Consider the implications of a 95% devaluation. That means any foreign debt, which was already problematic, just went up by 20x. It means your iPhone, which was already too expensive, just went up by 20x. WTF.
'Pegging' currencies is a problem, because the country loses monetary policy controls, but maybe they're smart enough to realize that's the problem in the first place ... it's smart to peg it to something petroleum based as the economy is effectively based on that. Perhaps it's a desperate attempt to restore faith in the currency, i.e. it's 'crypto' and can't be tampered with, and attached to something rational.
This might actually be the first hard case use for a good crypto: to basically provide 'integrity' wherein the underlying political system has none ... of course, the only way it can work is if the regime has enough self awareness to recognize this and accepts the limitations of the crypto, and the fact it's an admission that they are so incompetent that they screwed up the entire economy and currency.
Of course, any smaller nation may still very well simply opt to use USD as it's considerably more liquid and just makes more sense for so many reasons, political populism aside.
No it didn't. The foreign debt didn't move an inch. If you needed to sell 1.5 billion oil barrels to repay your foreign debt at $65/barrel, you still need to sell 1.5 billion oil barrel to repay your foreign debt. No change there.
On the other hand, all the debt that was issued in bolivars is basically void since a loaf of bread is now worth more than several millions bolivars. All savings are lost, pensions are worth nearly nothing and anyone who trusted the Venezuelan government by buying bonds and/or financing their projects by lending bolivars is fucked.
This moves allow Venezuela to technically erase around 1/3 of it's debt, hoping that will allow them to not default on the part that is due in foreign currencies, but scarifying it's own population in the process. Fun times.
> No it didn't. The foreign debt didn't move an inch. If you needed to sell 1.5 billion oil barrels to repay your foreign debt at $65/barrel, you still need to sell 1.5 billion oil barrel to repay your foreign debt. No change there.
If you could produce so much oil, then you wouldn't have the debt in the first place.
So the debt actually went up by the Bolivar devaluation, because now Venezuelans must create 20 times the value they created before in order to repay the debt.
They definitely can produce so much oil. Venezuela produces around 2 million barrels / day and are ranked no1 by proven oil reserve (https://en.wikipedia.org/wiki/List_of_countries_by_proven_oi...) . So 1.5 billion barrels is completely in their range over several years ! No one said they need to repay the debt tomorrow, as long as they do not default on the foreign debt (which is the whole point of the move) they can restructure it and repay it at their own pace.
The issue comes from the fact that during the last weeks/month, oil production has significantly dwindled due to political turmoil. Instead of defaulting on the foreign debt, they sacrificed their own population.
They do not need to create 20x the value they created before. The USD price of a Kilogram of coffee did not change at all, so any amount of coffee they would be selling now will contribute the exact same amount towards foreign debt reduction than the same amount produced 3 month ago: they don't suddenly need to produce 20x more.
On the other hand, if they did sell a significant amount of coffee 3 month ago and saved the profits in bolivars for their old days, or to invest in modernising the farm, their savings just got divided by 20.
Their Oil is 'tarsands' type Oil and it's the most difficult to produce and requires a lot of processing = massive investment that few are willing to make because a) market volatility and b) government volatility.
It's funny because 'stability and predictability' alone would yield them the kind of business climate and interest rates they would need to attract investment and they'd be much richer as a result.
> It's funny because 'stability and predictability' alone would yield them the kind of business climate and interest rates they would need to attract investment and they'd be much richer as a result.
Mexico, Brazil, Argentina and Colombia proves that your point is not right.
None of those countries have stable politics and economies, and certainly none of them have vast amounts of Oil Sands that require investment.
If they were like Japan, or Germany, or Sweden - they would get tons of investment.
Canada is the 'other country' that has vast Oil Sands and we get billions invested to extract it. The volatility is only in the market demand side, not the geopolitics side.
The fact that this list puts the United States at 11th in Oil reserves is highly suspect. Also your source even says that the list is unreliable [1]. I personally wouldn't use this list as a source. Also if Venezuela starts increasing its production beyond 2 million barrels per day they could help to lower crude prices, which would probably have a negative effect on them and other OPEC countries.
