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  • Mathieu Provencher

Is Venezuela out of time?


(picture from Wix's library)

Hello everyone!

As some of you might know, I’m particularly interested in countries that generate what economists call “hyperinflation”. I’ve followed very closely the developments in Zimbabwe around a decade ago as well as studied the cases of Brazil and Peru in the 80s and beginning of the 90s.

A few years ago, my interest shifted to Venezuela and its infamous leader: Mr. Maduro.

Before I get all excited sharing with you guys what I’ve heard, seen, and concluded, let me first say a few words for the ones living under the incredibly harsh reality of hyperinflation.

Living in a country that sees its prices double in less than a month… month after month… is a horrible thing. It is particularly horrible if your income is paid in the local currency (the Bolivar in our case) and if you are on the lower end of the income ladder. Not only is your money worth less and less every day, but even if you do have enough to buy basic products, they are often not available.

Just to give you an idea: if a loaf of bread costs around 1.50 today, it will cost around 3.00 next month, 6.00 the month after, 12 the month after that, and so on and so forth. A year later, that same loaf of bread with the same ingredients (if there is enough to make bread at that point) will cost you around 6,000.00. That’s inflation of around 4,000%, which is low compared to what Venezuela is going through at the moment (it has been estimated that inflation was around 1,000,000% last year and could be ten times higher this year if everything continues as is).

Keeping this in mind, my heart goes to the unfortunate Venezuelans that suffer because of Mr. Maduro’s unsustainable policies.

I’ll take a few paragraphs to give you guys a context before I move to the real topic of this article. Let’s set things straight before we start: social programmes such as healthcare and affordable education do NOT necessarily lead to inflationary pressures.

What are often called “populist” policies, which could also be called “social programmes + + +” are also not necessarily bad for the economy… if done right. The problem in most of the countries I’ve been studying is that they are an exaggerated version of what could be sustainable. Populist policies done wrong often include a multitude of transfer payments (‘gifts’ from the government, often in money) to specific groups in the economy purely for political reasons. There are often no justifications for these handouts other than to appease such groups in order to stay in power.

A government needs a whole lot of money to continue paying for these programmes month after month, year after year. When the government has a good stream of income, which was the case for Venezuela up until relatively recently (they generated a lot of revenue thanks to oil exports… which dropped substantially when the price of oil also dropped a few years ago), it can keep populist policies and still be solvent (without incurring much debt). When revenues of the country cannot pay (or stops being able to pay in the case of Venezuela) for those programmes, money has to come from somewhere else.

That’s when government officials and heads of states have a brilliant idea: if we can’t get the money to stay in power, let’s just make it… let’s print money! Countries can print as much as they want of their own money. In countries that have reached hyperinflation, the government is able to control, or coheres, the central bank of the country and order them to print as much as they need to pay for all these gifts. That’s basically how the economy gets destroyed by hyperinflation… that’s where Venezuela is right now thanks, or because of, Mr. Maduro.

SO! What’s the deadline for Venezuela?

Although all of this is very exciting for me, mostly because it goes and confirms how well our Economic models work and explain the world… that’s not what caught my eye last week.

As some of you might know, a politician self-declared himself as the new interim president of Venezuela. His name is Mr. Guaido and I have to be very frank: I have no clue if he’s going to be better than Mr. Maduro… only time will tell (if my predictions are correct).

However, what I know is that many countries have recognized him as the legitimate president of the country. The United-States of America have said, for example, that all money to be paid for Venezuelan oil will be put in a special account to be delivered to the government of Venezuela only if he replaces Mr. Maduro. Also, humanitarian aid (food, medicine, and the like) have arrived in Columbia to be delivered to Venezuela (which is being blocked by Mr. Maduro at the moemnt). Mr. Guaido is trying to let this aid inside the country.

Now this is very interesting for me!

Mr. Maduro’s only chance of staying in power is the army and the police. As long as he controls both, I have the impression he could keep his country in a miserable state for years to come. Zimbabwe’s Mr. Mugabe kept his country is utter misery and chaos for years and years without any real opposition using the same tactics. To keep the army on your side in such situations, you need a lot of money… money that was available to Mr. Maduro up until the USA decided to stop paying for their oil. Although Venezuela sells oil to other countries, such as Russia and China for example (which do not put any pressure on Mr. Maduro to leave office), no cash comes back to the country. These other exporting countries have given substantial loans to Venezuela and their oil is a payment back for those.

SO!

Mr. Maduro is going to go dry on US dollars soon, which looks very risky for him since he won’t he able to continue bribing the military and the police (to stay in power). Mr. Guaido on the other hand will have access to enough US dollars to pay the military and the police if they decide to switch side.

On top of that, Mr. Guaido asked the military to help deliver the humanitarian aid that is ready to be distributed in the country. He said he would pardon all military and police officers if they turn on Mr. Maduro and help him deliver that aid… a very smart move in my opinion.

The military is now faced with a fairly easy choice: stick with Mr. Maduro and eventually get paid in Bolivars (which will be worthless by that time) or go with Mr. Guaido and continue being paid in US dollars… and although no-one will ever say that, I think that the military will be offered a cut of the humanitarian aid if they help with the situation.

Talking to my colleagues last week, I told them that the current developments have changed my estimates on Venezuela’s situation. I now believe that Mr. Maduro will be ousted much faster than I first thought.

I had predicted that Mr. Maduro will be overthrown in the next six months or later… and later could have been years. I now think that he might lose his presidency, and perhaps his life, in a few days to a few months (up to perhaps two or three).

Let’s see what happens! And make sure to clearly remind me of my mistake if my prediction does not come true… or adore me and listen to my every word if my predictions come true!!!!!!!

Take care everyone and don’t forget to have fun!

#Venezuela #Hyperinflation #Inflation #PrintingMoney #Maduro #Guaido #Macroeconomics

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