Starvation in Venezuela — How Bad Economics Collapsed a Country

If you haven’t noticed, Venezuela is in the middle of one of the most psychotic economic breakdowns in history.

People are starving.

There’s no power or fresh water.

Shelves are all empty in the supermarket.

Inflation is nearing a million percent.

A million percent — 1,000,000%. That’s insane. If you had exchanged US$1 million for bolivars back in 2013, today that cash would be just enough for you to buy a can of L&P — about $3.40.

That’s what economists call ‘hyperinflation’.

And poor President Maduro. The guy is watching his country burn to the ground…and he has no earthly idea how to fix it.

He tried knocking off five zeros from the value of the money. In other words, a million bolivars turned into 10. That, of course, did nothing.

He tried a 3,000% minimum wage increase…which forced most of the surviving business owners to close their doors overnight.

Now he’s ramped up the VAT from 4% to 16% and printed a whole new suite of banknotes.

And the people have responded by leaving the country in droves…

According to the UN, over two million Venezuelans have left in the past few years.

It’s an exodus of biblical proportions.

 

When did it all go wrong?

If I had to put a date on it…I’d say 6 December 1998 — when Hugo Chavez was elected President of Venezuela.

Now, some would proclaim that Chavez was simply the by-product of decades of economic collapse…of people being tired of the corrupt and the powerful…that this storm was brewing long before Chavez had his eye on the throne.

Others might defend Chavez, claiming that this whole thing is because of the oil price which has tanked over the recent years.

Some of the remaining socialists might even say that Chavez didn’t go far enough.

If only he’d just been able to nationalise a few more industries…

If only those darn capitalists hadn’t tried to interfere…

If only he hadn’t been stricken with cancer…

Then Venezuela would truly be a modern utopia…right?

But, instead, it’s collapsed into ruin. Its citizens live without food, water, or power. Every industry has eroded to nothing…

No, Chavez — and his minion, Maduro — made the mistake of believing that they could control the market. They thought that they could arm-wrestle the ‘Invisible Hand’ and win…but they were so, so wrong.

Instead, Venezuela joins a long list of failed socialist states. Think Cuba, Laos, Vietnam, USSR, East Germany, North Korea, Cambodia, Ukraine, Yugoslavia, and a couple dozen more.

And if history is any indicator, it could take decades before Venezuela gets upright.

 

But what about Sweden?

At this point in the conversation, someone always says, ‘But what about Sweden?

Sure, there are several countries have successfully pulled off socialism — New Zealand being one of them.

I have my own ideas as to why they’ve succeeded…pulling theory from economists like von Mises, Hayek, Menger and Schumpeter…

But that’s a conversation for another time.

 

A strange safe haven

Today we focus our eyes on Venezuela.

Because what we’re seeing right now will be what economists study for centuries.

This Venezuelan collapse will sit alongside the breadlines during the Great Depression, the flowers of Tulipomania, pasting German marks as wallpaper, and other legendary chronicles of economic lunacy.

To illustrate just how bizarre it’s become, you need to hear about Runescape (Thanks to my dad for showing me this one).

Runescape is a video game that came out about 20 years ago. It’s considered by the Guinness World Records as the world’s largest MMORPG ever. Over 200 million accounts have been created.

And as part of the game, you can farm gold. That gold can be sold for real money on a players’ market. The exchange rate is about 500,000 in-game gold for about 75 cents. Farming that much gold takes about an hour of playing and ‘farming’.

In other words, you can play this game and make 75 cents an hour.

Doesn’t seem like much, but if you consider that Maduro’s new minimum wage is around $18 per month — and that’s up from $2 per month previously — you might see how 75 cents an hour sounds pretty good.

Hundreds of Venezuela’s youth are flocking to their computers to farm this ‘gold’. They aim to make more than their college-educated peers working as doctors or engineers.

That’s how weird Venezuela’s economy has become.

 

What next?

Without an economy to speak of, Venezuela’s future will require a full-scale reset.

It’ll require a new government with a totally different business model.

It’ll need billions of dollars from more bouyant neighbours like Brazil and Argentina.

It’s going to mean the privatisation of the largest companies…and abolishing the social programmes that soaked up the budget.

Frankly, it might not even be called Venezuela when it’s all said and done.

And there’s not much we can do about it but sit back and watch…

Or go buy some Runescape gold — it might feed a Venezuelan today.

Best,
Taylor Kee
Editor, Money Morning New Zealand


Taylor Kee is the lead Editor at Money Morning NZ. With a background in the financial publishing industry, Taylor knows how simple, yet difficult investing can be. He has worked with a range of assets classes, and with some of the world’s most thought-provoking financial writers, including Bill Bonner, Dan Denning, Doug Casey, and more. But he’s found his niche in macroeconomics and the excitement of technology investments. And Taylor is looking forward to the opportunity to share his thoughts on where New Zealand’s economy is going next and the opportunities it presents. Taylor shares these ideas with Money Morning NZ readers each day.


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