[1]: "Some statistics on this page are disputed and controversial. Different sources (OPEC, CIA World Factbook, oil companies) give different figures. Some of the differences reflect different types of oil included. Different estimates may or may not include oil shale, mined oil sands or natural gas liquids."
Even with conventional oil, though, 11th place worldwide seems reasonable, particularly compared to neighboring countries (behind Nigeria and ahead of Kazakhstan, China, and Qatar). Don't forget that the U.S. still has very active oil production in Alaska, Southern California, Texas/Oklahoma, and the offshore Gulf of Mexico.
Isn't it sulfur-laden oil, of no interest in the market unless there's a demand shortage? And in the current market, there's slumped demand, so they can't give it away.
Also, renovation of the Venezuelan infrastructure was paid for but not accomplished (graft/corruption). So they're in a hole for efficient production?
Finally, food production: they divided up farms and gave small holdings to the workers, who unfortunately had not the education, equipment nor capital to run them. So food supplies tanked, resulting in foreign exchange being used principally to import food.
All this added up to, a total fail of the regime to pay for their socialist experiment? Never mind games with imaginary points (currency valuation). The country can't feed itself nor make its own food nor trade its resources for food. They're in a big hole.
Yes, their oil has to be refined a lot more than other types [1]:
> Venezuela produces extra-heavy crude oil in the Orincoco Oil Belt area and heavily relies on imports of lighter liquids (diluents) to blend with this crude oil to make it marketable. Financial difficulties recently have occasionally prevented the state-owned oil company, Petroleos de Venezuela SA (PdVSA), from importing the necessary volumes of diluent to sustain production and exports.
Their socialist experiment was unsustainable from the start, to be fair. They effectively killed their internal economy by capping the price of staple goods, driving business to failure and closure in the process.
Denmark is actually, literally, in the Merriam-Webster definition of Social Democracy / Democratic Socialism. [1] Your one-word denials are unhelpful and uninteresting. Cite some sources and make a case.
Social democracy is not socialism. Social democracy is always expressed within a capitalist and liberal framework, while socialism negates capitalism altogether.
So should literally every single person every commenting on US politics ever, because pretty much no person in recent history who has ever come close to holding any federal elected office in the US has ever advocated for actual socialism, even the people who self-identify as socialists like Bernie Sanders or Alexandria Ocasio-Cortez.
If you use the real definition of socialism, you might as well say "the US should not adopt Nazism" as "the US should not adopt socialism" because both are equally likely to actually be adopted (i.e. not very likely at all). No mainstream politician in the US is suggesting that the state should take over ownership of most private businesses.
> These are actually considered equivalent in modern political discourse
Not true. Especially not in Europe.
> hit that Merriam-Webster link in the parent
Unfortunately, Merriam-Webster has it wrong in this case. Social democracy is not a synonym for democratic socialism. The two are very different ideologies with very different goals. As stated in the Wikipedia article for social democracy (with accompanying references):
"Social democracy is a political, social and economic ideology that supports economic and social interventions to promote social justice within the framework of a liberal democratic polity and capitalist economy... Social democracy became associated with Keynesian economics, state interventionism and the welfare state, while abandoning the prior goal of replacing the capitalist system (factor markets, private property and wage labor) with a qualitatively different socialist economic system... By the post-World War II period, most social democrats in Europe had abandoned their ideological connection to Marxism and shifted their emphasis toward social policy reform in place of transition from capitalism to socialism." [emphasis added]
Contrast this with the article for democratic socialism:
"Democratic socialism is further distinguished from social democracy on the basis that democratic socialists are committed to systemic transformation of the economy from capitalism to socialism, whereas social democracy is supportive of reforms to capitalism... As socialists, democratic socialists believe that the systemic issues of capitalism can only be solved by replacing the capitalist system with a socialist system—i.e. by replacing private ownership with social ownership of the means of production."
