We’ll get to our Venezuela : Down The Rabbit Hole segment in a few but first…The Center For Strategic & International Studies (CSIS) had a piece titled “The Venezuela External Public Debt Crisis : Everything Everywhere All At Once” The article, in a very lengthy piece, tries to make some sense of Venezuela’s public debt situation (crisis), which is very complicated, as is almost anything Venezuela-related. Let’s see if we can simplify it a bit…

 The first point they make is that Venezuela’s public debt crisis has largely been ignored. The focus of the international community has been on Venezuela’s democratic backsliding, the increasing criminalization of a weak state, the systematic Human Rights violations, etc. (The etc. could include everything from lack of affordable food, medicine, reliable electric power, access to fresh water, and almost everything needed by the Venezuelan people, which doesn’t get nearly enough coverage)

 Venezuela’s external debt is estimated at $140 billion, which exceeds it’s assets by far and is a lot of money for a country that has destroyed it’s cash cow, the oil business, which is responsible for 96% of it’s legal revenue (it makes more money from illegal trafficking of drugs, gold, etc. these days).

 Next, Venezuela’s assets are frozen, due to sanctions, and the use of those assets by the 2015 National Assembly, the legitimate government of Venezuela, recognized by the US and 50 other countries, goes through the US Treasury Department- OFAC (Office of Foreign Asset Control).

 Now we have the leader of the 2015 National Assembly, “interim president” Juan Guaido, being replaced by the Venezuela opposition’s Unity Party and his government dissolved. He has been replaced by a new president and a board appointed to handle the responsibilities previously handled by Guaido’s government.

 It is a complicated process, especially now, to get assets unfrozen to be used to fund the (opposition) government and for the proposed $3.2 billion UN-managed humanitarian fund for the benefit of the Venezuelan people, agreed upon in the Mexico negotiations between the Maduro regime and the opposition delegation.

 We also have an ever-growing number of companies, all with legitimate claims against Venezuela, many of whom already have arbitration awards, lining up to seize shares of Citgo, the US refiner wholly controlled by PDVSA (Venezuela government-owned oil company), which has an estimated value of $8-10 billion. Bondholders of PDVSA and Venezuela sovereign bonds are also positioning themselves to seize shares of Citgo which are currently under the protection of the US Treasury Department but that protection is due to expire this year and it’s unclear it that protection will be extended.

 OK, so I told you it was complicated, right? We’ll take a break and continue with this tomorrow but for now, let’s head Down The Rabbit Hole…

 Chapter 5/ Control Freaks…

 If there is anything that can match the failure rate of socialism it’s price controls. They simply never work…anywhere…anytime. I don’t know about you but when I hear “this time will be different” I know failure is assured. It’s never different! When the housing bubble in the US in 2007 was questioned we heard it and as well when we had the tech bubble in 1999 and many other instances. I believe “this time will be different” about as much as I believe, as Ronald Regan famously referred to, “I’m from the government and I’m here to help”.

 A few years ago when Venezuela was going through yet another bout of food shortages one of the things that were abundantly available were eggs. Cholesterol concerns aside, it’s hard to worry about cholesterol when you’re starving, eggs are an excellent source of protein. It’s not like the people were clamoring for the government to do something about egg prices. While they weren’t particularly cheap they weren’t prohibitively expensive either and they were plentiful. Seems like a good balance of relevant factors. Well, we can’t have that now can we?

 At that time, Maduro, who has never enjoyed anything close to a positive approval rating (remember, current approval is about 5%), felt he needed to do something to boost his popularity. Since he ruled by decree due to the emergency powers he granted to himself he needed no approval and could impose any conditions he wanted. if you were looking for a good example of the ideas you get when there is nobody in the cabinet with an understanding of economics and the president has no experience in business or economics this is a good one.

 When Maduro went to bed the sale price for a flat of eggs (30) was 1.200 bolivares (local currency) and the cost to produce them was 800 bolivares. In the morning he announced he was lowering the price of eggs and he stressed that he came up with the idea himself and no “greedy capitalist” could influence him! He was doing this for the people of Venezuela! Effective immediately the price of a flat of eggs, including those already in stores, would be 400 bolivares. Viva la Revolucion!!!

 I’m sure you already know what’s coming. The retailers, with no other choice, sold what they had in stock, took the hit, and didn’t order anymore eggs. The wholesalers and producers weren’t interested in doing business at a loss either since no subsidies were announced. Almost overnight eggs just disappeared from stores. It did, however, add another item to the inventory of the “bachaqueros”, as the black marketeers are called.

 Producers produced less but commanded a higher price. Those that could afford it paid the higher price charged by the “bachaqueros” so they were OK. The wholesalers and retailers redirected their efforts so, after taking the initial financial hit, they were OK. As is so often the case with “Socialismo” those hurt most were those it was supposedly trying to help.

 This is just one of many examples of price controls in the Chavismo era. Strangely enough, no matter how many times if fails to produce the desired outcome, they keep coming back to the well of price controls. The reason, it sounds so good and plays into the ideology. They can always fall back on the excuse the socialists always trot out there. It would have worked if not for those “greedy capitalists”.

 Despite it’s failures the number of items subject to price controls grew over the Chavista years reaching a peak of 250. Since the government couldn’t afford to subsidize everything once all the extra revenue from high oil prices and loans dried up whatever didn’t receive a subsidy made a second list, the shortage list. Until I lived in Venezuela I had never heard of such a thing. Fedecameras, the Venezuela equivalent of the Better Business Bureau, keeps track of this as the government would never reveal how many things they had forced to disappear. While there were always some items in short supply in Venezuela it became completely out of control. Even products that were available morphed from high quality brands to very low quality products due to a number of factors we’ll get into later.

 More tomorrow….