Actions Have Consequences! Ask Venezuela

Authored by Bill Bonner via InternationalMan.com,

Let’s turn to an economy getting doomier by the day: Venezuela.

Actions have consequences. In public policy, it is impossible to say what the consequences will be. There are too many delusions and too much smoke.

Take a policy said to eradicate city rats. Its real purpose is to reward a large political donor who owns a pest control firm. It ends up killing the pigeons.

Often, policies with clear and obvious purposes end up producing outcomes completely at odds with the stated objectives.

Prohibition, for example, increased the number of drunks. The War on Drugs fattened drug dealers’ profits.

The War on Poverty has made poverty respectable… even attractive… to poor people.

The War on Terror has probably made a million otherwise sane and sensible Muslims yearn to blow up something with a U.S. flag on it.

Most often, these outcomes are not exactly surprises. Look more closely and you will often find, hidden behind the promises… a pest control firm!

News reports, for example, tell us that U.S. arms dealers are about to get a $110 billion payday. President Trump announced a weapons deal with the Saudis – the biggest in history.

Into the Abyss

Although the exact consequences of public policies are obscure, the patterns are familiar.

Win-lose deals always reduce total human satisfaction.

Win-lose deals – unless they are imposed by petty criminals or local bullies – require government insistence. Otherwise, no one would take the losing side.

So the more government there is… the more active, ambitious, and overbearing it is… the more win-lose deals subtract from the sum of human happiness.

A month ago, as many as a million of these disappointed people demonstrated against the government of Nicolás Maduro in Venezuela. It was the “Mother of All Protests,” they said.

What was their beef?

Inflation is running at about 700% a year. Last year, GDP plunged 19%. Food staples – beans, rice, bread – are disappearing. Families cross the border into Colombia to buy toilet paper.

Hospitals have no medicine, no equipment, not even rubber gloves and disinfectants. Sometimes, they have no electricity. Deaths of premature babies have increased 10,000% in the last five years.

How did a country make such a mess of itself?

Win-Lose

In a sense, the country was a victim of its own good luck… and then a victim of its own bad judgment.

The good luck happened in 1914 when the first oilfield was drilled. The money followed.

By the 1950s, with a basically market-oriented government, Venezuela rose to become the world’s fourth-richest country in terms of GDP per capita.

Today, the country has the largest proven oil reserves in the world – 297 billion barrels of the stuff compared to 267 billion barrels in Saudi Arabia.

But good luck allows you to make bad judgments. With the oil wealth flowing, Hugo Chávez – who described himself as a Trotskyist two days before his inauguration as president in 2007 – could impose win-lose deals on the whole economy.

Key industries were nationalized. Price controls were put in place. Wealth was redistributed.

Win-lose deals can redistribute wealth but only to the extent win-win deals create it. Take away the win-win deals, and the wealth soon runs out… as it did in Cuba and the Soviet Union.

Now the tank is about empty in Venezuela, too.

Banana Republic

It doesn’t matter what you call it – government is always a means for the few to exploit the many.

The few use every resource available to them to keep the hustle going, with special attention given to manipulating the gullible mob.

The typical citizen rarely has any idea of what is going on… and doesn’t have much curiosity about it. As long as he has credit for a new pickup and a champion who promises to smite his enemies, the common man will go along with almost anything.

But the Venezuelan auto industry has been ruined. And there’s no credit available. So there are few new pickups on the streets, and much of the public has turned against the government.

Not surprisingly, the policies that destroyed Venezuela delighted U.S. economists and politicians – who were eager to impose win-lose deals of their own.

In 2007, Nobel Prize-winning economist Joseph Stiglitz praised the “positive policies” in health and education of the Chávez government.

And in 2011, Bernie Sanders wrote:

These days, the American dream is more apt to be realized in South America, in places such as Ecuador, Venezuela and Argentina, where incomes are actually more equal today than they are in the land of Horatio Alger. Who’s the banana republic now?

Sanders had no idea what was really going on in Venezuela. But he was right about what was going on in the U.S. It was on its way to becoming a banana republic.

Only without the bananas. Or the republic.