In summary, social democracy grew out of a movement that advocated transitioning from capitalism to socialism, but ultimately rejected such a transition in favor of working within a capitalist economy. Democratic socialism, on the other hand, advocates for the abolition of capitalism and private property. It does not reflect the present policies of Denmark and Germany, given that neither intends to abolish private property and transition to a socialist economy.
For anyone who downvotes throw in a comment so a discussion can be had! Seriously though, I don't think many foreigners realize the extent of Government ownership of essentials of Canadian life. We call them Crown Corporations and there's a list as long as my arm at [1]. They're largely well managed and successful businesses - some of them are even buying and operating US businesses (as with Ontario Power Generation's recent acquisition of New Jersey's Eagle Creek Renewable Energy [2]). Not to mention health care.
Previously Canada has had and spun off: Nationalized petroleum company (PetroCanada), package delivery company (Purolator), freight rail network (CN), airline (Air Canada) and aircraft manufacturer (Canadair).
I feel the reason many people don't associate Canada with 'real' socialism is that I feel socialism in Canada is a pragmatic and not idealistic decision in many cases. It's a massive country and as a result it's not economical to provide many essential services. These services are pragmatically socialized, and once they become profitable to operate as businesses are spun off as was done with the aforementioned.
State ownership of some essential utilities and public services are a feature of social democracy, not democratic socialism. It should also be noted that the examples you mentioned were privatized decades ago (except Purolator, which remains owned by Canada Post).
That's why I said "at least in terms of propaganda". Anything that's owned by the state is considered to be owned by (all) the people.
Venezuela also is not by definition a socialist country, it just has a socialist party whose goal is socialism. There still is a relatively strong opposition.
In modern political discourse, democratic socialism and social democracy are considered interchangeable, and that's what I stated in the parent comment applies to Canada and it seems that's a pretty good model and consensus description.
(Using the definition "a democratic welfare state that incorporates both capitalist and socialist practices")
No. It's a social democracy.
Social democracy is not socialism. Social democracy is always expressed within a capitalist and liberal framework, while socialism negates capitalism altogether.
https://en.wikipedia.org/wiki/Social_democracy
Here's the thing, while I think your argument has merit, I think it's not the topic that we're discussing here. I seriously doubt anyone is promoting the elimination of private property these days within the West or Europe. To play the pedantic game here may not be relevant, when even the dictionary has equated the two - rightly or wrongly. I know neither Sanders nor Occasio-Cortez, nor the Canadian NDP advocate the elimination of private property, and in Europe these people are just referred to as Socialists and lumped together.
Not really, though. About 2X as many Americans live in Canada as Canadians living in America, accounting for a much larger share of the Canadian population than v.v.
According to the Canada 2006 Census, 316,350 Canadians reported American as being their ethnicity, at least partially. There are also between 900,000 and 2 million Americans living in Canada, either as full-time or part-time residents. [1]
According to U.S. Census estimates the number of Canadian residents was around 640,000 in 2000. [2]
According to Stats Canada, the trend has reversed over time as the absolute number of Canadians living in the US peaked in 1930 at 1.3MM, which would be about 12% of the Canadian population at the time, down to a current 1.8% [3] On the other hand, Americans in Canada acount for 0.66%. At most it's a 3X discrepancy, not 10X, and it's largely due to the draw of the US economy. What would be more interesting to me, IMO, would be how many return home.
By all means, have at them windmills though, at least you've got a good view from on top that high horse ;)
Don't just say no, cite some sources and have a conversation.
Two of our four major parties (the NDP and the Parti Québécois) officially adheres to a Democratic Socialist policy [1]. Sure they've not had a turn at governing though they've been the official opposition, and the NDP is currently in charge of the Alberta government. They're not some fringe party. Their platform overlaps heavily with the ruling Federal Liberals - and they're both considered "centre-left" parties.
The NDP constitution refers to democratic socialism only in the following sentence: New Democrats seek a future that brings together the best of the insights and objectives of Canadians who, within the social democratic and democratic socialist traditions, have worked through farmer, labour.... This doesn't mean they adhere to democratic socialism. In fact, only a minority faction of the NDP is committed to democratic socialism, namely the NDP Socialist Caucus. I couldn't find a source for PQ adhering to democratic socialism, but would welcome any references. The Liberal Party and its provincial counterparts are definitely not democratic socialist.
