Latin America’s revealing reaction to the Venezuelan election

The Bolivarian Revolution vs. the Brazil model.

As the whole world looked on, the indefatigable Hugo Chávez overcame his strongest obstacle yet to claim another six-year term as Venezuela’s President, keeping him in power until 2019.  

“Venezuela will continue along the path of democratic and Bolivarian socialism for the 21st century”, Chávez thundered from the balcony of Miraflores palace, holding aloft the sword of Latin American revolutionary Símon Bolivar.

This election was so salient because it showcased a clash of two different ideologies; of two different futures. It was a battle of two visions that pitted a leftist firebrand against one of the Venezuelan 1 per cent; between a populist demagogue and a wealthy elite out-of-touch with Venezuela’s bulging underclass.

Henrique Capriles promised major changes for Venezuela. He pledged to move the country away from quixotic idealism to pursue a more pragmatic foreign policy; away from pariah states such as Belarus and Iran and towards a more sanitised global image.

He promised to depoliticise the economy through spurring private investment and reviving oil deals with outside partners - a notion unimaginable under the current government that holds economic self-sufficiency and state nationalisation as sacrosanct principles of governance.

Crucially for Chávez, Capriles threatened to undermine Venezuela’s role as the flag-bearer for the continent’s radical left; as the leading extoller of Latin American anti-imperialism.

Naturally, for supporters of the chavista cause, Sunday was most certainly a red-letter day; a democratic endorsement of the Bolivarian revolution espoused by Chávez.

“Forward, comrade Chávez”, tweeted Ecuadorian President Rafael Correa. “All Latin America is with you and with our beloved Venezuela”.

“The victory of President Chávez is a victory for democracy, for the Bolivarian alliance, and all of Latin America”, declared Bolivian President Evo Morales.

“Your decisive victory ensures the continuity of the struggle for genuine integration in our America”, proclaimed Raul Castro, Cuba’s de facto President.

Nicaraguan President Daniel Ortega also paid effuse tribute to him, labelling him an “indisputable leader that will continue leading the Latin American revolution”.

These sentiments were echoed in Argentina as well, with President Cristina Fernández de Kirchner praising the victory whilst Argentines rallied outside the Venezuelan embassy in Buenos Aires to celebrate the news.

However, the response from other major regional players, particularly Peru, Mexico and Brazil was muted, highlighting a degree of indifference to the radical model of leftist politics extolled by South America’s chavista movement.

There is no question over the importance of Latin American independence on the continent. Last year, the establishment of a 33-country “Community of Latin American and Caribbean States” (CELAC) intentionally excluded Washington and other “Western” powers from membership, cementing the region as a power bloc with its own interests and agendas.

But the “Bolivarian Alliance for the Americas” (ALBA), conceived by Chávez in 2004, is a step too far for some. That only the most radical of Latin American governments claim membership (Bolivia, Nicaragua, Cuba and Venezuela) is a telling indicator of the state of South American leftism.

Many often interpret the left-leaning approach of most South American states as a unified, cohesive ideological movement against imperialist forces, but a more nuanced approach reveals some major fault lines.  

To some, Bolivarian governance has hit a crisis. With soaring inflation rates, over-reliance on nationalised industry and bloated bureaucracies rife with cronyism, much of Latin America’s far-left finds itself in an unenviable position.

The alternative model, embodied by Brazil, offers a different brand of leftism; one that embraces private property rights and upholds the sanctity of democratic institutions. Since the election of Luiz Ignácio Lula da Silva as President 2002, Brazil has shown that you do not have to stack the courts, censor the media, and politicise a country’s financial system to ameliorate poverty. As an emerging player on the world stage, Brazil has also shown that you can have sovereign independence whilst integrating into the global economy; that you can resist imperialism without having to denounce capitalism.

A signal that the Brazil mould is gaining momentum in Latin America came with the Peruvian election of Ollanta Humala in 2011. Humala originally campaigned under the chavista banner in 2006 and and lost. For the 2011 election, he rebranded as a more moderate socialist and has governed as such ever since.