Why The Left Refuses To Talk About Venezuela

During the 2016 presidential election, Bernie Sanders refused to answer questions about Venezuela during an interview with Univision. He claimed to not want to talk about it because he"s "focused on my campaign." Many suggested a more plausible reason: Venezuela"s present economy is an example of what happens when a state implements Bernie Sanders-style social democracy. 

Similarly, Pope Francis — who has taken the time to denounce pro-market ideologies for allegedly driving millions into poverty — seems uninterested in talking about the untrammeled impoverishment of Venezuela in recent years. Samuel Gregg writes in yesterday"s Catholic World Report: 

Pope Francis isn’t known as someone who holds back in the face of what he regards as gross injustices. On issues like refugees, immigration, poverty and the environment, Francis speaks forcibly and uses vivid language in doing so.

Yet despite the daily violence being inflicted on protestors in Venezuela, a steadily increasing death-toll, an explosion of crime, rampant corruption, galloping inflation, the naked politicization of the judiciary, and the disappearance of basic food and medical supplies, the first Latin American pope’s comments about the crisis tearing apart an overwhelming Catholic Latin American country have been curiously restrained.

This virtual silence comes in spite of the fact that the Catholic bishops who actually live in Venezuela have denounced the regime as yet another illustration of the "utter failure" of "socialism in every country in which this regime has been installed."

Thus, for many Venezuelans, the question is: "Where is Pope Francis?"

As with Sanders, it may very well be that Francis has nothing to say about Venezuela precisely because the Venezuelan regime has pursued exactly the sorts of policies favored by Bernie Sanders, Pope Francis, and the usual opponents of market economics.

It"s an economic program marked by price controls, government expropriation of private property, an enormous welfare state, central planning, and endless rhetoric about equality, poverty relief, and fighting the so-called "neoliberals." 

And, as Venezuelan president Nicolas Maduro has helpfully explained, "There are two models, the neoliberal model which destroys everything, and the Chavista model which is centered around people.”

The Chavista model is simply a mixture of social democracy and environmentalism which is easily recognizable as the Venezuelan version of the hard-left ideology espoused by a great many global political elites both in the United States and Europe. Neoliberalism, on the other hand — as I"ve noted before — is a vague term that most of the time really just means a system of relatively free markets and moderate laissez-faire. 

Indeed, no other regimes in the world, save Cuba and North Korea, have been as explicit in fighting the alleged menace that is neoliberalism. 

For this reason, as Venezuela descends into chaos, we are hearing a deafening silence from most of the left, as even some principled leftists have noticed. 

In an article at Counterpunch, for example, Pedro Lange-Churion points out: 

Venezuela was news while it was good news and while Chávez could be used as a banner for the left and his antics provided comic relief. But as soon as the country began to spiral towards ruination and Chavismo began to resemble another Latin American authoritarian regime, better to turn a blind eye.

Nevertheless, as a dedicated leftist, Lange-Chrion unfortunately still mistakenly thinks that the Venezuelan problem is political and not economic. For him, it"s merely an unfortunate coincidence that the implementation of the Chavismo economic agenda just happened to coincide with the destruction of the nation"s political and economic institutions. 

But here"s the thing: it"s not a coincidence. 

In fact, it"s a textbook case of a country electing a leftwing populist who undoes years of pro-market reforms, and ends up destroying the economy. 

This has been going on for decades in Latin America where, as explained by Rudiger Dornbusch and Sebastián Edwards, the cycle repeats itself again and again. 

It"s happened in Argentina and in Brazil most recently, and it goes something like this: first, a relatively neoliberal regime comes to power, moderately reduces government spending, somewhat restrains government power, and ushers in a period of growth. But, even with growth, middle-income countries like those of Latin America remain poor compared to the rich countries of the world, and large inequalities remain. Then, populist social democrats convince the voters that if only the regime would redistribute more wealth, punish greedy capitalists, and regulate markets to make them more "humane," then everyone would get richer even faster. And even better, the evil capitalists would be punished for exploiting the poor. Eventually, the economy collapses under the weight of the new social democratic regime, and a neoliberal regime is again elected to clean up the mess. 

