government from bloating itself. If you can stick to that, wealth will come.

Of course, since Argentina ran more or less free-market policies in the 1990s, which ended badly, and admirably free-market policies in the 1930s, which coincided with the Great Depression, the chances of the Argentine electorate accepting decent policies is pretty slim.

By comparison, Venezuela is more difficult.

If PdVSA is run properly (a job at which Chavez is failing - Venezuelan oil output is down by about a third since 2001), then there will generally be enough revenue to keep the place afloat.

However, it will all be concentrated in the government.

Even if PdVSA were fully privatized, a rational government would charge it huge royalties and produce the same effect. Thus Venezuela has not had free market policies since the 1950s, and is unlikely to get them as long as the oil lasts.

Even if the Venezuelan electorate underwent a mass conversion, Venezuela would still remain badly run; its troubles are far less the fault of its people's foolishness than in Argentina.

Argentina Takes the Lead
So while the two countries are fairly close on their road to ruin, Argentina has the lead.

Here's why.

Venezuela has nationalized almost all the foreign companies operating in the country, whereas Argentina has only begun by nationalizing the oil company. Indeed, in Argentina several mining companies are expanding, foolishly imagining they will avoid the treatment.

Both countries operate rigorous foreign exchange controls, both countries have "free market" exchange rates far lower than the official rates, and in both countries the governments have taken steps to seize the foreign exchange reserves.

Still, even though Venezuela has been slightly more hostile to foreign investment, my bet would be on Argentina running out of money first.

The reason is that Venezuela already controls its main source of export earnings through PdVSA, whereas Argentina is reliant on its agriculture sector and foreign mining companies to provide foreign exchange.

Thus bad behavior by the Argentine government will eliminate the flow of foreign money, whereas provided Chavez can find even a few top managers for the oil company, Venezuela's foreign money flow is guaranteed.

So here's the bottom line: unless Chavez gets sick again, Venezuela can probably stagger on for some years.

Argentina, on the other hand, could collapse within a year.

Needless to say, you should avoid investing in either one of these black holes.

Source :http://moneymorning.com/2012/10/17/which-one-of-these-losers-will-run-out-of-money-first/

Money Morning/The Money Map Report

©2012 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2014 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Free Report - Financial Markets 2014