Second, even if the NDP and PQ adhered to democratic socialism, that would not mean Canada is democratic socialist. The fact that the Conservative Party adheres to conservatism, for example, does not mean Canada is conservative.
Third, Canada is not democratic socialist because democratic socialism is incompatible with capitalism. Democratic socialists are committed to the systemic transformation of the economy from capitalism to socialism, including the elimination of private property. There is simply no realistic chance of Canada transitioning to a socialist economy and eliminating private property in the foreseeable future. This doesn't mean it couldn't happen eventually, just that it is not feasible under Canada's current political climate, government institutions, and legal framework.
PS: Did you mean to refer to Bloc Québécois (the federal party) rather than Parti Québécois (the provincial party)?
> They definitely can produce so much oil. Venezuela produces around 2 million barrels / day and are ranked no1 by proven oil reserve
One thing I find interesting is that Venezuela might have the number 1 oil reserves, and that's repeated over and over. Their oil is garbage (extremely heavy) and requires the importation of dilutants paid for by foreign currency, as well as equipment and specialized engineers that are paid for by foreign currency as well. If the prices of oil are too low, it doesn't matter how much oil is under the land they're sitting on. It's going to stay there until kingdom come.
The debt is denominated and must be repaid in USD. Nothing changed in Venezuela except some fantasy exchange rates than no one cares about except a handful of government cronies who are allowed to take advantage of those rates when they want to buy USD from the government using bolivars.
The 95% devaluation doesn't really change anything - unless you were specially connected, you couldn't change bolivars for USD at the official exchange rate. At most this devaluation just brings the official rate back in line with the black market rate, which is the real exchange rate because that's the only rate at which you can actually exchange currency.
Folks holding bolivars (and creditors, and pensioners) were already screwed. This just makes it official.
Consider the implications of a 95% devaluation. That means any foreign debt, which was already problematic, just went up by 20x.
In most situations, this is true. In Venezuela, however, inflation was already running at 300x a year before this announcement. (source: https://www.nytimes.com/2018/08/16/world/americas/inflation-... ). So it seems like any functional business must already essentially be operating in foreign currency.
It would only ever be true if the debt you owe is denominated in your own currency. Which would be highly unlikely in almost any case except USD or euros or one of a small handful of major world currencies.
No, they're right. The devaluation is relative to other currencies, so any debt measured in the devalued currency is now much cheaper when measured against other currencies.
I.e., if a debt is VB1000 before devaluation, worth about USD$100, but each bolizar is devalued by 100, then after devaluation, that same debt is still VB1000 but is now only worth USD$1. The devalued debt is now much easier to pay off.
However, if the debt had been measured in USD, it would now be 100x more expensive to pay off in terms of bolivars.
I have a friend that did large amounts of business with someone in Venezuela. Unfortunately due to the monetary policy the person in Venezuela had to stop doing profitable business with my friend.
I don't understand your point. If you devalue your own currency, your foreign debts don't move at all. If you owe 100 bucks plus interest, you still owe 100 bucks plus interest. The amount of bolivars you need just got higher, but no international buyer is going to give a crap about bolivars because they will rightly see bolivars as fake money.
Internal debts will be cut by a factor of 20, so if you owe a 5 million bolivar mortgage, suddenly that is much less money. Conversely if you have 5 million bolivars as life savings, they just became worthless.
"How did Maduro's govt mess up their economy? It was my impression that the US placing sanctions on Venezuela was the tipping point."
This is satire?
Total dysfunction, cronyism, corruption, dysfunction, (a lot of government debt is held by members of government!) and of course arbitrary government intervention in the economy like forcing retailers to have certain prices, nationalizing private businesses and factories willy nilly and ploughing them into the ground, fixing exchange rates etc. etc. etc..
I could go on.
Basically 'everything is wrong' with how they managed the economy.
