The Venezuelan economy has been on a downturn ever since Hugo Chavez came to power in 1999. It was never a perfect economy to begin with, but Venezuela was once the power in Latin America thanks to its thriving oil industry and a robust private-sector economy. Since 1999, the dismantling and collapse of the oil industry and the private sector takeover by the ruling drug cartel has led to an economic situation so bad, and a regime so inept at trying to fix it, that most economists would laugh at it if it were presented in a vacuum.
In 2007, inflation in Venezuela reached 17 percent. Because of this, Hugo Chavez resorted to his bizarro world economic and fiscal knowledge, and instead of finding real ways to reverse inflation, he simply dropped three zeros from the currency (the Bolívar, ironically identified as Bs) and proceeded to print new bills. For some context to this timeline: when I was a child, I used to get 1000Bs. That was a lot of money. With the new currency (the Bolívar Fuerte or BsF), the former valuation of 1000Bs is now 1 BsF.
Let’s fast forward 11 years. The now 100 percent nationalized oil industry is producing a measly 1 million barrels per day (from a high of well over 3.5 million). Venezuela has lost refining capacity. It is losing it’s most valuable asset (Citgo) by an American court order. The private economy is non-existent. Thanks to price controls, most business owners operate at a loss and can barely cover salaries let alone purchase raw materials. Average Venezuelans, whose minimum salary was a meager 4,000,000 BsF, cannot use their entire monthly salary to purchase a dozen eggs. A once-thriving nation is now in the midst of the worst humanitarian crisis ever for a country in peacetime, and the inflation rate for the already devalued Bolívar Fuerte has an inflation projection of 1,000,000 percent by the end of the year, according to the International Monetary Fund (IMF).
Enter President Nicolas Maduro’s financial plan of 2018 going into effect this week. In order to better the economy and reduce inflation, President Maduro did not lower taxes, did not give control of industry back to businessmen, did not recall the hordes of cash on the streets, and did not read Adam Smith. Instead, he took a page from the Chavez’s Democratic Socialism playbook, dropped a staggering five zeros from the Bolívar Fuerte, and is printing new bills, again, calling them the Bolívar Soverano (Sovereign Bolivar or BsS).
But that’s not all, folks. As part of his “Monetary Reconversion package,” he has raised the minimum wage by a factor of over 27. That’s not 27 percent. He has multiplied the minimum wage by 27, from around 4,000,000 BsF, to 108,000,000 BsF, which is 1080 BsS. He also added even more price controls. So along with a minimum-wage hike, businesses cannot raise their prices in order to afford this new wage. But not to worry, the government of the Bolivarian Republic of Venezuela (a.k.a. the ruling drug cartel) is going to cover the difference in wages for 90 days.
This is a government who has not paid public sector employees on time for years, and now private business workers are counting on them to provide them with their salaries for three months. The cartel has also been kind enough to give all workers a “bonus” of 600 BsS, immediately. The bigger problem is the government has no money because of the oil industry collapse. How are they going to get the money? They are not going to sell off assets, or even print the money. They are going to literally direct the central bank to “type it into the system.” The effect will be an enormous rise in inflation which, by the end of the year, will put Venezuelans right where they started.
Your head spinning yet? Well, since the cartoonish Venezuelan government is the gift which keeps on giving, they have tied the value of the BsS to the Petro. The petro is a government-created cryptocurrency (defeating the purpose of cryptos to begin with) with a value “tied” to the value of a Venezuelan barrel of oil. One petro is worth one barrel. The government created this crypto by confiscating (stealing) the miners for bitcoin and other cryptos which private Venezuelans were using to generate these cryptos in order to escape the uncontrollable inflation.
Gideon Long said of this move in the Financial Times: “Mr Maduro said the new ‘sovereign bolívar would be tied to the petro, a state-controlled cryptocurrency he launched this year with much fanfare but little clarity. The petro is supposedly backed by Venezuela’s huge oil reserves, even though there is no guarantee that oil will ever be brought to the surface. The government says it received $5bn in offers during a presale and initial coin offering of the petro but has yet to explain where the money is, and there is no secondary market for the currency. Since there is no market for it, there is also no market price for the petro so it is difficult to understand what anchoring to it would mean, said Francisco Rodriguez, an economist and expert on Venezuela at Torino Capital investment bank in New York. The Venezuelan government retains the capacity to print petros. This makes anchoring the bolívar to the petro not that different from anchoring the bolívar to itself.”
So let’s go back in history to my childhood and that 1,000 Bs. which is now worth .000000001 BsS. When I was a child, my parents purchased an apartment for 9 million Bs. (at the time $450,000). When we take the value of that apartment to today’s Venezuelan economy, it is worth .09 BsS. or about $6. How’s that for being underwater on your mortgage?
Because of this economic package the political opposition, including Maria Corina Machado, have called for a general strike of the entire country for an undefined amount of time. This strike began Monday, and so far, the country is pretty much at a standstill.
Make no mistake: this is not a Venezuelan issue. This crisis affects the entire world, especially our hemisphere. An estimated 1 million Venezuelans have entered the United States in the past three years (most legally) and over 3 million have fled, largely to Colombia and Spain. Other countries in the region, like Ecuador and Peru, are now cracking down on the immigration issue by requiring Venezuelans to have passports to enter the country. Not an unreasonable request, but when you consider the cost and time of acquiring a passport in Venezuela, which is over $3000 or 50 Petros, or 50 BsS, or 5,000,000 BsF, or 5,000,000,000 real Bolivars (the ones I knew in my youth), it becomes rather prohibitive and naive to expect a working-class Venezuelan escaping that nightmare to have a passport.
The bottom line is that this is the worst economic collapse in world history for a country which has never gone to war. It is quite literally unsustainable. Venezuela’s soap opera will end in violence, with either a bloody and prolonged civil war between the libertarian youth and the armed forces (a.k.a. Cartel sicarios), or the more preferable scenario of an international humanitarian intervention by the United States and Colombia.
