Things are not going well in Venezuela

Joshua Curzon at the Adam Smith Institute blog writes,

Hyperinflation in Venezuela has reached astonishing levels, making life extraordinarily difficult for ordinary people and causing immense economic damage. Inflation is currently running at some 200,000 per cent and is projected by the IMF to reach 1 million percent by the end of the year.

and he adds,

Using the salary of a full college professor as a benchmark, in the 1980s it took around 15 minutes of earnings to pay for one kilo of beef. In July 2017, this professor needed to work for 18 hours to pay for the same quantity. In mid-2018 he must work longer still, in the unlikely event beef can be found.

Prices are increasing at an ever faster rate. A large coffee with milk cost at least Bs.S.80 (Bs. 8,000,000) in Caracas on the 11th of September 2018, 78% more than the price of week before, and double what it cost 15 days ago and 220% more than five weeks ago.

As in all hyperinflations, the problems is that the government is printing too much money. Way too much!!

Venezuela’s monetary base – the amount of money printed by the government – increased by an extraordinary 30% in one week alone at the end of August. The move by the regime to remove 5 zeros from the currency and place greater emphasis on its Petro cryptocurrency (since revealed by a Reuters investigation to be largely imaginary) seems to have been a smokescreen for even greater money-printing.

In fact, it seems that physically printing money is beyond the means of the regime. As Venezuela’s banknotes are printed abroad, they have to be imported at significant cost to the government, which has led to severe shortages of physical cash. Since 2014, the number of active ATMS has plummeted to around 9,000, while card readers have multiplied.

But why print this amount of money, given you know what will happen?

The regime is printing money because it has little other means of staying afloat. It has largely destroyed the private sector through nationalisation and price control. Oil output is at its lowest level in more than 50 years and foreign reserves are at the same level as 1974 and plummeting downwards.

Hyperinflation is just another sign, if you needed one, that the regime's economic policies are just not working. You have to wonder just how long this can go on. Hopefully not too long.

You know your country is in trouble when .............

When people abandon a country in droves, it is rarely a sign of a healthy economy. 2.3 million Venezuelans (7% of the population) have fled poverty and economic despair, and another 2 million are predicted to leave over the next year and a half. For scale, imagine if half of London’s population left the UK, and the other half were about to leave. And we may be underestimating the crisis, since the situation is rapidly becoming nightmarish.

Hyperinflation has risen above 61,000% and is predicted by the IMF to reach 1,000,000% by the end of the year. When inflation runs this high, the lag between tax assessments and payments means that inflation wipes out the real value of taxes. This forces the government to print yet more money in a hyperinflationary death spiral. The recent botched operation to remove five zeros from banknotes has only caused further panic and confusion among the population.

This is from Jamie Nugent and Joshua Curzon at the Adam Smith Institute blog in a posting on Venezuela Campaign: A Country in a Death Spiral.

The only real question is how long will be until Venezuela hits rock bottom and just how bad will things be for the people when it does? Recovery will be long and hard.

Monica de Bolle on the economic challenges facing Argentina and Venezuela

From David Beckworth’s podcast series, Macro Musings comes this audio of an interview with Monica de Bolle on Argentina and Venezuela.

Monica de Bolle is a senior fellow at the Peterson Institute for International Economics and an associate professor at Johns Hopkins University. Monica is published widely on the subject of Latin American economies, and she joins the show today to explain some of the recent financial and economic developments in Argentina and Venezuela. David and Monica also analyze the political atmosphere and policy environment that led to Argentina’s current economic hardships and discuss where the country might be if they had not pursued such policies.

Venezuela's inflation rate

An interesting graph from Steve Hanke showing Venezuela's rate of inflation. Not a pretty sight.

You know your economy is in trouble when ......

you get paid in eggs!

A Wall Street Journal report on the situation in Venezuela tells us

One U.S. dollar now fetches around 236,000 bolivars on the street, around 80 times what it bought at the start of last year. Five years ago, that could buy a small apartment; now it barely covers an appetizer at lunch.

“The authorities have lost control, they can’t stop creating bolivars even if they wanted to,” said Omar Zambrano, a former economist for the Inter-American Development Bank. “This ends in two ways: Either we adopt the dollar or we go back to bartering.”