Mass cash inflows from Oil sales can paper over a lot of problems and pay for some infrastructure, healthcare and education for the plebes (which is good), but ironically it can make the rest of the economy very dysfunctional and fragile ... but his 'red revolution' did in realtime what all the red revolutions do. How many times does this story need to repeat itself?
Some of the reasons you listed occurred after the recent sanctions. You listed dysfunction twice and I don't know what "(a lot of government debt is held by members of government!)" means or implies.
Intervention in the economy was also a move employed by Chavez - who was, and still is, well loved by the country.
Price control was implement so that the poor would not starve - maybe this was a good idea poorly implemented. Fast forward several years and with foreign goods becoming cheaper than what they could make in their own country = devalued Bolivar + more inflation.
Anyways, the point I was making was that it was already set in motion that their economy would crash before Maduro took power. Hence, my statement "How did Maduro's govt mess up their economy?"
"Intervention in the economy was also a move employed by Chavez - who was, and still is, well loved by the country. Price control was implement so that the poor would not starve"
Chavez set into motion that which Maduro continued and is the primary problem creator.
Chavez is only beloved by some because he had massive Oil revenues to bribe the plebes with, and he left others holding the bag of the destruction he created.
'Price controls' are a very temporary and ultimately destructive way to do anything and certainly will only guarantee more economic destruction thereby making things much, much worse for everyone especially the poor.
Maduro is responsible because he resided over the continuance and embellishment of stupidity. He could have ushered in some responsible reforms, but he did the opposite.
Chavez/Maduro style democratic populism was based on expensive social welfare programmes targeted at the poor, funded by oil revenues.
Some would call this well-intentioned socialism, others clientist bribery. But it doesn't really matter. What matters is that these programmes were affordable only when the price of oil was sky-high. When the price of oil collapsed a few years ago, they became unaffordable.
At this point, the government needed to make substantial cuts to the size of the state and its welfare programmes to stabilise its finances. However, such cuts are just not really possible for this kind of government: The entire basis of its power is a huge web of political patronage and self-enrichment, sitting on top of a mass of impoverished supporters. Money is the only thing that makes the system work.
Thus, the government attempted to maintain its spending through borrowing and enlargement of the money supply. Their hope was that, eventually, oil prices would rebound enough to restore the lost revenue and stabilise the economy. As they waited, their domestic and foreign opponents saw an opportunity to make the situation worse for them through measures like sanctions. However, the debt and printing of money would have lead to financial crisis sooner or later.
You're missing the bits about mismanagement, nationalization of productive resources thereby making them dysfunctional, price fixing, terrible monetary policy, dismantling democracy, authoritarian tendencies, hysterical anti-American populism, messing with elections, shutting down journalists etc. etc..
"As they waited, their domestic and foreign opponents saw an opportunity to make the situation worse for them through measures like sanctions. "
America is not an enemy of Venezuela and does not want to hurt them.
Canada is also working with the US on sanctions and here is the motivation from Gov. Canada website [1]:
"After democratic elections held in December 2015 saw a coalition of opposition parties win a majority in the National Assembly, the Venezuelan government proceeded to systematically strip the powers of the National Assembly. In January 2016, President Nicolas Maduro declared a state of emergency and has since been ruling by decree."
To be fair, there's been a sharp decline since Maduro took power. Maybe the current government is simply too corrupt and incompetent. And let's not forget that any other plausible government in Venezuela wouldn't be any better. Venezuela doesn't have a single "government success" story. That makes it even more sad, Venezuela should be a much better, richer country on paper, but they are cursed with natural resources.
Venezuela's oil was discovered in the early 20th century. Norway's oil was discovered in the mid-late 20th century, at a time when the oil countries started fighting for control over their natural resources. The power structures created over oil in those two countries are nothing alike.
Furthermore, Venezuela oil was seen as a necessity for some companies, while Norway oil was discovered at a time when there were decades of oil reserves on tap.
Ironically, considering all the anti socialist rants in the discussion so far, Norway's oil industry is state owned and the government has taken the profits and invested in creating one of the largest sovereign wealth funds and in a lot of national infrastructure.
