Venezuela is not the first developed country to put itself on track to fall into a catastrophic economic crisis. But it is in the relatively unusual situation of having done so while in possession of enormous oil assets. …
The Venezuelan government, though it doesn’t claim to be full-fledged in its devotion to Marxism-Leninism, has been pursuing as absurd an economic policy mix as its Soviet predecessor. It has insisted for years on maintaining drastic price controls on a wide range of basic goods, including food staples such as meat and bread, for which it pays enormous subsidies. …
But as the oil price has fallen by slightly more than half since mid-2014, oil incomes have fallen accordingly. And rather than increase oil production, the Venezuelan government has been forced to watch it decline because of its mismanagement of the dominant state-owned oil company, PDVSA.
And now Venezuela seems intent on repeating the Soviet folly of the late 1980s by refusing to change course. This is allowing the budget deficit to swell and putting the country on track toward ultimate devastation.
The Soviet Union in its latter years had a skyrocketing budget deficit, too. In 1986 it exceeded 6 percent of GDP, and by 1991 it reached an extraordinary one-third of GDP. Venezuela is now following suit. The Soviet Union used its currency reserves to pay for imports, but when those reserves shrank, the government financed the budget deficit by printing money. The inevitable result was skyrocketing inflation.
It seems as if President Nicolás Maduro has adopted this tried-and-failed combination of fiscal and monetary policy. Venezuela already is dealing with massive shortages as a result of its controlled prices, because the government can no longer afford its own subsidies. But it will get worse from here.
Maduro seems intent on printing money like crazy, so the next step will be hyperinflation. Inflation is already believed to have reached 700 percent a year, and it is heading toward official hyperinflation, that is, an inflation rate of at least 50 percent a month.
Hyperinflation is as frightful as it is rare. According to Johns Hopkins University professor Steve Hanke, the world has experienced only 56 hyperinflations, and half of them occurred when communism collapsed. …
Hyperinflation is profoundly demoralizing. Suddenly, it makes no sense to work any longer. Instead of standing in queues to buy food with the money they’ve earned, people stop working entirely, because they cannot spend the money they would have earned. Smart profiteers indulge in speculation, buying safe assets such as commodities or real estate.
The leftwing Australians who publicly extolled Chavez and his economics, and invited him here in 2007, such as the ABC’s Philip Adams, couldn’t be reached for comment.