Venezuela – how to collapse an economy in 5 easy lessons…

The collapse of national economies is common enough that I have to think it is either “by design” by those who gain from it, or the human condition is just not able to restrain itself nor learn from the past very well.

The current poster child is Venezuela, yet right behind it is Argentina (again) and not that far back is the EU, and with the USA doing its best to join the parade.

The basics are simple. Overspend your means of production. Borrow heavily when that “has issues”. Inflate the currency when you can’t repay the real debt. Put in place wage, price and / or currency and capital controls when the resultant inflation causes the economy to stagnate and the people to get pissed. Watch as the real productive capacity of the economy wastes away due to no maintenance, no new construction, and capital flight. Await the revolution and the reconstruction.

With that, let’s look at Venezuela.

http://money.cnn.com/2016/10/25/news/economy/venezuela-breaking-point/index.html

This gives a good synopsis of where things were in October 2016 (so about 1/2 year ago).

4 reasons why Venezuela became the world’s worst economy
by Patrick Gillespie @CNNMoney October 25, 2016: 10:20 PM ET

1. Economic crisis: three years of recession

Venezuela is in its third year of recession. Its economy is expected to contract 10% this year, according to the International Monetary Fund. The IMF forecasts Venezuela will be in recession until at least 2019.

While the economy shrinks, the price of goods is skyrocketing. This year, inflation is expected to rise 475%, according to the IMF.

I’d count those as two separate things. Rampant inflation (now somewhere around 700% a year, so hyperinflation range) and a distinct economic recession. More on that below, but basically the non-oil economy is entering the moribund stage.

2. Venezuela’s broken engine: oil

Things got really bad when oil prices started to plunge in 2014. Venezuela has the world’s largest oil reserves, but the problem is that oil is the only game in town. It makes up over 95% of Venezuela’s revenue from its exports. If it doesn’t sell oil, the country doesn’t have money to spend.

Oil prices were over $100 a barrel in 2014. Today, they hover around $50 a barrel, after dropping as low as $26 earlier this year.

The problem is that Venezuela has not taken care of its cash cow — squandering opportunities to invest in its oilfields when times were good. Because the country has neglected with the upkeep of its oil facilities, production has dropped to a 13-year low.

Venezuela’s state-run oil company, PDVSA, hasn’t paid the companies that help extract its oil, such as Schlumberger (SLB). In the spring, Schlumberger and other companies dramatically reduced operations with PDVSA, citing unpaid bills.

That’s the specific. IMHO the generic description is just spending all you make in good times, then refusing to prepare for bad times. Had Venezuela invested that $100 oil revenue (or 1/2 of it) into a robust economy, they would not be having a problem…

NEVER spend all you make. Be frugal in good times, even more so than in bad times.

3. Soaring food prices & broken hospitals

Venezuela’s food shortages became extremely severe this year. Venezuelans went weeks, in some cases months, without basics like milk, eggs, flour, soap and toilet paper.

Despite a crashing currency and falling oil revenue, the government continued enforcing strict price controls on goods sold in the supermarkets. It forced food importers to stop bringing in virtually everything because they would have had to sell it for a major loss.

In the first half of 2016, food imports were down by nearly 50% from the same time a year ago, according to several estimates.

Only recently has the government stopped enforcing price controls, and food has returned to supermarket shelves. However, prices are so high that few Venezuelans can afford the food.

Buggery of the currency always ends in disaster. Have a stable and reliable currency. As soon as inflation gets over about 10% / year, real production falls off and gaming the system starts to grow, eventually to dominate.

4. Running out of cash and gold

Venezuela is running out of cash quickly. It doesn’t have enough money to pay its bills for too long.

The math just doesn’t add up: It owes $15 billion between now and the end of 2017, while the nation’s central bank only has $11.8 billion in reserves. At the same time, Venezuela’s only other cash source, PDVSA, is pumping less oil and risking default.

Most of its reserves are in the form of gold. So, to make debt payments this year, Venezuela has shipped gold bars to Switzerland.

China used to bail out Venezuela and loan it billions of dollars. But even China has stopped giving its Latin American ally more cash.

Don’t expect to live on the Credit Card. Eventually it gets revoked. Worse, that inability to get liquidity causes a decay and eventual collapse of the real productive plant and equipment (and staff…) eventually leading to ever lower income to service that ever larger debt. Nationalizing industries does NOT get rid of this problem, but DOES drive out any capital that wasn’t smart enough to have already left and assures nobody is going to send in more.

