When you get away from what Venezuela’s government media puts out there (and their friends in Cuba,Iran,etc.) stories about Chavismo are remarkably consistent… like this piece about the Director of Transparencia Venezuela. The report details, and this is just the tip of the iceberg, they are currently following an investigation involving 69 countries, 96 corruption cases, and with only 40% of the files so far they are looking at over $30 billion.
And then we have workers at 15 Caracas area hospitals protesting for full payment of the money promised them by Health Ministry authorities. Good luck with that.
The UK Foreign Office has issued an advisory. They advise against “all but essential travel to Venezuela due to COVID issues” and advises the same due to “crime and instability.” And how does this differ from their pre-Covid advisories? Well, it’s the same but without COVID.
And how’s that remarkable education program by 21st Century Bolivarian Socialism faring these days? The head of the Venezuela Teachers Union says 80% of students wouldn’t be able to pass exams on content learned remotely. They are essentially developmentally frozen.
I know this isn’t nearly as good a story as when it’s a right wing regime but Lupa por la Vida reports there were 2,853 extrajudicial killings by the Maduro regime last year. OK, now that is in one year. You don’t hear much about it but for some reason people love to talk about the horrible right wing Pinochet regime in Chile (and yes, he was a really bad guy) who was responsible for about 3,000 extrajudicial killings in 17 years. Hmmm….
Now, let’s get Down The Rabbit Hole shall we?
….As they wound their way through changes in controls over the next few years one thing was very clear.They were not going to do much that would hurt arbitrage opportunities for the Chavistas even though the supply of dollars was much tighter. From the 6.3 rate in 2014 they only adjusted the lower rate up to 10 bolivares per dollar. That increased the distortion from an 11 t0 1 arbitrage margin to 2,379 to 1. The really crazy part about this is in 2014 Economic Minister Rafael Ramirez gave a speech stating that the exchange rate system was not functioning properly. With the collapse in oil prices causing tight revenues, high inflation (if he only knew what was coming), and shortages of food and medicine, reforms needed to be made or the distortions would cause more problems. A few months passed and the only reform made was a new Economic Minister. Rafael Ramirez was assigned to the United Nations.
In 2016 a new system was announced although it wouldn’t actually be functioning until 2017. The new DICOM would solve everything! Hmmm… isn’t that what they said about the three systems before DICOM? Anyway… one thing that was different was a higher exchange rate while still maintaining the 10 bolivares rate for priority usage called the DIPRO.
So now we have the DICOM, the DIPRO, and the black market. Since DICOM and DIPRO required that the government spend some of their much coveted dollars there wasn’t much volume in these two. DIPRO was almost non-existent and DICOM only sold $32 million from inception until mid 2019. In the world of foreign exchange that is almost nothing so, as before, businesses and non-connected individuals had to rely on the black market. Here’s an example of the breakdown from 2018 : DIPRO – 10 bolivares/dollar
DICOM – 3,345 bolivares/dollar
Black Market – 240,000 bolivares/dollar
At the same time this was happening the government was printing money at an astounding rate. They kept increasing the minimum wage 4-5 times per year and funding it by creating money out of thin air. The money supply increased 3,000% in 2018 alone. The hyperinflation genie was out of the bottle.
The earlier example of the breakdown was from January,2018. By April,2018 here’s what it looked like : DIPRO – 10 bolivares/dollar
DICOM – 60,000 bolivares/dollar (average for the month)
Black Market – 880,000 bolivares/dollar
At this point the minimum wage was 1,800,000 bolivares a month or just over two bucks. Here’s a snapshot of a few prices from April,2018
Vegetable oil – 748,367 bsf (bolivares fuertes – after Chavez lopped off 3 zeros from the bolivar)
Cheese – 2,160,950 bsf (non-imported)
Chicken – 2,299,500 bsf
Toilet paper – 400,000 bsf (2 rolls)
Ground beef – 1,150,000 bsf
Pair of shoes – 6,000,000 (non-designer brand)
As you can see, food was becoming a luxury and having to work more than three months to buy a pair of shoes isn’t doable. Over the next several months it would get much worse. The monthly minimum wage would reach a low (when converted at the black market rate, the only real rate) of 60 cents per month.Prices were so out of control that stores were weighing cash instead of counting it. Financial institutions were having difficulty because their systems weren’t able to process transactions in the trillions and beyond so they were amending statements with a note that the figure represented them having dropped decimal places. Something had to give and Maduro had already shown he wouldn’t listen to anyone regarding economic matters.He even blew off recommendations from Russia and China, his two primary creditors.
