Venezuela is holding National Assembly elections today. At stake are all of the 167 seats in its legislative body.
The big question is whether the people of Venezuela will reject the ruling United Socialist Party of Venezuela which has been in power for the last 17 years.
During that time Venezuela has become an economic basket case under the leadership of socialists Hugo Chavez and Nicolas Maduro.
Inflation is rampant. The most basic necessities are not available in stores. A country with the largest oil reserves in the world (yes, it passed Saudi Arabia on that score in 2012) is running a government deficit of 14% of GDP proving once again that the problem with socialism is that you soon run out of spending other people's money.
Despite the large oil reserves, Venezuela is actually producing 25% less oil than it did when the socialists took power. Even worse, oil exports (critical for the hard currency to buy imported goods for its people) are only 50% of what they were in 1999.
Why?
Economic mismanagement. No protection of private property rights. Massive subsidies for oil locally to keep those Venezuelan voters happy. Therefore, there is less to export and sell.
The price of gasoline for locals? 1.5 cents per gallon. Of course, you can get to the grocery store very cheaply if you can afford a car but it is unlikely anything will be on the shelves when you get there.
Right after I wrote that, the voters in the national election voted out the ruling majority United Socialist Party of Venezuela, but the head of the party, Nicolas Maduro, still is President. His term does not expire until 2019. The Socialists also continue to control most local offices, the Supreme Court and the military, so any changes are slow in coming to Venezuela.
The opposition National Assembly is attempting to recall President Maduro in a referendum but Maduro's electoral officials are blocking the efforts claiming fraud in obtaining the requisite signatures.
It is a sad state of affairs in what was once the most prosperous country in South America. It also shows how hard it is to turn things around once the socialists are entrenched in a country.
Inflation is now out of control in Venezuela. It has officially entered the hyperinflation realm.
The price level is doubling every 17.8 days.
As bad as this is, it could get even worse.
Economist Steve Hanke of Johns Hopkins University is an expert at analyzing and tracking inflation around the world. He was one of the originators of the Hanke-Krus Hyperinflation Table that captures all of the major hyperinflation periods since the 18th century. Of note, almost every episode of hyperinflation has been experienced in the last 100 years. Most have been in the last 30 years. Do you think there is some type of correlation here with the amount of government meddling with monetary policy?
These are all of the episodes of hyperinflation that have exceeded what Venezuela is experiencing right now.
The textbook case that I always remember hearing about regarding hyperinflation was Germany in the 1920's. The most memorable story I recall from my Economics courses was of the man who needed a wheelbarrow to haul all the paper money required to buy a loaf of bed. He put the wheelbarrow down and turned to open the door to the bakery. When he turned back all of the money was in a pile on the sidewalk...it was the wheelbarrow that had been stolen!
It was much worse in Germany in 1922-3 than it is in Venezuela today. Prices were doubling in 3.7 days back then. However, in 1946, Hungary prices doubled in a mere 15.0 hours. They doubled in 24.7 hours in Zimbabwe in 2007.
This is a chart that Hanke developed to show the fall in the value of Venezuelan currency on the black market exchange compared to the official exchange rate that the government is rather unsuccessfully trying to control.
What are people doing in Venezuela to attempt to protect what wealth they have? They sure do not want to hold paper currency.
It seems that those that can are investing in the Venezuelan stock market. It is up almost 10-fold since January 1, 2015.
Stock certificates may also be paper instruments but they represent shares of ownership in real things of value---real estate, oil and mineral reserves, manufacturing plants and machinery. Those that have held these assets in times of hyperinflation have been those that have survived periods like we are seeing in Venezuela. Those who have relied on paper (or promises) backed by corrupt governments have been devastated in the past. It is happening before our eyes in Venezuela. It will undoubtedly happen again to those that do not hold their leaders accountable.
It is also worth remembering these words of Steve Hanke as he calculates the new inflation rate in Venezuela.
Venezuela, welcome to the record books. You have now entered the inglorious sphere of hyperinflation. It is a world of economic chaos, wrenching poverty, and death. Its purveyors should be incarcerated, and the keys should be thrown away.
The people of Venezuela thought they were going to get a free lunch when they turned their country over to the socialists led by Hugo Chavez. They are now realizing that there is no free lunch. The price they are paying for that mistake has come due. And it is horrific.
May it be a lesson to all of us.
(Hat tip on this piece to PowerLine).
No comments:
Post a Comment