Norway discovered its oil fairly late and has taken a good look at how other countries did it. For example, the Netherlands, another mostly non-corrupt country, squandered their gas revenues.
The situation with PDVSA was more complicated than that [1].
As for Norway, to avoid the Dutch disease they made several crucial decisions [2] early on, one of them being to encourage the development of a healthy, competitive private oil/gas sector while still retaining the majority of revenue and oil fields. They also funneled the profits into the now-famous sovereign wealth fund.
> To be fair, there's been a sharp decline since Maduro took power. Maybe the current government is simply too corrupt and incompetent.
Given the incentives in place, it is hard to imagine that it could turn out anything but corrupt and incompetent. What reason do Venezuelan officials, aside from personal pride, have to execute their office faithfully and competently? What reason do they have to hire people who execute their offices faithfully (aside from to their boss) and competently?
>Consider the implications of a 95% devaluation. That means any foreign debt, which was already problematic, just went up by 20x. It means your iPhone, which was already too expensive, just went up by 20x. WTF.
At risk of sounding inflammatory, every time someone complains about inflation, the response is "don't worry, that means your wages go up by the same amount".
If they just changed the law so you could exchange bolivars at whatever rate you wanted and dropped import restrictions so you could import/export what you wanted and dropped price controls and subsidies a fair chunk of their problems would go overnight. Instead more weird disfunction seems to be continuing.
They would also have to return expropriated companies (at least in the food sector) and farms to their rightful owners.
None of that would make up for all the lost equipment (to theft, to disuse, to misuse, to lack of maintenance). Nor would any of that encourage new investment (how can you trust that the government won't go back to its old bad ways?). Nor would it bring back all the population that has left for Colombia, Ecuador, and Brazil.
But all of what you said and all of what I listed, together, would be a good start. It would also help a great deal to abandon all the violent rhetoric, allow truly free and fair elections, allow the opposition to win when they do, and so on and so forth.
Argentina did all of what you said (well, they still have some subsidies), and it wasn't quite enough by itself. The primary budget deficit is still very large and the immediate driver of inflation there.
Large welfare state + underdeveloped economy + expropriation == no trust/confidence. Or, how to destroy your country in just a few steps and a just few years.
Eh, "have to" is way too strong. If anything, simply stopping fucking things up more would allow for a lot of economic growth in a way that isn't nearly as heavy a lift as reversing everything that's happened in the past decade.
Argentina has unfortunately not changed is monetary emision rates even though they claim to have chanced monetary policy. Argentina is headed for disaster because precisely, it admires Venezuela.
Well, no, the current Argentine government decidedly does not admire Venezuela's model (the preceding government did admire Chavez/Maduro). Their problem is that to rein in inflation they must cut the welfare state way down, including a variety of subsidies (electric, ...). Removing those subsidies is known there as a "tarifazo", which means "massive rate increase", and has caused previous governments to fall, which is why the current government is so scared to do it.
Macri's government hopes that they can slowly adjust things rather than go the shock therapy route -- if all goes well, it could work, but both approaches are risky, and it could all end badly again either way.
That’s the narrative but the results show still rampant inflation, still high government spending, and same monetary base expansion. The current government is economically very similar to the previous, and substituted hiperinflation with external debt
I mean, the Macri government is clearly not at all like the Fernandez government. The problems you list are real, and they are making mistakes as they always do, but the Fernandez govt really did want to go the way of Venezuela. The Macri government just doesn't have the oomph to push through the reforms they want -- whether for lack of seats in the congress or lack of conviction or fear of a repeat of 2001, I don't know.
That would make some key stakeholders (in the military and govt) quite unhappy, leading to difficulties staying in control, leading to prison or worse for the top. It's gotten to the point that they need to cling to power.
People are complaining about price controls being relaxed (a bit) on fuel, too. Look at this[1]:
> Mr. Maduro hasn’t specified when gasoline prices may start rising. Some of his detractors have started to call his plan a “neoliberal” austerity package that undermines the socialist ideology long espoused by his ruling party.