Venezuela is in the midst of this cycle right now. After decades of relatively restrained government intervention, Venezuela became one of the wealthiest nations in Latin America. During the most recent twenty years, though, the Chavistas were able to take that wealth and redistristribute it, regulate it, and expropriate it for the sake of "equality" and undermining capitalist evil. But, you can only redistribute, tax, regulate, and expropriate so much before the productive classes give up and the wealth runs out. 

To the leftwing mind, the explosion of poverty that results can"t possibly be the result of bad economic policy. After all, the Chavismo regime got everything it wanted. It redistributed wealth at will. It "guaranteed" a living wage, health care, and plentiful food to everyone. "Equality" was imposed by fiat over the cries of the "neoliberal" opposition. 

The only possible answer, the left assumes, must be sabotage by capitalists or — as the Pope reminds us — too much "individualism." 

The problem the global left has in this case, though, is that this narrative simply isn"t plausible. Does Colombia have fewer capitalists and individualists than Venezeuala? It almost certainly has more. So why do Venezuelans wait hours in line to cross the Colombian border to buy basic food items not available in the social-democratic paradise of Venezuela? Has Chile renounced neoliberal-style trade and markets? Obviously not. So why has Chile"s economy grown by 150 percent over the past 25 years while Venezuela"s economy has gotten smaller? 

The response consists largely of silence. 

This isn"t to say that what the left calls call "neoliberal" is without its faults. Some aspects of neoliberalism — such as free trade and relatively free markets — are the reason that global poverty and child mortality are falling, while literacy and sanitation are rising.

Other aspects of neoliberalism are odious, particularly in the areas of central banking and crony capitalism. But the free-market answer to this was already long-ago voiced by Ludwig von Mises, who, in his own fight against the neoliberals, advocated for consistent laissez-faire, sound money, and far greater freedom in international trade. 

For an illustration of the left"s answer to neo-liberalism, however, we need look no further than Venezuela where people are literally starving and will wait hours in line to buy a roll of toilet paper. 

And if this is what the the left"s victory against neoliberalism looks like, it"s not surprising the left seems to have little to say.

"All I Have Is Hunger" - Many Venezuelans Too Weak To Protest Despite Maduro Misery

While tens of thousands of angry Venezuelans turned out for the "mother of all protests" yesterday, facing an increasingly hostile military/police state, the numbers could have been significantly larger but for the fact that legions of poor Venezuelans are simply too frail from starvation to protest.

Some say they are intimidated by armed pro-government militias who scour the slums for signs of dissent. Others say they are afraid to lose the few food handouts the cash-strapped government still provides.

“We wear our protest on the inside for the fear of losing our bag of food,” said San Félix resident Luisa Gutiérrez, a single mother of three.

As The Wall Street Journal reports, President Nicolás Maduro has lost support among the legions of poor Venezuelans that once backed the late Hugo Chávez, but they have largely shown little interest in joining the opposition-led protests that have convulsed the country the past three weeks. Many of the impoverished residents of the vast slums that ring Caracas and other major cities are angry about a collapsing economy and food shortages. But Venezuela’s political unrest remains mostly confined to middle-class enclaves, underscoring the struggle the opposition here faces in trying to unseat an increasingly authoritarian government.

“All I have is hunger—I don’t care if the people protest or not,” said laborer Alfonzo Molero in a slum in Venezuela’s second-largest city, Maracaibo. “With what strength will I protest if my stomach is empty since yesterday?”

Until the slums rise up, Mr. Maduro will likely hang on, analysts say...

Almost two-thirds of Venezuela’s poor, as defined by a variety of socioeconomic factors, want Mr. Maduro to leave, up from 40% when he took office in early 2013, according to pollster Delphos.

The lower classes have also been instrumental in giving the opposition alliance a record two-thirds congressional majority in the last electoral contest, held in December 2015. Polls show the poor would hand the government a drubbing in any vote held this year.

Yet that growing disillusionment hasn’t translated into organized protest, said pollster Luis Vicente León.

Without support in the shantytowns, many opposition supporters fear the current protests will end like the previous wave of unrest in 2014, when three months of demonstrations in middle-class neighborhoods left 43 people dead—without achieving any political change. The failure of those protestshas demoralized and fractured the opposition alliance for years.