There’s some interesting bits in here, too:

https://en.wikipedia.org/wiki/Economy_of_Venezuela

Venezuela was a major oil producer. During $100 oil days, they spent like crazy on good times. Then started doing things like nationalizing the oil properties (thus assuring no further investment by outsiders). When oil prices dropped, they were on the hook for covering the shortfalls. Now, with investment and even maintenance on hold due to non-payment of debt and nationalizing things, even their present oil production is at risk and dropping.

This put a horrific bind on foreign exchange (mostly US $ ) and so they could no longer buy things needed to keep the other half of the economy running. Now it is spiraling down to zero. The graphs tell the story:

Exponential Inflation in Venezuela

Venezuela Inflation

Their non-oil exports are likely a good proxy for non-oil production generally:

Non-Oil exports collapsing

Non-Oil exports collapsing

Since Hugo Chávez’s “socialist revolution” half-dismantled its PDVSA oil giant corporation in 2002 by firing most of its 20,000-strong dissident professional human capital, and imposed stringent currency controls in 2003 in an attempt to prevent capital flight, there has been a steady decline in oil production and exports and a series of stern currency devaluations, disrupting the economy. Further yet, price controls, expropriation of numerous farmlands and various industries, among other disputable government policies including a near-total freeze on any access to foreign currency at reasonable “official” exchange rates, have resulted in severe shortages in Venezuela and steep price rises of all common goods, including food, water, household products, spare parts, tools and medical supplies; forcing many manufacturers to either cut production or close down, with many ultimately abandoning the country, as has been the case with several technological firms and most automobile makers. In 2015, Venezuela had over 100% inflation – the highest in the world and the highest in the country’s history at that time. The rate increased to nearly 500% by the end of 2016 with Venezuela spiraling into hyperinflation while the population poverty rate was between 76% to 80% according to independent sources.

So, largely dependent on a single commodity for foreign exchange, spend all you make in good times, then don’t stop spending in bad times. Borrow like their is no tomorrow, since there isn’t…

Bugger the currency and tell the rest of the world you want to grab all their money via ‘capital controls’. This flushes every possible bit of money out of the country and out of your currency.

Attack the companies and workers in your most important productive sector. Drive it into the ditch. Nationalize chunks of it, assuring nobody will invest in your country for a generation.

When inflation becomes painful, institute price controls. This assures the rest of your economy grinds to a halt as well. Nobody will bother making things for a loss.

As these things drive your economy into recession, blame everyone but yourself. Blame your major customer (in this case the USA) along with driving away your lenders as they realize you are an incompetent deadbeat. (in this case China). Pay no attention to the rampant hardships driving your population into riot. Insist others are responsible and others need to pay for your needs.

In Conclusion

So there you have it. Happening now in places from Venezuela to California to Greece to …

Same story, different pace to the music sometimes.

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About E.M.Smith

A technical managerial sort interested in things from Stonehenge to computer science. My present "hot buttons' are the mythology of Climate Change and ancient metrology; but things change...
This entry was posted in World Economics and tagged , , , . Bookmark the permalink.

15 Responses to Venezuela – how to collapse an economy in 5 easy lessons…

  1. pearce m. schaudies says:

    Hi Chief. The SAudi’s and other oil economys must be sweating bullets over the Venezuela spectacle. The Saudi are prepping an IPO for aramco business and it looks like it’s way over valued. One blog I read said Saudi are attacking Yemen because they have four to five times oil Saudi claims to have. And Yemen’s has been pumped hardly at all.

    Sparken- poppen revolutions soon. At least in Venezuela they have a Jungle full of food very nearby. The Mideast oil economies have sand, heh.

    Regards,
    Pearce M. Schaudies.
    Minister of Future

  2. p.g.sharrow says:

    Socialism is a Opiate that requires constant injections of other peoples money. When that runs out, disaster is inevitable. Addicts must hit the very bottom to have their habit of shooting up broken,
    Nostradamus said that things would get so bad that the “Philosophy of More” or Utopia would be thoroughly discredited…pg

  3. E.M.Smith says:

    Schlumberger per Yemen’s Oil potential:

    http://www.slb.com/~/media/Files/resources/mearr/wer12/rel_pub_mewer12_2.pdf

    Not seeing Saudi scale, but still they are finding oil. Would not expect it to shout if it were a giant… but hint maybe… Needs a close read and some more poking.