I'm not sure the people would stand for what's needed to fix the problem -- they know they don't want the country in the destroyed state it's in, but I'm not sure they're all on the same page on what's needed to fix it aside from "less corruption please".
For the suggestions in the top-level comments that might just apply to subsidies, though. I'm sure allowing imports, exports (and international aid...) would be broadly popular.
No, entirely not. What would happen overnight is that the currency would plummet against all other currencies into Deuschemark territory, at which point there is no import/export possible with that currency. This is not a simple problem to get oneself out of, dear random internet commenter, which is why you don't want to get into it in the first place. The spread between the official rate and the black market rate already reflects a shred of the drop that would occur if the currency floats.
The black market rate is the floating exchange rate. There isn't really much of an actual non-floating exchange going on.
Forced black market trading makes the currency less valuable.
Yes, that was precisely my point. But there is a limit to how much currency can be floated on the black market. I was replying to someone who thought floating all of it would be a good idea.
There was a great episode of Planet Money a few weeks ago about the unofficial exchange market and how the government came after them and threaten their lives.
According to the article, the new Venezuelan sovereign bolívar is pegged to a cryptocurrency petro, which itself is linked to movements in oil prices. I know the basics of crytocurrency, but I don't understand how this works. Could somebody explain?
I say this with no sarcasm: I'm pretty sure it doesn't. I'm pretty sure this very much is just razzle-dazzle, hoping to fool people for just a little while longer.
Contrary to popular belief, even trotted out here on HN in about half our discussions on BitCoin, currencies are not just something that some government said somewhere is worth whatever. They need to back to something. US currency backs to the fact that the US law enforcement and potentially military (if you're big enough) will come after you if you fail to pay taxes, which, while perhaps a bit brutalist and in violation of some of our more delicate follow-citizen's tastes, turns out to be enough to keep an economy humming along.
If the Venezuelan government is incompetent enough to have that same delusional view of how currency valuation works... well... behold its results.
US currency backs to the fact that the US law enforcement and potentially military (if you're big enough) will come after you if you fail to pay taxes,
The US currency is backed by the US economy, due to it being legal tender (i.e., form of payment) for all debts governed by US laws.
For point of comparison: the Fijian dollar is roughly half the value of the US Dollar, but Fiji has one of the smallest militaries in the world. It's value holds up because you have to spend FJD in Fiji for commercial transactions. And the EU's Euro is worth more than the dollar, despite a smaller military and more permissive legal system, because the EU has a very large economy (and the potential to be larger than the US' economy, if the Mediterranean states got their shit in order).
> The US currency is backed by the US economy, due to it being legal tender (i.e., form of payment) for all debts governed by US laws.
This is true. The demand for US currency is driven by demand to access good and services (or even to exchange to other currencies) denominated in USD.
> the Fijian dollar is roughly half the value of the US Dollar, but Fiji has one of the smallest militaries in the world. It's value holds up because you have to spend FJD in Fiji for commercial transactions.
These comparisons aren't useful. A comparison of USD to another currency would need to fully account for quantity of currency in circulation, and the liquidity (transaction volume) in exchange markets. Generally speaking, comparing currency values in USD is not useful - it can be more useful to look at purchase parity (how much it costs to purchase the same basket of goods in another country), or size of economy (e.g. measured in USD).
Edit:
Another way to look at things is that it doesn't matter how much a currency is worth in USD. What matters more is the rate of change of that exchange with USD. The faster the currency devalues against USD, the less quickly market participants can adjust and effectively "price" good and services, leading to the currency's further collapse and potential abandonment for a more "stable" currency.
My point wasn't to compare currency valuations. My point was that the value of currency doesn't depend on guns, it depends on the actual use of the currency.
Agreeing with others, I don't particularly trust Venezuela's own cryptocurrency to be an adequate backing for Venezuela's currency. There's still circularity there.
But I'd also add that there's more to backing that just saying "And this currency is backed by that." Go ahead; try it. Scribble some badlogninagain bucks down on some paper and try to get people to accept them for goods and services instead of dollars. When they complain, tell them that your badloginagain-bucks are backed by US dollars and see if that satisfies them. It shouldn't. For badloginagain-bucks to be backed by dollars, you need to be able to produce dollars in exchange for them. That's what a backing is; something you can always exchange the currency for.