That’s what Marina Fernandez, a professor of architecture at a Caracas university, has done, finding out that some people will take, yes, the humble egg. When she didn’t have enough cash to pay for parking, she handed over two eggs. Her university department, short of cash, paid a computer programmer with a carton of eggs.

Ms. Fernandez said onions or bananas, for some reason, just won’t do. “If you’re going to receive food as payment, the people want it to at least be a protein,” she said. “The egg is perfect.”

Barter is really, really inefficient but sometimes its the best you can do. Hyperinflation means money is worthless so people go back to barter. Or they start to use a new medium of exchange. But eggs seem a bit too breakable to be a totally satisfactory replacement for money.

Such is the crazy, sad world of Venezuela today.

Venezuela officially enters the not-REAL-socialism stage

Writing at the IEA blog Kristian Niemietz says,

Now we’ve finally learned what went wrong in Venezuela: it wasn’t real socialism. At the World Economic Forum summit in Davos, Shadow Chancellor John McDonnell explained:

“It’s not that the issue is socialism vs capitalism. […]

All the objectives of Chavez […] would have been successful if they had mobilised the oil resources to actually invest in the long term […]

I think in Venezuela they took a wrong turn, a not particularly effective path, not a socialist path.”

McDonnell is in good company. Quite a few prominent figures on the left, such as Noam Chomsky and Slavoj Žižek, are now explicitly disputing Venezuela’s socialist credentials.

So Venezuela joins the very long list of countries that at some point are held up as role models of "socialism" by Western intellectuals but which, once they start failing, became an embarrassment to the socialist cause. When the problems become so obvious and undeniable socialism in these countries ceases to be ‘real’ socialism, which of course why it fails. Or so we are told. But every socialist country seems to suffer the same fate. Why is this I wonder.

Why you want to keep politicians away from business

The ever disintegrating Venezuela gives us a great illustration of why politicians should be kept out of businesses. Trying to gain political support by interfering in the running of a business doesn't improve the business.

To survive months of street protests and an economy in tailspin, Venezuelan President Nicolas Maduro is trying to turn state oil company PDVSA into a bastion of support, further degrading an already vulnerable enterprise.

Political appointees are gaining clout at the expense of veteran oil executives, while employees are under mounting pressure to attend government rallies and vote for the ruling Socialists. The increasing focus on politics over performance is contributing to a rapid deterioration of Venezuela's oil industry, home to the world's largest crude reserves, and to a brain drain at the once world-class company.

Interviews with two dozen current and former employees, foreign oil executives, and contractors point to a PDVSA coming apart at the seams.

"Everything is a disaster and yet we have to clap," said a PDVSA employee, who asked to remain anonymous because she feared retaliation.

and

Now Venezuela's oil production is on track to end 2017 at a 25-year low, but the leftist government still relies heavily on PDVSA to be its financial motor.

That leaves management in a precarious balancing act and sources say political factions are increasingly locked in power struggles within the company.

A senior management team named in January that draws heavily on political and military appointees has left PDVSA's president, the Stanford-educated engineer Eulogio Del Pino, largely powerless, according to two high-level sources in PDVSA and the government who spoke on the condition of anonymity for fear of reprisals.

Meanwhile, the infrastructure of the company is crumbling, rig counts are at historic lows and refineries are working at a fraction of capacity.

Staff at PDVSA's once gleaming headquarters complain that many elevators are out of service, the bathrooms lack toilet paper, and their cars are broken into in the parking lot. Scarce paper and ink are diverted to make political posters.

and

Prominent new executives include trading division boss Ysmel Serrano, who used to work for current Vice President Tareck El Aissami, and finance vice president Simon Zerpa, a young ally of Maduro's.

The influx of inexperienced executives and middle managers is keenly felt by foreign oil executives, who say they sometimes spend hours waiting for PDVSA representatives and complain that simple decisions are inexplicably delayed.

"Most of the time executives don't answer phone calls or emails. It's surprising how young and unprepared some managers are," said a representative of a foreign firm holding a supply contract with PDVSA.

He said that managerial and operational chaos was worsening, with waiting time to load a tanker stretching to 30-40 days compared to 2-3 days a few years ago.

In short the business of politicians is politics, not business.