  4. E.M.Smith says:

    http://www.geoexpro.com/articles/2013/08/oil-exploration-in-yemen

    Claims around 3 billion bbls. Not giant, but nice for them.

  5. pearce m. schaudies says:

    @Chief. I really don’t trust ANY oil reserve estimates. Proof of pudding is in the pumping, heh.

    Late in last year, another economic expert said Washington and Riyadh had bribed the former Yemeni government to refrain from oil drilling and exploration activities, adding that Yemen has more oil reserves than the entire Persian Gulf region.

    Above clip from …

    http://ahtribune.com/world/north-africa-south-west-asia/war-on-yemen/1537-saudi-arabia-yemen-oil-total.html

    Regards,
    Pearce M. Schaudies.
    Minister of Future

  6. R. Shearer says:

    Venezuela began nationalizing (stealing) whole businesses and industries over a decade ago. One day a hotel was a Hilton, next day it was owned by the government. The more this happened the more difficult private investment became.

  7. gallopingcamel says:

    Stupid government is hard to get rid of. It comes in many forms as illustrated by Venezuela, North Korea and the EU. All are doomed to “Regime Change”.

    In the USA we have had decades of stupid government but maybe Trump will end that if the spineless GOP will get behind him.

  8. E.M.Smith says:

    @G.C:

    Is there any durable non-stupid form of government? I can not think of an existence proof…

    @R. Shearer:

    I have a general rule of pulling 100% of investments from any country that nationalizes any industry OR implements currency controls (at the earliest possible). It has not failed me yet.

    The only exception I’ve made was when Obama nationalized GM and healthcare. Mostly because I was already 100% in cash and my costs are in $ US (and there wasn’t much else to choose from…). But had we not swapped congress to stymie more of it, I’d have been working more on other currecies and economies.

    @Pearce:

    Lots of individual opinions in that link, not much information or evidence…

  9. gallopingcamel says:

    @Chiefio,
    “Is there any durable non-stupid form of government? I can not think of an existence proof… ”

    You must be right otherwise there would be an empire that rose and then failed to fall.

  10. Larry Ledwick says:

    Well it looks to me that he just triggered the first stages of runaway inflation and collapse, it will take a couple months for the effects to be realized but probably no going back now. Doubling wages to fight inflation is a losing gambit. Too bad he does not know anyone who understands math.

    https://www.apnews.com/0e505257fe654a4f80687355126861f1/Venezuela's-Maduro-hikes-minimum-wage-amid-rising-protests

  11. E.M.Smith says:

    With a present inflation rate of 700%+ headed for 2000% next year, doubling minimum wage will cover about 2 months of inflation….

    They are already in the finsl stages of collapse. That’s why I’m watching them so much. An exponential decay, past the knee, goes SPLAT! very suddenly… and I don’t want to miss it in real time…

  12. philjourdan says:

    Seriously. Do not quote from CNN unless you want to demonstrate bad news. Your analysis of Venezuela is on target. However, the subterfuge in the CNN article is pure horse pucky. I can see why the left is the next one in line behind Venezuela.

    But you group the “EU” as one entity. As “one”, it will not fail until all fail. And Germany is a lot stronger than most Economies (but then most economies do not have PIIGS). So I think your timing on that is off. However, should the EU break apart (and if that is what you mean by fail I agree), then the pieces will fail fairly quickly. At least the PIIGS part. The others will hang on for a time.

    It never ceases to amaze me how stupid people can be. Even after seeing the same thing happen over and over and over, they still want to try it. With no record of success, and 100% record of failure, they refuse to admit it does not work.

  13. Larry Ledwick says:

    Related to Venezuela we have Puerto Rico, also circling the drain. Going to file the largest ever bankruptcy.

    Puerto Rico is set to file the largest public sector bankruptcy in history after vulture capitalist hedge funds that bought big pieces of the island’s $73 billion in defaulted debt for pennies-on the-dollar refused to take $24 billion haircut.

    http://www.breitbart.com/california/2017/05/01/puerto-rico-to-file-largest-public-sector-bankruptcy-in-history/

  14. p.g.sharrow says:

    Yup! looks like Soros is working on his next big score, force the government to make good on the bonds he has bought up. Want to guess who will begin shilling for a federal bail out so poor poor Puerto Rico can make good on their bonds? The paid for FAT CAT liberal politicians…pg

  15. E.M.Smith says:

    @Phil:

    It makes a lot of sense when you remember Soros makes money out of shorting things that are failing…

    BTW, CNN is often a good bad example…

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