Does this reveal a political schism in Latin America? Not exactly. Whilst fault lines have appeared, it doesn’t mean incompatibility. Nevertheless, the Brazilian model shows that Latin American governments can have their cake and eat it too; they can remain economically and politically self-sufficient without resorting to authoritarian and isolationist policies that breed malaise.

Whilst Sunday’s election victory has not derailed the Bolivarian revolution, its tight victory margin and the increasing appeal of the Brazilian mould has certainly taken the wind out of its sails.

A pro-Chávez mural in his hometown of Sabaneta, Venezuela. Photo: Getty

Alex Ward is a London-based freelance journalist who has previously worked for the Times & the Press Association. Twitter: @alexward3000

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We're racing towards another private debt crisis - so why did no one see it coming?

The Office for Budget Responsibility failed to foresee the rise in household debt. 

This is a call for a public inquiry on the current situation regarding private debt.

For almost a decade now, since 2007, we have been living a lie. And that lie is preparing to wreak havoc on our economy. If we do not create some kind of impartial forum to discuss what is actually happening, the results might well prove disastrous. 

The lie I am referring to is the idea that the financial crisis of 2008, and subsequent “Great Recession,” were caused by profligate government spending and subsequent public debt. The exact opposite is in fact the case. The crash happened because of dangerously high levels of private debt (a mortgage crisis specifically). And - this is the part we are not supposed to talk about—there is an inverse relation between public and private debt levels.

If the public sector reduces its debt, overall private sector debt goes up. That's what happened in the years leading up to 2008. Now austerity is making it happening again. And if we don't do something about it, the results will, inevitably, be another catastrophe.

The winners and losers of debt

These graphs show the relationship between public and private debt. They are both forecasts from the Office for Budget Responsibility, produced in 2015 and 2017. 

This is what the OBR was projecting what would happen around now back in 2015:

This year the OBR completely changed its forecast. This is how it now projects things are likely to turn out:

First, notice how both diagrams are symmetrical. What happens on top (that part of the economy that is in surplus) precisely mirrors what happens in the bottom (that part of the economy that is in deficit). This is called an “accounting identity.”

As in any ledger sheet, credits and debits have to match. The easiest way to understand this is to imagine there are just two actors, government, and the private sector. If the government borrows £100, and spends it, then the government has a debt of £100. But by spending, it has injected £100 more pounds into the private economy. In other words, -£100 for the government, +£100 for everyone else in the diagram. 

Similarly, if the government taxes someone for £100 , then the government is £100 richer but there’s £100 subtracted from the private economy (+£100 for government, -£100 for everybody else on the diagram).

So what implications does this kind of bookkeeping have for the overall economy? It means that if the government goes into surplus, then everyone else has to go into debt.

We tend to think of money as if it is a bunch of poker chips already lying around, but that’s not how it really works. Money has to be created. And money is created when banks make loans. Either the government borrows money and injects it into the economy, or private citizens borrow money from banks. Those banks don’t take the money from people’s savings or anywhere else, they just make it up. Anyone can write an IOU. But only banks are allowed to issue IOUs that the government will accept in payment for taxes. (In other words, there actually is a magic money tree. But only banks are allowed to use it.)

There are other factors. The UK has a huge trade deficit (blue), and that means the government (yellow) also has to run a deficit (print money, or more accurately, get banks to do it) to inject into the economy to pay for all those Chinese trainers, American iPads, and German cars. The total amount of money can also fluctuate. But the real point here is, the less the government is in debt, the more everyone else must be. Austerity measures will necessarily lead to rising levels of private debt. And this is exactly what has happened.

Now, if this seems to have very little to do with the way politicians talk about such matters, there's a simple reason: most politicians don’t actually know any of this. A recent survey showed 90 per cent of MPs don't even understand where money comes from (they think it's issued by the Royal Mint). In reality, debt is money. If no one owed anyone anything at all there would be no money and the economy would grind to a halt.