You know your country is in trouble when

you get these kind of things happening,

In a hastily organized plebiscite on July 16, held under the auspices of the opposition-controlled National Assembly to reject President Nicolás Maduro’s call for a National Constituent Assembly, more than 720,000 Venezuelans voted abroad. In the 2013 presidential election, only 62,311 did. Four days before the referendum, 2,117 aspirants took Chile’s medical licensing exam, of which almost 800 were Venezuelans. And on July 22, when the border with Colombia was reopened, 35,000 Venezuelans crossed the narrow bridge between the two countries to buy food and medicines.

Voting with your feet is a real thing.

And

The most frequently used indicator to compare recessions is GDP. According to the International Monetary Fund, Venezuela’s GDP in 2017 is 35% below 2013 levels, or 40% in per capita terms. That is a significantly sharper contraction than during the 1929-1933 Great Depression in the United States, when US GDP is estimated to have fallen 28%.

You know your economy is in trouble when ....

you are involved in "bread wars"! Kenneth Rapoza writes at the Forbes website,

Venezuela police arrested four bakers cited for making "illegal brownies and other pastries" on Friday. President Nicolas Maduro is threatening to take over bakeries in Caracas as part of a new "bread war", Reuters reported today. Maduro has sent in food inspectors and actual armed soldiers into more than 700 bakeries to enforce a rule that 90% of wheat must be destined to making bread and not pastries. Bienvenidos a la Unión Soviética!

When the government starts cracking down on bakeries, claiming they are consuming too much wheat, you just know the economy is in bad, bad shape. Having the government, rather than the market, determine how much wheat is used for making what is a sure sign the economy is on a downwards trajectory. There is just no way the government has the knowledge of time and place needed to be able to micromanage in this way.

You know that your economy is in trouble when .....

Tim Worstall at the Forbes blog writes,

The stirring achievements of Bolivarian socialism as practised in Venezuela never cease to amaze. They’ve managed to create, at one time, an entire country running out of beer. The banknotes cost more to print than they are worth. A fertile tropical nation has widespread food shortages. They’ve even managed that the place sitting on the world’s largest oil reserves has to import oil from the United States. To add to this list of blows struck against the imperialist yankees we can now add the possible bankruptcy , or at least default on its debts, of the monopoly oil company sitting on top of that ocean of oil which is the world’s largest reserves.

Quite a list of achievements. It would be funny if the costs to the Venezuelan people weren't so high. It is the people who pay in terms on increasing poverty and hardships. Such outcomes do suggest mismanagement by the government of  the economy on a massive scale.

The problems with the state oil company, in Worstall's view, include,

This is that Venezuela’s oil is very heavy and thus needs large capital investment for it to continue to be extracted. The basic operating method of the Chavez and then Maduro administrations has been to skimp on that capital spending and then spend the money saved on consumer imports into Venezuela. Largely as a means of buying political support despite their complete and total mismanagement of the domestic economy. There were also further borrowings using the oil company as the legal form doing the borrowing, again to fund such spending upon consumers.

But, obviously, borrowing spent on rice doesn’t increase the ability of the oil company to produce more oil to pay back the borrowings. Production, and thus income, has been falling, even without any influence of the falling oil price itself.

You can indeed buy bread and circuses with resource rents. But do too much of it and you’ll not have the capital to keep those resource rents coming.

All this doesn't say much for Bolivarian socialism.

You know the economy is in trouble when .......

This report is from Reuters.

Venezuela is putting neighborhood committees linked to the ruling Socialist Party in charge of distributing basic foods amid increasingly violent unrest over chronic shortages that have battered the socialist government's popularity.

President Nicolas Maduro's government wants state agencies to buy some 70 percent of food produced in local plants and distribute much of it to the population, which is suffering under a severe recession and triple-digit inflation.

Officials say the system will cut down on smuggling of state-subsidized food by limiting the role of private food distributors, who Maduro accuses of hoarding goods and raising prices as part of an "economic war" against him.

The first question you have to ask is, What determines the prices the state agencies will buy at? If they force prices down firms will not produce or will produce and sell on the black market rather than sell to the state. The answer to shortages isn't more state control but a return to a market economy. It seems likely that the only "economic war" being waged here is that by the government against the people in Venezuela.

But the country's opposition is slamming the plan as a discriminatory rationing system that will worsen hunger and could give Socialist Party sympathizers the power to withhold food from government critics.

