Last night a 7.3 magnitude earthquake hit the nation of Venezuela that must feel like it has the four horsemen of the apocalypse on its case right now. Fortunately there does not seem to have been major damage but we cannot say that about the economic earthquake that has been hitting it in recent times. As ever I will do my best to avoid politics in what has become a politically charged area and merely point out that it is another case of a country being held up as an economic model and then seeing trouble hit just like we have seen with Turkey. However the problems here are on a much larger scale.
If we go back to the 7th of November 2013 then Mark Weisbot told us this in the Guardian.
Will those who cried wolf for so long finally see their dreams come true? Not likely.
But how can a government with more than $90bn in oil revenue end up with a balance-of-payments crisis? Well, the answer is: it can’t, and won’t. In 2012 Venezuela had $93.6bn in oil revenues, and total imports in the economy were $59.3bn……… This government is not going to run out of dollars.
Hyperinflation is also a very remote possibility.
And then perhaps the denouement.
Of course Venezuela is facing serious economic problems. But they are not the kind suffered by Greece or Spain, trapped in an arrangement in which macroeconomic policy is determined by people who have objectives that conflict with the country’s economic recovery.
With one bound it could be free.
Venezuela has sufficient reserves and foreign exchange earnings to do whatever it wants, including driving down the black market value of the dollar and eliminating most shortages.
Sadly for Venezuela that analysis has turned out to be a combination of wishful thinking and castles in the sky. Let us start with what should be the jewel in the crown which is oil production as I recall back in the day London Mayor Ken Livingstone planning a big oil deal with Venezuela. From the BBC in February 2007.
Ken Livingstone has signed an oil deal with Venezuela – providing cheap fuel for London’s buses and giving cut price travel for those on benefits.
Now we see very different times as Venezuela seems unable to get the oil out of the ground and to markets as oilprice.com reported on Monday.
Venezuela’s oil production continues to decline. In July, output fell to just 1.278 million barrels per day (mb/d), down 500,000 bpd from the fourth quarter of last year and down nearly 1 mb/d from two years ago. A growing number of analysts see output dipping below the 1-million-barrel-per-day mark by the end of 2018.
This is a big deal for an economy that was summarised like this by Forbes last November.
Venezuela’s oil available for export is at its lowest level since 1989. The lost revenue devastates: Oil sales are 50% of Venezuela’s GDP and 95% of its export revenue.
We can do a rough calculation as according to the Latin America Herald Tribune this is the price of oil there.
According to Venezuelan government figures, the average price in 2018 for Venezuela’s mix of heavy and medium crude for 2018 which Caracas now prices in Chinese Yuan is now $59.41.
So as a rough rule of thumb it has been losing some US $60 million a day so far in 2018. Also I do not know about you but if your largest customer is US oil refineries then trying to price your oil in Yuan does not seem well thought out! Actually what we might call the potential loss is extraordinary as the Herald Tribune continues.
In 1998, the year prior to Hugo Chavez becoming president, Venezuela was producing 3.5 million bpd and had plans to increase that production go 6 to 8 million bpd by 2008.
There are two main consequences here as we note the impact on Venezuela itself which is highly deflationary and on the rest of us which is inflationary. This is because it is this lack of production which has helped drive oil prices higher as Venezuela is a long way short of its OPEC quota.
Money Money Money
There is plenty of this and in theory much more as Reuters hinted at on Friday.
Jittery Venezuelans on Friday rushed to shops and lined up at gas stations on concerns that a monetary overhaul to lop off five zeros from prices in response to hyperinflation could wreak financial havoc and make basic commerce impossible.
Sadly the website of the Central Bank of Venezuela cannot be reached so Bloomberg takes up the tale.
The official rate for the currency will go from about 285,000 per dollar to 6 million, a shock that officials tried to partly offset by raising the minimum wage 3,500 percent to the equivalent of just $30 a month……..The devaluation comes at the same time the government is redenominating the currency by lopping off five zeros and introducing new bills and a name change. So instead of the new minimum wage being 180 million strong bolivars, it will be 1,800 sovereign bolivars. Banks were closed and busy trying to adopt ATMs and online platforms to the new currency rules.
My financial lexicon for these times would of course have warned about any currency with “strong” in its title and the strong Bolivar has behaved as the novel 1984 would suggest. As to inflation please do not adjust your sets ( or screens).
One likely outcome is that inflation, which already was forecast to reach 1 million percent this year, will get fresh fuel from the measures. Prices are currently rising at an annualized rate of 108,000 percent, according to Bloomberg’s Café con Leche index.
If I was there I would only be able to help by providing an inflation index for prisoners as for quite some time it has been illegal to try to measure inflation. If we step back for a moment the numbers here do evoke images of Weimar Germany and the hyperinflation then.
In Venezuela, the old bolivar bills could be seen muddied and crumpled up on the street, so worthless that not even street beggars picked them up. ( Wall Street Journal).
Or to put it another way pictures of cash in wheelbarrows from back then have been replaced by pictures like this.
— DonaDona🌸 (@Dona_Lambert124) August 22, 2018
In theory the currency has backing but in practice we will have to wait and see.
What we are seeing here is the breakdown of basic economic concepts. Let us start with the simple concept of how to price things.
Many shopkeepers said they had no idea how much to charge customers ( WSJ)
This has a lot of consequences. Firstly how can they operate and sell anything? Basic concepts such as value of stock break down and the value of the business. So it is no surprise that many shops have shut. The concept of a price has broken down which means so has inflation.
Next there is the issue of what Abba called money,money money. As it too loses much meaning. For example the person quoted below in the Wall Street Journal has not been able to get cash for five months!
When Henrique Rosales got to the automated-teller machine on Tuesday to withdraw Venezuela’s new currency, he found it dispensed a maximum of 10 sovereign bolivars a day, the equivalent of 15 U.S. cents.
“This money is going to disappear out of my hands in no time,” said the 29-year-old waiter, who said he hasn’t seen cash in five months. He hasn’t been able to pay for bus fare and walks several miles a day from his hilltop slum to the seafood eatery where he works.
In such a situation the concept of a money supply breaks down as well as if we are in trouble with the cash or high-powered money element what about the rest? If we look at the UK we see that narrow money is about 3% and the other 97% we can summarise as bank lending. But how can banks in Venezuela lend right now? Do they even have the faintest idea what the bank is worth let alone whether it is wise to lend to the customer?
The truth is that numbers like GDP and the like become pretty much meaningless at a time like this as if we do not even have a price the whole theoretical structure breaks down. What we will see are toe factors at play. There must be an element of barter going on and probably a large one and irony of ironies a lot of transactions must be in US Dollars. Back at the height of the Ukraine crisis I pointed out that we needed a US Dollar money supply as well and let us bring things really up to date as we may well need to measure this too.
Cryptocurrency Dash is seeing a surge in new merchant sign-ups and wallet downloads in Venezuela as hyperinflation in the country runs wild………..”We are seeing tens of thousands of wallet downloads from the country each month,” Ryan Taylor, the CEO of the Dash Core Group, told Business Insider. “Earlier this year, Venezuela became our number two market even ahead of China and Russia, which are of course huge into cryptocurrency right now.” ( Business Insider)
At a time like this we perhaps get the clearest guide from other indicators.
Over the past three years about 3,000 Venezuelans have entered Colombia every day and the country has granted temporary residence to more than 800,000.
Peru says that last week alone, 20,000 Venezuelans entered the country. ( BBC)
Meanwhile the Economist Intelligence Unit does give us a clue as to a cause of the hyper inflation.
The government heavily relies on monetisation to fund its deficits,