Venezuela is basically bankrupt again
is running out of food, running out of beer, and running out of
dollars. In other words, it’s not going bankrupt gradually anymore. It’s
going bankrupt much more suddenly.
And the government is to blame.
more than anywhere else, socialism should have worked in Venezuela.
After all, it has the world’s largest oil reserves, so it should have
had more than enough petrodollars to finance a generous safety net. But
rather than creating a Norwegian-style state, Venezuela has opted for a
more Soviet one. It started when the late Hugo Chavez turned the
country’s state-owned oil company from being largely autonomous to being
little more than his personal piggy bank. Profits came out, but new
investment didn’t go in, and, as a result, oil production fell 25 percent between 1999 and 2o13. Oil exports plunged twice as much, because so much of the country’s crude stays home at the extremely subsidized price of 1.5 U.S. cents per gallon.
Venezuela’s government didn’t want to just control the petrodollars. It
wanted to control all the dollars. That would give it the power to tell
businesses that need dollars to, well, stay in business what kind of
prices, profits, and production they could offer. So, to that end, the
regime has set up a three-tiered exchange rate that let companies and
cronies—is there a difference?—get a hold of dollars for what is now 100
times less than the black market rate, which they are then supposed to
use to buy imports with.
The only problem is this creates
shortages when it works and worse ones when it doesn’t. That’s because
the government doesn’t just decide who gets cheap dollars, but also how much they
and everyone else can charge. Companies that don’t get dollars at the
official exchange rate would lose money selling at the official prices,
so they don’t—they leave their stores empty. But even ones that do get
low-cost dollars would make more money selling them in the black market
than using them to sell goods at the official prices, so they don’t as
well—their stores stay just as barren. In other words, it’s not
profitable for unsubsidized companies to stock their shelves, but not
profitable enough for subsidized ones to do so, either. That’s why
Venezuela’s supermarkets don’t have enough food, its breweries don’t
have enough hops to keep making beer, and its factories don’t have enough pulp to produce toilet paper. That’s left Venezuela well-supplied with only one thing: lines.
now Venezuela is facing a new shortage. Oil is back down to around
$50-a-barrel, which means the government barely has enough dollars to
pay back what it owes, let alone dole them out to companies. So it’s
had to print more money than usual—which was already a lot—to try to
paper over this problem. The result, as you can see below, has been a
complete collapse in Venezuela’s currency, the bolivar. Going by the
black market rate, which is the closest there is to an actual one, the
bolivar has plummeted from 79 per dollar last August to 687 today.
That’s an 89 percent drop in the last year, with 40 percent of that
coming in the last two months alone.
this rate, hyperinflation won’t be far away, if it isn’t already here.
Venezuela officially had 68.5 percent inflation last December, the last
time it published any numbers, but that figure should be much higher now
that import prices are. It’s just another default, as Ricardo Hausmann
points out, in a long line of them on Venezuela’s people. The lack of
food, medicine, and any other basic item you can think of is, in part,
the result of the government using what dollars it does have to pay
foreign creditors instead of domestic ones. Making the currency worth
little more than the paper it’s printed on is just another way of doing
The question now is whether Venezuela will run out of the
last thing it has left, besides day-long lines. And that’s people’s
patience with an economic system that could hardly fail more than it
already has. With elections looming, the government has gone back to
doing what it always has, stealing from the few to give to the many,
this time commandeering food warehouses to turn into cheap public housing.
Venezuela’s government can’t afford to say let them eat cake, because Venezuela’s people actually can’t afford to.