They say the committees, known by their Spanish acronym CLAP, violate basic freedoms and do not address the underlying causes of shortages, which include an unproductive economy and artificially low caps on food prices that stimulate smuggling.

and

In the working class community of Araguaney on the outskirts of Caracas, residents on Wednesday lined up to buy bags of groceries that included a chicken, pasta and corn flour for 2,300 bolivars, equivalent to around $2.30 on the black market exchange rate.

"It wasn't very much, but we have to accept it, because right now there's nothing," said Flor Gaviria, 36, who quit working at a pharmacy last year because standing in supermarket lines to buy food was too time-consuming to hold down a job.

There clearly is something very wrong with an economy when you have to give up your job so you can stand in line to buy food.

An obvious part of the problem is that

Local firms have little interest in producing because price controls often require them to sell below cost.

Residents are increasingly turning to black markets where product such as milk or sugar often fetch 10 times the regulated prices, creating a lucrative smuggling business.

With prices below cost, firms either stop producing or produce and sell in the black market or smuggle their goods into neighbouring countries where prices are not controlled. These are very predictable responses to price controls.

You REALLY know your economy is in trouble when .......

you start to run out of beer!!

From Vice News comes the news that Venezuela Faces Looming Beer Shortage in Dispute with Nation’s Biggest Brewer.

Venezuela's largest food distributor on Thursday denounced the government occupation of a Caracas warehouse amid accusations that the company is hoarding goods.

Soldiers took over the warehouse complex used by Empresas Polar late Wednesday just as Venezuela's federation of brewers announced that Polar's beer manufacturing subsidiary is shutting two of its six plants because of a lack of imported barley — a crucial ingredient in beer.

and

Earlier this month, the head of Venezuela liquor store federation warned that the nation was about to run out of beer because brewers had reached "zero hour" amid widespread shortages in raw materials. Days later, he was detained for reasons that remain unclear.

An economy without beer is an economy in need of reform, big time!

Well this will make things better .......... not!

Just when you thought things in Venezuela couldn't possibly get any worse, they do. This from Yahoo! News:

Caracas (AFP) - Venezuelan President Nicolas Maduro has promised to nationalize food distribution in the South American nation beset with record shortages of basic goods, runaway inflation and an escalating economic crisis.

During a rally Friday, on International Workers' Day, the socialist leader allowed a union activist to ask for the nationalization of food and essential-item distribution.

Citing new decree-making powers recently granted by the National Assembly, Maduro said he would carry out such a measure "in the coming days and weeks."

Maduro had pledged earlier in the week to announce economic reforms.

Various estimates suggest the government already controls about half of the country's food distribution, but that hasn't stopped record shortages in shops and markets.

Has no one in the Venezuelan government not looked around the world or looked at history and asked, Under what system does food distribution work best. Under a market system being the answer. Just think about the stories of shopping in the old Soviet Union to get the point.

On any given day, people in Venezuela can wait hours to get some subsidized milk, cooking oil, milk or flour -- if they can be found at all.

And does Madura really think nationalising the rest of the food distribution system will help. Market reforms are needed to get the economy going again. What is needed is the use of the price system to allocate resources giving consumers and producers the right incentives and information about scarcities. This would counter the black market and smuggling of goods out of the country.

Venezuela powers down

Things just keep on getting worse in Venezuela. From the BBC we get this bit of news,

Venezuela says it will cut the working day for public sector workers to five-and-a-half hours to conserve energy, down from eight to nine hours.

The initiative is part of a nationwide electricity rationing plan.

Vice-President Jorge Arreaza said there had been a surge in energy demand due to extremely hot weather. He said state employees would now work from 07:30-13:00 to save on air conditioning.On Monday, local media reported blackouts across the country.

Mr Arreaza said private companies would be asked to use their own generators to reduce pressure on the national grid.

But he said it was private homeowners who consumed the most energy, and he called for everyone to turn the dial down on their air conditioners.

"We are appealing to everyone's conscience, to use energy efficiently."

Last week the government claimed that energy problems were due to maintenance issues, but the opposition criticised the government for not investing enough in the energy sector, BBC Venezuela correspondent Daniel Pardo reports.

Power outages are common in Venezuela, which is a big oil producer but depends heavily on hydro-electric power.