“For the masses to come out, they need to feel that they are at a point of no return,” said Félix Seijas Jr., director of pollster Delphos. “We’re still some ways away from that.”

Judging by the eating flamingos, suffering with no toilet paper or soap, and martial law controlling and repressing any anti-government sentiment, we suspect the clock is ticking... as the black-market Bolivar shows...

As Bloomberg details, Venezuela’s black market bolivar is trading at a record low of 4,709 per dollar, according to dolartoday.com, after at least two people were killed when security forces confronted protests against Nicolas Maduro’s increasingly-dictatorial regime with bullets and tear gas. Its weakness is a measure of both the shortage of dollars in the country, and the desperation of Venezuelans to buy food, medicine and other basics, most of which are imported. The official exchange rate is still fixed at around 10, while the legal market-based rate has been allowed to devalue at a controlled pace to 714 per dollar, a 5.8 percent devaluation this year compared with 33 percent on the black market.

Maduro Scrambles To Defuse "Explosive" Situation As Supreme Court Reverses Ruling

While investors had largely given Venezuela"s economic catastrophe the benefit of the doubt for the past two years as crude collapsed and the country"s CDS soared to record highs only to normalize subsequently, yesterday bond investors got very nervous for the first time in a while, as the Venezuela 9.25% of 2027 bonds crashed on fears a presidential coup may be imminent after Wednesday"s decision by the pro-Maduro supreme court to assume the functions of congress, in effect making Venezuela a Maduro dictatorship. The opposition promptly slammed the decision as a "coup" against an elected body and demanded army intervention, and the tipping point came when even a formerly pro-Maduro Attorney General, Luisa Ortega, slammed the "unconstitutional" usurpation of power.

One day later, the bond selloff, coupled with a dire surge in domestic anger and protests, as well as international condemnation, appears to have been sufficient to spook Maduro that this may be one of his last (bad) decisions because on Saturday morning, Venezuela"s Supreme Court reversed its decision to strip congress of its legislative powers.

"This controversy is over ... the constitution has won," Maduro said in a televised speech just after midnight to a specially convened state security committee that ordered the top court to reconsider its rulings. The Supreme Court duly erased the two controversial judgments during the morning, the information minister said.

In an amusing twist, Maduro tried to cast the U-turn as his own personal achievement, one of a wise statesman resolving a power conflict, everyone and certainly his opponents said it was a hypocritical row-back by an unpopular government that overplayed its hand.

"You can"t pretend to just normalize the nation after carrying out a "coup,"" said Julio Borges, leader of the National Assembly legislature, quoted by Reuters. He publicly tore up the court rulings this week and refused to attend the security committee, which includes the heads of major institutions.

While the Supreme Court flip-flop may take the edge off protests, Maduro"s opponents at home and abroad will seek to maintain the pressure. They are furious that authorities thwarted a push for a referendum to recall Maduro last year and also postponed local elections scheduled for 2016. Now they are calling for next year"s presidential election to be brought forward and the delayed local polls to be held, confident the ruling Socialist Party would lose.

"It"s time to mobilize!" student David Pernia, 29, said in western San Cristobal city, adding Venezuelans were fed up with autocratic rule and economic hardship. "Women don"t have food for their children, people don"t have medicines."

Venezuelan Bolivarian National guards officers are confronted by university students
during a protest outside of the Supreme Court in Caracas, on March 31, 2017

As mentioned yesterday, today the National Assembly plans an open-air meeting in Caracas, while South America"s UNASUR bloc was to meet in Argentina with most of its members unhappy at Venezuela. The hemispheric Organization of American States (OAS) had a special session slated for Monday in Washington.

As Reuters adds, even before this week"s events, OAS head Luis Almagro had been pushing for Venezuela"s suspension, but he is unlikely to garner the two-thirds support needed in the 34-nation block despite hardening sentiment toward Maduro round the region.

That said, Venezuela can still count on support from fellow leftist allies and other small nations grateful for subsidized oil dating from the 1999-2013 rule of late leader Hugo Chavez. Maduro accuses the United States of orchestrating a campaign to oust him and said he had been subject this week to a "political, media and diplomatic lynching."

