Summary: Bolivia is facing a financial crisis due to dwindling foreign reserves and high foreign-currency debt, which could lead to a currency crash. The government’s attempt to maintain a strong currency by pegging it to the dollar has resulted in inflation and economic instability. This situation highlights the dangers of poor macroeconomic management, regardless of a country’s political system.
In both countries, a long-term lack of investment in the main export industry (oil for Venezuela, gas for Bolivia) led to a lack of exports and a shortage of incoming dollars, eventually causing a currency crisis. Both countries lived for the moment, offering their people more government largesse and more cheap imports than they could afford in the long term, and setting themselves up for disaster when the music stopped. (View Highlight)
In an emerging-market currency crisis you generally want to cut government debt, in order to stabilize the currency. But in a deflationary depression, you want to increase government debt, in order to stimulate aggregate demand. (View Highlight)
macroeconomics is like a predator that eats foolish regimes, both democratic and authoritarian. Countries that ignore time-honored principles like “Don’t try to keep your currency overvalued with a dollar peg”, “Don’t borrow a ton of money in foreign currency”, or “Don’t respond to deflation with fiscal austerity” are just asking for trouble. (View Highlight)