More evidence that command and control equals chaos when implemented at the macro level. Why not let prices adjust to reflect increased demand? Higher prices would give consumers an incentive to reduce quantity demanded while the revenues generated could help provide funds to invest in the energy sector.

Things just keep on getting worse in Venezuela

From the Financial Times,

Mr Maduro’s escalating nationalist agitprop — including the unveiling of Venezuela’s longest flag — comes as he faces accusations of mishandling the economy. Two years since he took office, even former officials call the country “a laughing stock”.

“It’s as if we have the Midas touch in reverse,” said former finance and planning minister Jorge Giordani earlier this year. The country, which sits on the largest oil reserves in the world, suffers from “fiscal nymphomania”.

Venezuela’s economy is forecast to shrink by 7 per cent this year. Inflation is expected to top 150 per cent, fuelled by printing money to fund a fiscal deficit estimated at 20 per cent of gross domestic product.

Asdrúbal Oliveros, head economist at local consultancy Ecoanalítica, estimates the drop in government revenues caused by the collapse in oil prices squeezed imports by 22 per cent last year and will slice another 31 per cent off imports this year, crushing supplies of essential goods. “It is going to be a very tough year,” said Mr Oliveros. “The crisis is hitting all social classes.”

and

A large reason behind Venezuela’s topsy-turvy economy is its system of parallel markets and multiple exchange rates.

The minimum wage, for example, is 5,620 bolívars a month — worth $892 at the main official exchange rate, or just $21 at black market rates. Government stores sell food at regulated prices, but shortages mean many consumers must turn to the black market.

“Everyone is hustling,” said Luis Vicente León of Datanálisis, a local pollster. “Some 70 per cent of people queueing at state stores simply resell their goods on the black market. There are arbitrages everywhere.”

Yes price controls do drive black markets since people see the obvious arbitrage opportunities and take them. No amount of enforcement of price regulations will stop this. Deregulating and allowing the law of one price to take effect will. Such adjustments will, in the short term, be painful but the longer reform is delayed the more painful the adjustment be.

Just when you thought things couldn't get any worse in Venezuela ....

it looks like they have.

Andrew Rosati writes at Bloomberg Business

Venezuela, which already has the world’s fastest inflation rate at a reported 69 percent in December, could see that rate more than double this year as it struggles to respond to falling oil prices.

“We may end up this year with inflation at close to 200 percent,” Alberto Ades, co-head of global economics research at Bank of America, said in an interview on Bloomberg Surveillance Friday.

and

Annual inflation could rise to as much as 150 percent in 2015, and climb as high as 250 percent if the Central Bank included factors currently being omitted in the official statistics, he said.

But interestingly the inflation numbers have not been released so far this year.

The central bank, which typically releases inflation data each month, has yet to publish any information for this year.

[...]

“It’s a strictly a political decision,” Asdrubal Oliveros, director of the Caracas-based consultant Ecoanalitica, said Friday in an interview, referring to the data delays. “It’s not like they’ve stopped calculating inflation. The director of the Central Bank knows what the rate is.”

Not releasing the numbers is not a good look. It does suggest that they are bad and the government doesn't want people to know just how bad.

Part of the problem is that Venezuela relies on oil for the vast majority of its foreign-exchange earnings and the price of oil is dropping. Its almost half of what it was last year.

Venezuela has received an average $45.21 a barrel for its exports so far this year compared with $88.42 in 2014, according to the oil ministry. The nation relies on oil for about 95 percent of its foreign-currency earnings.

Loss of foreign exchange means that imports have to be cut.

Venezuela has responded to falling oil prices by reducing imports, which dropped 18 percent in January compared with the same month last year, BofA Merrill Lynch Global Research said in a report on April 7.

“The Maduro administration is in the midst of undertaking one of the largest import adjustments in Venezuelan history,” the bank said, adding that many of the country’s economic problems are “to a large extent self-inflicted.”

and the economy is suffering,

He [Alberto Ades] forecast the economy would shrink 4 percent. “Venezuela is in a dire crisis.”

The 50 percent drop in oil prices in the past year has buffeted Venezuela’s economy and forced it to reduce imports, exacerbating shortages of everything from shampoo to beef. On the black market, the bolivar has weakened 74 percent in the past year to about 257 bolivars per dollar, compared with the official rate of 6.3 for priority imports.

