Sunday, November 02, 2014

Hyperinflation as a gateway to dollarization (or eurozization if you wish)

Printing bolivares
There is no need now to argue against the disastrous economic situation of Venezuela, all of Chavez making (Maduro is a mere idiot managed by his Cuban puppeteers who are merely making things worse than what they should be). The results are for all to see. From an oil exporting country we have done our first importation of oil. More than at any time in our history we depend on oil, at a time where the oil barrel has lost around 25% of its value. We import at the very least 60% of our food (some estimates reach 75% of our total needs in whatever). Our international reserves have reached a decades low. The "official" yearly inflation is now 63% when the real one, outside of a failed price control system, hovers probably around 100%. And this, my friends, when all your neighbors have a yearly inflation average below 4% means hyperinflation, in XXI century parameters. The more so when there is a nasty trend in many advanced countries towards deflation...

My experience in the last month confirms all of this, Besides my culture shock coming back, my business trip in Europe was dismal. I could start by the difficulties I experienced in getting an airplane ticket out of Venezuela, in bolivares. In dollars there is no problem, the more so if someone buys it from you from outside the country. But if you want it in local currency and you get one, you pay full fare. No discounts whatsoever. Yet I did not care since we all try to unload as many bolivares as we can. The nasty surprise was that CENCOEX did not approve my travel dollars for technical reasons (set to make sure that a fair percentage of people cannot access them, even at SICAD 1 of 13 to a USD instead of the offical 6.3). Thus I had to do a business trip on MY personal euro savings, of which I will only recover a portion. As such I cannot tell you how expensive is Europe when you travel at 102 bolivares for an euro (based on declared reserves).

But that was not the worst thing. Every one I approached did not want to do further business with Venezuela. Sure, they would sell me anything if I paid in advance which is impossible. Though understandable. But in one case there was that Chinese company who sent me packing. That is right, some in commie China do not want to deal with Venezuela EVEN if you pay in advance. It is not worth the bother between permits and assorted headaches from paper work.  My investment talk were simply heard of with a lot of sympathy, the kind you use when your poor relatives try to convince you with a business proposal, before declining your participation in it.

After this eye opening experience, discovering that once welcome Venezuela is now a business outcast, I am back home to learn that not only airplane tickets are in dollars, but from now on car sales will also be in dollars. That is right, the regime has reversed a decades all policy to promote at least assembly lines in Venezuela. Rather than allowing for agonizing car assemblies to import what they need to work, the regime has decided that it is preferable to have direct imports of assembled vehicles, if you have the dollars.  I am going to pass on who has dollars today in Venezuela to import fancy cars (hint: they dress in red in public meetings). The point here is that "el pueblo" can forget about buying small cars, that dollarization advances and that just like in Cuba, those who will live better are those who are able to get a few greenbacks. A decade and a half of bogus revolution to reach monetary dependency.

This is the fate of Venezuela, move towards a dollarization of the economy because the regime has failed in creating a sustainable economic system. This is not a matter of a willful political decision to impoverish the population to make it more dependent on the regime. If it is true that this is the case in Cuba and becoming so in Venezuela, it is also true that economic failure came first and that the regimes simply decided to use that economic failure the best they could (making economy worse as an afterthought). After all, it is in the political interest of these countries to have a viable economy, or at least one that produces enough cash to promote revolutions elsewhere. Remember that Cuba regained importance only after Chavez started bankrolling that influence, gaining after the fact Nicaragua, Ecuador, Bolivia, some Caribbean and to a lesser extent Argentina (with or without Venezuelan help, countries like Uruguay or Brazil were fated to "alternance").

Thus we have reached an undeclared dollarization of the economy, promoted through hyperinflation. The only way the bankrupt regime can retain control is to drop "unnecessary" sectors of the economy (cars, electronics, luxury item, exogenous food products, etc..) to a dollar market, while retaining control on basic staples for which they may get enough cash for cheap distribution to its hard core base. Even advanced medical care has been thrown to dollar holders as the case of Jaua's nanny reveal. The wife of a regime high ranked minister went to Brazil for medical treatment instead of getting it in Venezuela (and the 12 years serving nanny got caught at the Sao Paulo airport with a gun).

The minister of "comunas", the one in charge of organizing "el pueblo" has had a nanny for at least 12 years, sends his kids to the most expensive schools in Caracas, travels free in governmental airplanes (that is why the nanny could leave with a gun in her bags) to have the best health care possible outside of Venezuela, paid in dollars. He is dollarized. Meanwhile that pueblo can eat dollarized shit, but paid in bolivares.


  1. Anonymous2:33 AM

    Complete dollarization would stabilize the economy though. If Chavistas are incompetent enough to go through with it far enough ...

    One can always hope.

    1. Dollarization has pro and cons. Let's not forget that contrary to the Euro zone, if your country uses dollars, you still do not have a peep squeak with the federal reserve. And thus US monetary policies are yours, whether you like them being irrelevant.

    2. Anonymous7:15 AM

      Yea, it has downsides all right. But the downsides pale compared to unrestrained fiscal expansion of the Robolution. Dolarization would also pretty much force the regime to abandon price controls that are choking the economy.

      Compared to these boons things like "but US monetary policies are yours, whether you like them or not" become so tiny as to be rendered irrelevant, imho.

      My 2 cents anyway.

  2. You forget the revolution isn't supposed to follow your logic. They seem to be mixing a hellish recipe, using fidel Castro and marx, a pinch of mafias with a corrupt military, the idiocy of Idi amin and the cagey wise guy moves mixed with lies, North Korean style worship and Orwellian lies, all glowing in the admiration of leftists and somehow ignored by both the EU and the USA as it violates human I wonder why you worry about doing business at all. Venezuelans today remind me of Titanic passengers before they realized the ship was sinking for real.

  3. Anonymous8:12 PM

    Yes, I agree completely with your diagnostic.

    They are indeed dollarizing those sectors of the economy considered low priority for their base just like in Cuba. They know that corruption and falling oil prices make it impossible to go back to 2004, so they are clearly implementing the advise of Cuban technicians about how to reorganize the economy. In the process they will increase their control of economic activity under the guise of "radicalizing the revolution". The future of Venezuela looks bleaker than ever...


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