But of course debt has to be owed to someone. These charts show who owes what to whom.

The crisis in private debt

Bearing all this in mind, let's look at those diagrams again - keeping our eye particularly on the dark blue that represents household debt. In the first, 2015 version, the OBR duly noted that there was a substantial build-up of household debt in the years leading up to the crash of 2008. This is significant because it was the first time in British history that total household debts were higher than total household savings, and therefore the household sector itself was in deficit territory. (Corporations, at the same time, were raking in enormous profits.) But it also predicted this wouldn't happen again.

True, the OBR observed, austerity and the reduction of government deficits meant private debt levels would have to go up. However, the OBR economists insisted this wouldn't be a problem because the burden would fall not on households but on corporations. Business-friendly Tory policies would, they insisted, inspire a boom in corporate expansion, which would mean frenzied corporate borrowing (that huge red bulge below the line in the first diagram, which was supposed to eventually replace government deficits entirely). Ordinary households would have little or nothing to worry about.

This was total fantasy. No such frenzied boom took place.

In the second diagram, two years later, the OBR is forced to acknowledge this. Corporations are just raking in the profits and sitting on them. The household sector, on the other hand, is a rolling catastrophe. Austerity has meant falling wages, less government spending on social services (or anything else), and higher de facto taxes. This puts the squeeze on household budgets and people are forced to borrow. As a result, not only are households in overall deficit for the second time in British history, the situation is actually worse than it was in the years leading up to 2008.

And remember: it was a mortgage crisis that set off the 2008 crash, which almost destroyed the world economy and plunged millions into penury. Not a crisis in public debt. A crisis in private debt.

An inquiry

In 2015, around the time the original OBR predictions came out, I wrote an essay in the Guardian predicting that austerity and budget-balancing would create a disastrous crisis in private debt. Now it's so clearly, unmistakably, happening that even the OBR cannot deny it.

I believe the time has come for there be a public investigation - a formal public inquiry, in fact - into how this could be allowed to happen. After the 2008 crash, at least the economists in Treasury and the Bank of England could plausibly claim they hadn't completely understood the relation between private debt and financial instability. Now they simply have no excuse.

What on earth is an institution called the “Office for Budget Responsibility” credulously imagining corporate borrowing binges in order to suggest the government will balance the budget to no ill effects? How responsible is that? Even the second chart is extremely odd. Up to 2017, the top and bottom of the diagram are exact mirrors of one another, as they ought to be. However, in the projected future after 2017, the section below the line is much smaller than the section above, apparently seriously understating the amount both of future government, and future private, debt. In other words, the numbers don't add up.

The OBR told the New Statesman ​that it was not aware of any errors in its 2015 forecast for corporate sector net lending, and that the forecast was based on the available data. It said the forecast for business investment has been revised down because of the uncertainty created by Brexit. 

Still, if the “Office of Budget Responsibility” was true to its name, it should be sounding off the alarm bells right about now. So far all we've got is one mention of private debt and a mild warning about the rise of personal debt from the Bank of England, which did not however connect the problem to austerity, and one fairly strong statement from a maverick columnist in the Daily Mail. Otherwise, silence. 

The only plausible explanation is that institutions like the Treasury, OBR, and to a degree as well the Bank of England can't, by definition, warn against the dangers of austerity, however alarming the situation, because they have been set up the way they have in order to justify austerity. It's important to emphasise that most professional economists have never supported Conservative policies in this regard. The policy was adopted because it was convenient to politicians; institutions were set up in order to support it; economists were hired in order to come up with arguments for austerity, rather than to judge whether it would be a good idea. At present, this situation has led us to the brink of disaster.

The last time there was a financial crash, the Queen famously asked: why was no one able to foresee this? We now have the tools. Perhaps the most important task for a public inquiry will be to finally ask: what is the real purpose of the institutions that are supposed to foresee such matters, to what degree have they been politicised, and what would it take to turn them back into institutions that can at least inform us if we're staring into the lights of an oncoming train?