A woman wears a banner over her mouth with a message that reads in Spanish:
"Venezuela lives in a dictatorship" during a protest, in Caracas

Serious criticism even came from within government, with Venezuela"s attorney general Luisa Ortega rebuking the court in an extremely rare show of dissent from a senior official. "It constitutes a rupture of the constitutional order," he said in a speech on state television on Friday.

The Supreme Court"s decision helped to further galvanize resistance to Maduro, Pockets of protesters had blocked roads, chanted slogans and waved banners saying "No To Dictatorship" around Venezuela on Friday, leading to some clashes with security forces. Given past failures of opposition street protests, however, it is unlikely there will be mass support for a new wave. Rather, the opposition will be hoping ramped-up foreign pressure or a nudge from the powerful military may force Maduro into calling an early election.

* * *

Meanwhile, the nation continues to disintegrate, with Reuters reporting that Venezuela"s murder rate rose to an average 60 per day last year, up from about 45 per day in 2015, the attorney general"s office said on Friday, as the country"s worst economic and political crisis in history continues to claim victims Official data put the murder rate at 70.1 per 100,000 inhabitants last year, one of the highest in the world and up from 58 in 2015.

Violent crime is one of the most pervasive anxieties for Venezuelans, especially in poor slums dominated by gangs and rife with guns. Numerous state security plans and disarmament drives in recent years have failed to curb violence given easy access to weapons, police participation in crime, and high levels of impunity in the nation of 30 million people.

A brutal economic recession that has millions skipping meals has pushed more Venezuelans towards crime, according to officials, rights groups and neighborhood organizations. Recently, Venezuela - the country"s with the world"s largest proven oil reserves, ran out of gasoline.

Venezuela's March Toward Default

It is only a matter of time until Venezuela will default on its foreign debt. After a short peak in 2009, when the country’s foreign exchange reserves stood at over $40 billion, Venezuela has been steadily hemorrhaging its reserves down to $10 billion. In 2016, Venezuela started to sell gold in order to compensate for the loss of its monetary reserves. As a consequence, Venezuela’s gold reserves plunged from over 360 tons down to less than 190 tons. Other than in the case that some foreign power, such as China, for example, would jump in as a lender, Venezuela’s default seems unavoidable (graph 1).

Venezuela is not only the victim of falling oil prices although these have the strongest immediate effect on the country’s finances. Oil revenue finances more than half of Venezuela’s government budget and accounts for almost all export income. Venezuela’s deeper problem comes from the fact that almost all of the government’s so-called social benefits in the wake of the “Bolivarian Revolution” under presidents Hugo Chavez and Nicolás Maduro have been financed by monetary expansion.

In 1998, before Hugo Chavez became president, the extended broad money supply (M3) stood at 10.6 billion bolivars. By 2010, the Venezuelan money supply had already risen to more than 290 billion bolivars, and as of October 2016, money supply M3 reached 7,513.9 billion Venezuelan bolivars (graph 2).

Consequently, annual price inflation shot up from around 25 percent in the years before 2012 to over 180 percent by the end of 2015 until the government practically stopped publishing the official figure. The International Monetary Fund estimates an inflation rate of 480 percent for 2016 and of 1,640 percent for 2017.

Since 2012, the price of Venezuelan oil has dropped from $100 per barrel to less than $50. Due to political turmoil and socialization of the industry, the overall oil production of the country has fallen to a 13-year low in 2016. Venezuela’s exports that consist almost completely of oil have plummeted from a peak of $30.7 billion in the third quarter of 2008, to currently less than $10 billion per quarter. In February 2016, the Venezuelan government officially devalued its currency by 37 percent against the US dollar from 6.3 to 10 bolivars all the while when the black market rate stood at over 1,000 bolivars for one dollar.

The Bolivarian Revolution, which Hugo Chávez started in 1999, is coming to its end. Severe shortage of basic goods, food lines, exorbitant black market prices, the collapse of the currency and hyperinflation now afflict a country that claims to possess the highest proven oil reserves of the world.

It is only a matter of time until Venezuela can no longer finance its imports and social and political chaos of unprecedented proportions will afflict the country. The fallout will also affect Venezuela’s neighboring countries.