Historical Mullet: The Atlas Shrugged Scenario Being Played Out

A post using the Venezuelan crisis to illustrate an “Atlas-Shrugged” effect, predictions of how it might play out and considerations for our own economy. Also an early visible struggle with trying to express dynamic feedback in written forms. 

I described this as the Atlas Shrugged scenario a few posts ago, basically a series of steps that governments follow in an effort to boost availability while reducing prices that instead accomplishes the opposite and systematically destroys access to the very commodity they are trying to help. Those steps are:

1. Government makes extensive changes to the business rules of the producers of a commodity, thereby increasing their costs to do business. OR governments allow rampant inflation to come into existence by lax monetary policy or excessive deficit spending.
2. In response to government rules changes, or rampant inflation, producers begin increasing prices to cover the increased costs and remain a going private concern.
3. Government uses the bully pulpit against “price gouging”, without understanding why prices have risen, and legally seeks to institutes either out right price caps or more nuanced methods to control the pricing.
4. Commodity producers begin to lessen production, as demand remains the same, inflation in the commodity skyrockets and shortages appear.
5. The government, reacting in knee jerk fashion to the lack of supply, decides it needs to take “drastic”; measures to kick start production and distribution of the commodity at a “fair price”, the government effectively seizes or nationalizes the producers.
6. The government doesn’t know how to run the business well, uses it as a political payback mechanism granting political allies key executive roles, the productive capability of the producer erodes or evaporates – and even though the government is “running it”, the production of the commodity decreases even further, and shortages spread.
7. The producers and capitalists who made the original production system work seek to leave the country, taking their expertise, finances and technologies with them. This means that even if the government ended it’s activity there’s been such a brain-drain and capital-drain, it could take a decade to restore the production to the original levels.
8. Failing in all above means and facing widespread crisis, the government turns to compulsory labor of the remaining experts. If there is insufficient expertise left in the country available, they begin forced labor of non-experts. In either event, the use of forced-labor is vastly less efficient than free enterprise and cannot bridge the gap.
9. Depending on the importance of the commodity to the economy – the persistent shortages can either result in sustained hardship, famine or wholesale collapse of the entire economy.

I’m still refining this series of steps but I think it’s behind why Iran is one of the largest holders of oil reserves, but worst oil producers and also explains the Zimbabwe agriculture implosion. But we can watch it “live-time” playing itself out in Venezuela.

This article lays out the latest action, Chavez seizing and nationalizing rice producing factories. Here’s a key quote from the article:

The anti-U.S. president, who has nationalized swaths of the economy, is popular among the poor for pressuring companies to produce cheap goods and for government programs that provide subsidized food in city slums. The moves to tighten the government’s grip over the food supply were criticized by the private sector and many economists who say the state distorts the supply chain and contributes to food shortages. Chavez, an ally of communist Cuba, recently seized some rice mills belonging to Polar, Venezuela’s largest private business, after accusing the food industry of skirting his price controls and failing to produce enough cheap rice.

In terms of rice production, Venezuela is entering Step 5. This isn’t the first nationalization played out under Chavez, and the article indicates how several industries are already in Steps 6 & 7. This  chart is a long term look at Venezuela’s oil output over the last 30+ years. You can see from the chart that peak of production was actually in the 1960’s. Venezuela nationalized it’s oil companies and it’s productive output – even with 30 years of technical improvement and the oil boom of 2003-2008, has never touched the pre-nationalizatoin levels.

What does all this mean and why am I concerned? Why should we be watching Venezuela and learning from it just as much as we study Japan’s “Lost Decade” or Switzerland’s “Bank Nationalizations.” I’m very concerned that as a nation and political system we are looking at mortgages as something like rice. We talk about the “rights” to home ownership and “fair pricing”. The “shortage” of available mortgages for refinancing or new home purchase. We’re right now somewhere in steps 2-4. Unrealistic price caps are already being influenced by Fannie & Freddie (now completely nationalized), the government is again working to change the rules drastically with cram-down provisions, and refi programs that abrogate previously written contracts and “change the game”  for lenders. It’s able to influence these provisions both legally (through Congress) but also by leaning on entities which have taken government bailout money to enact politically (rather than market) driven programs of fair housing. As I warned, government cannot resist the temptation to exert control over anything it touches – and the bailout money was the invitation to begin meddling – in financial companies, car companies etc. All of these activities are going to eventually work their ways into cost and supply; costs will go up and supply (of mortgages) will go down. If it hasn’t already in terms of supply.

It will be interesting to see how far into the next steps – actively nationalizing and trying to manage/run mortgages the government will go.