Are we watching an economy implode simply because of its government's policies?

You know your economy is in trouble when ....

hotels start asking guests to bring their own toilet paper and soap.

Not exactly a common practise in tourism unless you are holidaying in Venezuela.

Manuel Rueda at Fusion is reporting that

Venezuela’s product shortages have become so severe that some hotels in that country are asking guests to bring their own toilet paper and soap, a local tourism industry spokesman said on Wednesday.

[...]

“It’s an extreme situation,” says Xinia Camacho, owner of a 20-room boutique hotel in the foothills of the Sierra Nevada national park. “For over a year we haven’t had toilet paper, soap, any kind of milk, coffee or sugar. So we have to tell our guests to come prepared.”

But if you have price controls and a very weak currency then you get smuggling and a black market.

“Five hotels have told me they are going through this situation, where they have to ask guests to bring their own toilet paper,” Montilla told Fusion. “We’re near the border with Colombia, just two and a half hours away, and lots of [Venezuelan] goods are taken there, because they sell for more money in Colombia.”

Montilla says bigger hotels can circumvent product shortages by buying toilet paper and other basic supplies from black market smugglers who charge up to 6-times the regular price.

And the government response?

Recently, Venezuelan officials have been stopping people from transporting essential goods across the country in an effort to stem the flow of contraband. So now Camacho’s guests could potentially have their toilet paper confiscated before they even make it to the hotel.

Can't help thinking removing price controls and letting the price mechanism work would fit the problem most quickly.

Venezuela should be rich, but its government has destroyed its economy

Thats a headline from the Wonkblog at the Washington Post, which says it all.

Matt O'Brien makes a simple but important point when he writes,

It [Venezuela] should be rich. But it isn't, and it's getting even poorer now, because of economic mismanagement on a world-historical scale. The problem is simple: Venezuela's government thinks it can have an economy by just pretending it does. That it can print as much money as it wants without stoking inflation by just saying it won't. And that it can end shortages just by kicking people out of line. It's a triumph of magical thinking that's not much of one when it turns grocery-shopping into a days-long ordeal that may or may not actually turn up things like food or toilet paper.

The problem?

Venezuela, you see, has the most oil reserves [in the world], but not the most oil production. That's, in part, because the Bolivarian regime, first under Chavez and now Maduro, has scared off foreign investment and bungled its state-owned oil company so much that production has fallen 25 percent since it took power in 1999. Even worse, oil exports have fallen by half. Why? Well, a lot of Venezuela's crude stays home, where it's subsidized to the you-can't-afford-not-to-fill-up price of 1.5 U.S. cents per gallon. (Yes, really). Some of it gets sent to friendly governments, like Cuba's, in return for medical care. And another chunk goes to China as payment in kind for the $45 billion it's borrowed from them.

That doesn't leave enough oil money to pay bills. Again, the Bolivarian regime is to blame. The trouble is that while it has tried to help the poor, which is commendable, it has also spent much more than it can afford, which is not. Indeed, Venezuela's government is running a 14 percent of gross domestic product deficit right now, a fiscal hole so big that there's only one way to fill it: the printing press. But that just traded one economic problem — too little money — for the opposite one. After all, paying people with newly printed money only makes that money lose value, and prices go parabolic. It's no wonder then that Venezuela's inflation rate is officially 64 percent, is really something like 179 percent, and could get up to 1,000 percent, according to Bank of America, if Venezuela doesn't change its byzantine currency controls.

So what is the government up to?

The Maduro regime wants to throttle the private sector but spend money like it hasn't. Then it wants to print what it needs, but keep prices the same like it hasn't. And finally, it wants to keep its stores stocked, but, going back to step one, keep the private sector in check like it hasn't. This is where its currency system comes in. The government, you see, has set up a three-tiered exchange rate to try to control everything — prices, profits, and production — in the economy. The idea, if you want to call it that, is that it can keep prices low by pretending its currency is really stronger than it is. And then it can decide who gets to make money, and how much, by doling out dollars to importers at this artificially low rate, provided they charge what the government says.

