Venezuela is about to earn another ignominious distinction.
Long home to the world’s highest inflation rate, the country now is set to become the site of the 57th hyperinflation event in modern recorded history, says Steve Hanke, professor of applied economics at Johns Hopkins University. While the feat may be little more than a formality in a country where Hanke calculates annual cost-of-living increases already run at 772 percent, it’s the latest sign a debt default may be closer than traders previously thought.
With Venezuela’s currency losing 32 percent of its value in the past month in the black market, according to dolartoday.com, and falling oil prices throttling the cash-starved nation’s biggest revenue source, the government may run out of money to pay its debts by year-end, according to Societe Generale SA. Derivatives traders have ratcheted up the probability of a default within one year to 63 percent, compared with 33 percent just two months ago.
“They’re very close to hyperinflation,” Hanke, who wrote a book on hyperinflation in Zimbabwe, said by phone from Baltimore. “When you have a domestic currency that is withering on the vine, it becomes more problematic servicing foreign debt.”
The currency fell so fast on Monday that it implied a monthly inflation rate of 53.98 percent. A full month of days on which the implied monthly rate was faster than 50 percent would meet his definition for hyperinflation.
This is in addition to massive shortages of basic goods, soaring crime, rapidly rising unemployment. So much for Chavismo.
Now this is the point where some well-meaning fool will tell me it’s all America’s fault or something. But the thing is, this economic collapse was predicted by everyone who knew what they were talking about. McCardle:
For about a decade, some sectors of the left hoped that Hugo Chavez represented an alternative to the neoliberal consensus on economic policy. Every time I wrote that Chavez was in fact direly mismanaging the economy, diverting investment funds that were needed to maintain oil output into social spending, I knew that I could look forward to receiving angry e-mails and comments accusing me of trying to sabotage his achievements for the benefit of my corporatist paymaster.
The problem was that the money he was using was, essentially, the nation’s seed corn. Venezuelan crude oil is relatively expensive to extract and refine and required a high level of investment just to keep production level. As long as oil prices were booming, this policy wasn’t too costly because the increase offset production losses. But this suffered from the same acceleration problem that we discussed earlier: The more production fell, the more the country needed prices to rise to offset it.
A little over a decade ago, I had a long car ride with a woman who worked in the oil industry. She said basically the same thing: that Venezuela was sitting on a lake of oil but not investing their massive revenue in sustaining or growing production. High oil prices weren’t going to last forever (Peak Oil hysterics not withstanding). Her particular field was using geological data to more accurately find undersea reserves of oil and she knew production was going to come back up and prices would fall. This would doom Venezuela because their production wasn’t going to be able to keep up: they were entirely dependent on high prices. When oil crashed, so would their economy.
Chavez was riding an asset bubble and claiming it proved his genius. Maybe if Venzuela has used their revenues to develop a thriving private sector of the economy, they could have withstood this. But they didn’t and oil was all they had. So we’re finally into the end game for Hugo Chavez’s “nobel experiment”.
I would like to think that people would learn a thing or two from the smoking crater in Caracas. But they never do. In fact, right now they’re wondering why the hell China is imploding as well. After all, Thomas Friedman’s been writing about sixteen columns a week on how superior their system is to ours. People like me have been pointing out that China has huge problems with corruption, an aging population and an economy that, while growing, had picked all the low-hanging fruit. We’ve been pointing out that China’s “explosive growth” was a result of having been dirt poor in the first place (it’s much easier to grow 10% of nothing that 10% of everything). Eventually, that engine was going to run out of steam. But, no: Very Wise People kept insisting that China had a found an alternative to the free market.
Just like Venezuela had.
And just like Japan before that.
And the Soviet Union before that.
And Germany before that.
Boy. These new economic ideas never seem to work out, do they?