People were using bolivar notes in various denominations to make things like handbags. Street vendors offered bills instead of napkins because they were cheaper. When rioting and looting occurred and people came in to assess the aftermath the floor would be littered with bolivar notes from the register or cash box. They weren’t even worth picking up.
So what does Maduro do? Wait for it….. he announces in August,2018 a complete economic overhaul including massive devaluation, a new currency ( the “Sovereign Bolivar”), a 3,000% increase in the minimum wage, and all these changes would be tied to the government’s already discredited and utterly failed cryptocurrency “the Petro”. He proudly proclaimed that, once again, no one with any knowledge of economics, business, or finance had any input regarding these changes.It was purely a Chavista invention and was a new way forward for “The Revolution” and the world! Viva la Revolucion!! …again.
The new currency, the Sovereign Bolivar, designation bsS (bolivares soberanos) would lop 5 zeros off the Strong Bolivar, designation bsf ( bolivares fuertes),which had lopped 3 zeros off the bolivar. So let me get this straight, one new bsS would be the same as 100,000,000 of those boring old pre-Chavismo bolivares.Uhh…OK… and we won’t even get into the Petro here. Again, it deserves it’s own chapter.
If you’re feeling a bit confused you’re not alone. Here’s something I found a while ago. keep in mind that these figures come from official government websites.
According to the Venezuelan Ministry of National Commerce :
1 Petro = 36,000 bsS = $60
DICOM official exchange rate – 3,297 bsS/dollar
According to DICOM each Petro should = 197,820 bsS ($60)
If the value of the Petro really is 36,000 bsS the petro is worth only $10.92
The government can’t even reconcile values from it’s own websites! needless to say this discrepancy has never been covered by the government media and there is never an interview or press conference where someone might ask “So what is it? It has to be one or the other! It can’t be both!!” To ask that question would be to ask for jail time.
So, how would this work out for the Revolution’s “New Way Forward”? Well, in the three and a half weeks between the announcement and when the changes went into effect the new Soveriegn Bolivar didn’t stop the minimum wage’s nosedive in real terms. The huge increase of 3,000% got the minimum wage earner UP TO $30 a month. Yes… UP TO A BUCK A DAY!! (a dollar a day is the UN’s definition of extreme poverty) By the time it went into effect the devaluation in dollar terms reduced the minimum wage to $22 and quickly reached $7 and continued to fall.
Summary : What were the announced intentions of these price and currency controls? Price controls would provide food to the people at affordable prices. The reality was the controls created increased shortages of many items and increased prices on many others. Either you couldn’t find things or you couldn’t afford what you could find.
Currency controls would keep dollars from leaving Venezuela and help control inflation while protecting the buying power of the average Venezuelan. Well the dollars still left the county although not through conventional avenues. it went into overseas bank accounts of overnite millionaire Chavistas created by the controls. Inflation went from 100% to 1,000,000%. Buying power,well … $200 a month that was deemed unacceptable when Chavez came to power is now $2 a month and that’s up from the 2018 low of 60 cents a month. People that used to think about buying a house,a car, or taking a vacation now think about how to survive when a month’s minimum wage buys you a couple of kilos of flour and that’s all.
What’s that I hear? It’s that broken record again. There was no major drought or famine. There was no war. There was no natural disaster. This is an economic disaster. A man made disaster, A Chavista made disaster.
Next week : Tales From The Crypto
Have a great weekend!
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