This might sound complicated, but it really isn't. Venezuela's government wants to wish away the inflation it's created, so it tells stores what prices they're allowed to sell at. These bureaucrat-approved prices, however, are too low to be profitable, which is why the government has to give companies subsidies to make them worthwhile. Now when these price controls work, the result is shortages, and when they don't, it's even worse ones. Think about it like this: Companies that don't get cheap dollars at the official exchange rate would lose money selling at the official prices, so they leave their stores empty. But the ones that are lucky, or connected, enough to get cheap dollars might prefer to sell them for a quick, and maybe bigger profit, in the black currency market than to use them for what they're supposed to. So, as I've put it before, it's not profitable for the unsubsidized companies to stock their shelves, and not profitable enough for the subsidized ones to do so, either.

A big issue for Venezuela is its reliance on oil.

Not when 95 percent of its exports come from oil, and its price has fallen by half. (It's actually a little worse than that, since Venezuela's crude is so heavy that it sells at a $5 a barrel discount to the rest of the world's). Without as many petrodollars, Venezuela has had to cut back on imports so much that its shortages, which had already hit 30 percent of all goods before the central bank stopped keeping track last year, have gone from being a fact of life to the fact of life. Things are so bad that there isn't a bank run — who wants to save their worthless currency? — but rather, as Jonathan Wheatley puts it, a supermarket run. People have lined up for days to try to buy whatever they can, which isn't much, from grocery stores that are even more empty than usual. The government has been forced to send the military in to these supermarkets to maintain some semblance of order, before it came up with an innovative new strategy for shortening the lines: kicking people out of them. Now they're rationing spots in line, based on the last digit of people's national ID cards.

This is a story which simply can't end well. If the government keeps on doing what its doing things will only get worse and if starts to deal with the problems it has created the short term results will see a lowering of the already low standard of living for all citizens, but especially the poor, of Venezuela.

You know your economy is in even more trouble when ......

This from the Economist magazine:

Venezuela is in trouble. Such trouble, in fact, that the central bank (BCV) has not published GDP figures since the beginning of the year and is two months behind with inflation figures. Leaks from inside the BCV suggest annual inflation is now well over 60% and that GDP fell by almost 5% in the first half of 2014. Shortages of food, medicines and other basic goods, including spare parts and tyres for vehicles, have reached critical levels. Representatives of private health clinics say more than half have suspended elective surgery for lack of crucial supplies and parts for medical equipment. The government plans to address shortages by fingerprinting customers to prevent them from buying extra goods to sell on the black market.

Dependent on oil revenues for 97 out of every hundred dollars in foreign earnings, and on imports for a large part of what it consumes, the country is heavily in debt to foreign suppliers, many of whom have cut off credit. But instead of adopting an adjustment plan, the government has continued to print money and introduce ever more stringent price and exchange controls. Massive price differentials with neighbouring Colombia have fuelled the contraband trade, to which the authorities have responded by closing the border at night.

You can't help but think that this can't end well.

You know your economy is in trouble when .........

In City A.M. Guy Bentley writes

The President of Venezuela, Nicolas Maduro, has announced plans for a major mandatory fingerprinting system to combat the increasingly dire food shortages and rampant smuggling afflicting the Latin American state.

He said the fingerprinting system would be similar to the one the country uses for voting and was intended to stop Venezuelans buying too much of a single item. Venezuelan authorities report up to 40 per cent of the goods the country subsidises for its domestic market are smuggled to Colombia and sold at higher prices.

and

The opposition argued mandatory fingerprinting is yet another demonstration of the government's "failed socialist policies", which has seen essential goods driven from shop shelves, oil production plummet and growth slow to a snail's pace.

Venezuela has been running short of basic goods like toilet paper, soap and cooking oil for over a year. Strict currency controls and a shortage of US dollars have hammered consumers' ability to get imported goods.

Furthermore, price controls have crippled the ability of producers to make profits and correctly identify market signals.

and

Earlier this month, in a desperate move to combat a wave of smuggling, the government deployed 17,000 troops on the Colombian border and began closing crossings at night.

I can't help but think that any system that requires 17,000 troops to stop smuggling of staple food items and fingerprinting of shoppers to stop them buying "too much" is a system that clearly is not working. Instead of such measures, which won't work anyway, President Maduro should remove subsidies, price controls and currency controls and reintroduce markets so that the price mechanism can work to give producers the right incentives to produce and consumers the right information to make decisions about what to buy. Only then will shortages be removed and smuggling stopped.