Monday, February 1, 2016

Venezuela on Brink of Collapse


Its not 'socialism' its the national public policy of seeking non-productive contribution (rent) via reliance on their membership in the OPEC cartel.

We might have to get the military involved down there this could be headed for the biggest humanitarian crisis ever in the hemisphere.

WaPo out to lunch as usual blaming it on "money printing!":

So it did what all poorly run states do when the money runs out: It printed some more. And by "some," I mean a lot, a lot more. That, in turn, became more "a lots" than you can count once oil started collapsing in mid-2014. The result of all this money-printing, as you can see below, is that Venezuela's currency has, by black market rates, lost 93 percent of its value in the past two years.


15 comments:

Peter Pan said...

Being or not being in OPEC would not have saved them. They don't call the shots, the Saudis do.

Matt Franko said...

The public policy is oil rent seeking ie no emphasis on real domestic production... so hence they have no domestic production... OPEC membership is confirmation of this policy... ie they are on board with opec...

Our oil industries benefit from high rents when they manifest but we also have other domestic industries which are productive Venezuela not so much... they dont even have toilet paper and now food is in short supply...

We need to be planning contingency naval operations they could go down the tubes....

Ignacio said...

And they have interest rates probably at 500000%

Textbook positive feedback loop. Hey, I'm holding up all this 3mo short term paper and is adding up trillions in income monthly due to surreal IR, no problem mate!

Unknown said...

Iggy, I think I recall reading that the CB had interest rates at like 900% at one point to "fight inflation".

Honestly, I've been leaning towards the conclusion lately that high interest rates are the primary villain in these hyperinflation episodes. Hard to curtail Govt spending, the deficit, and thus inflation when you're spending like mad on interest and in turn the banks are crediting accounts like mad. What possible other reinforcement mechanism could there be? It doubt they are indexing every single bit of Govt contract and payment.

Tom Hickey said...

Almost no inflation results from 'money printing." It's not the "M" in MV=PQ but the "Q"

It's supply side rather than demand side. Raising interest rates to reduce demand is the wrong approach. The correct approach is lowering borrowing cost to facilitate consumption and investment while using the power of government to increase supply.

In Venezuela and other countries like it, the higher oil price allowed importation of goods. The lower oil price is now preventing that and the price of scarce imports is rising. The solution is import substitution and where that is not possible rationing necessities.

Unknown said...

"Almost no inflation results from 'money printing." It's not the "M" in MV=PQ but the "Q""

have to disagree here Tom. M & Q are intrinsically linked. No possible way to single out one or the other because inflation is about the relationship between the two through time. IMHO your comment here is roughly equivalent to saying that only Debt matters to debt to GDP ratios. Well no, they are intrinsically linked, they are variables that are dependent on each other.

Thats why nobody can answer this question: How much inflation would an additional $1 trillion in FICA tax cuts generate? Its impossible to know because of the dependent nature of supply on demand. In the first year, companies may expand up to their existing capacity and then prices rise more after that constraint is hit, but if you promise to maintain that demand in the future, Biz will simply build the amount of supply necessary to satisfy the demand thus stopping the upwards price pressure. Not to mention the fact that the entire world is essentially in the US supply chain.

On the flip side, there is a type of asymmetry to the M \ Q relationship as its far harder to reduce Q than to increase M given that M is purely nominal and Q involves the real world. Which brings us back to my point about the dangers of high interest rates. That just continue to pump out M, and if interest rates get high enough on enough outstanding Govt IOUs, the pace of Govt iOU creation goes exponential with a vengeance.

Maybe we can think about it another way. Take Japan as an example, with Govt IOUs outstanding at 250% of GDP and much of those held by the Non-Govt are short term IOUs thanks to lots of BOJ QE. They think that negative rates can help inflation when in reality, with that level of outstanding Govt IOUs, a increase in the FFR to 10% would generate a 2.5% of GDP increase in Govt spending. A 100% FFR would increase Govt spending by 25% of GDP. NO wonder the Zimbabwe CB couldnt stop hyperinflation with 1000% interest rates, in the Japan situation that FFR would produce a GOvt spending increase of 250% of GDP!!!!!!

How can prices rises by 1000% continuously for years without the Govt doing massive inflation indexation via high interest rates? IMO it cant be done.

Tom Hickey said...

Auburn, I agree all cases are different and must be evaluated on the merits.

What I am saying is that' assumption is that inflation is lead by munnie. I define "monetarists" in general as those who assume this. This is the dominant policy position since the Seventies. The tool is, of course, interest rates.

In my view, that is usually wrong contemporaneously. Goods inflation is not due to money creation but rather shortages of goods.

The monetarists' response is therefore generally to adopt ineffective policy that probably just makes the problem worse.

The obvious way to deal with a problem is analyzing the actual causes rather than assuming them. Venezuela is not experiencing inflation because they "printed too much munnie." They have a goods shortage in critical areas that an increase in the oil price would solve.

Barring that, austerity is not going to help the goods shortage and probably will exacerbate it. They need to address the inability to rely on a imports as previously owing to the fall in oil revenues.

The way that Latin American countries deal with this prior to the rise of leftist regimes was to keep the majority of the population poor, so that a fall in the price of oil would just have affected the amount of rent the elite could hoard.

So, yes, cutting the bottom in on the rent did lead to less hoarding by the top and more munnie velocity. The solution of the top now is to return to the prior system of keeping the poor poor.

Andy Blatchford said...

I did hear something interesting about Venezuela, apparently that roughly half of it's imports get diverted into Colombia. What is happening is Importers are using the official peg to exchange local currency into USD through the CB, importing and taking the goods to Colombia selling them there in USD, then exchanging on the black fx market making a huge mark-up.

Ignacio said...

Tom, is a feedback loop. If there are shortages and you keep funneling nominal income growth through higher rates prices will raise further.

Suddenly supply is not 900% than a week ago. Quantity matters, in some cases. Depens on where is flowing, from where and at what rate.

Stop providing liquidity and hyperinflation stops. OFC that's not going to solve shortages, but ot will then show off in an other way: Depression and deflation.

Both are faces of the same coin, and people suffering will end up being the same. But to clean up, you need an stable currency.

Joe said...

As Matt and Tom said, it's about production.

Why has no one in Venezuela thought about building a toilet paper factory? Is Venezuela so thoroughly infected with the economic non-sense that you should only do one thing you're good at and then export it? Other people are better at producing toilet paper so you shouldn't even try? C'mon it's not that hard to figure out. Some degree of autarky is not a bad thing. Sheltering your country from the whims of the international markets can only be a good thing. So what if Venezuelan produced tp is a little rougher than good ol' charmin, you'll live, develop some calluses. Build some factories people.

Matt Franko said...

Joe I'm tellin' ya they could get the plant and equipment for free in N.A. if they would agree to move it... huge capacity taken out of that industry (forest products) in N.A.

Perfect opportunity to establish a COOP producing low cost "no frills" personal care products in general not just TP down there...

Matt Franko said...

Soap, toothpaste, shampoo, TP, feminine products, deodorants, etc...

These are not "high tech" products....

Matt Franko said...

Just dont try to convert the COOP into the JG... Establish a JG separately so as to compete effectively with imports and the COOP can succeed...

Peter Pan said...

Venezuela should have developed their agricultural potential. They are in the tropics and cannot feed themselves.

SA's economy is not diversified and they know it.

NeilW said...

Venezuela has a pegged currency.

So it's Greece with a Dutch Disease problem.

Socialists love pegged currencies. And they always end up in the same place. Eventually they'll work out what the problem is.