Exchanging dollars for people not busting down your door and taking your stuff is certainly more abstract that exchanging it for silver, but it seems to be functional. Exchanging Venezuelan currency for Venezuelan cryptocurrency doesn't seem to be making progress. At this point my faith and credence in that government is quite rationally zero that they won't screw with something under their control, which is, you may note, concretely backed by the rest of the world by the fact that the only assets in the world worth anything are also all the assets not under their control. I'll believe it's pegged to international oil markets when it's actually stabilized the currency and people have demonstrated the ability to convert the newest bolivars into oil concretely at will.
If I buy some of their petrodollar cryptocurrency what is the mechanism which I can redeem it for oil? If I'm willing to pay shipping will they send me a barrel?
I mean in theory there are a lot of people who trade in oil or precious metals who aren't interested in actually acquiring the resource physically. There are plenty of people that are looking to arbitrage that don't necessarily want the raw resource. The same goes for the FX market. You're right in asking if you can even get it though. I don't actually have the answer to your questions.
There was an episode of Planet Money in the last few years where they bought a commodity and then tried to go collect it. Can’t remeber if it was oil or corn or what.
You can peg a currency to a commodity by guaranteeing that if someone brings in 1 unit of currency, you'll give them 1 unit of commodity. Gold, oil, another currency, bananas, a slowly-inflating basket of goods and services, whatever.
Trick is, people have to believe that you can and will make the exchange. If you have a whole fortress full of gold, for example, people will probably believe your pieces of paper that say "redeemable for 100 gold coins", and the value of the paper is about that of the coins. If I issue paper that says "redeemable for 1 acre of prime Manhattan real estate" you wouldn't (and shouldn't) believe it, because I don't have any Manhattan real estate.
So: how much should one believe that 1 "petro" is actually redeemable for 1 barrel of oil? Clearly they have some oil, but there's no clear mechanism yet for making that exchange. And long term, there's obviously trust issues.
It doesn't. At all. The concepts don't even make sense strung together like that.
Basically, the Venezuelan bolívar isn't worth very much, due to a number of reasons, including rampant printing. They tried passing laws to say it was worth more, but nobody listened, because nobody outside Venezuela cares what the Venezuelan government says (and even inside the country, you can ignore the laws of reality, but it doesn't mean they'll ignore you...). So they made a cryptocurrency of sorts, backed by nothing other than people's faith in the Venezuelan government, which is basically nil, so it was also basically worthless. So they said it was backed by oil, but the only way you can "back" a cryptocurrency with a commodity like that is to just sort of promise you'll totally back it, and (see above) nobody trusts the Vezezuelan government to honour their promises, so it was still basically worthless. They they announced petro gold which was ...I don't even know, maybe a second type of petro coin backed by gold instead, but I don't think that went anywhere because (see above) nobody cares. So now they're passing a law to back the bolívar with the cryptocurrency. So...
...in other words, they're realised that a currency backed by their promises is worthless, so they're trying one backed by a promise to back it with something which is backed by their promises. Because obviously if you don't trust the government to manage the existing bolívar correctly, you'll totally trust them to manage the new one, which is pegged by fiat to a different currency, which you're also trusting them to manage, and which is pegged by fiat to an actual commodity, which you're trusting them to actually have.
Fundamentally, the whole thing is fiat all the way down. An fiat currencies can work very well when well managed by an entity which is trusted by market participants, it doesn't work here, because it's not well managed and nobody trusts anyone. Waving a hash algorithm over your fiat currency doesn't magically make it non-fiat.
(Also! A 95% devaluation is an enormous "fuck you" to anyone who actually still trusted the current Venezuelan government, and will have ensured that any trust that did somehow still remain is now gone. All existing currency, savings, pensions, many contracts, etc., have just been ripped up. And now they're saying "right, now that we've totally screwed anyone who trusted us before, now just trust us when we say that this time, this paper is actually backed by some magic crypto which is actually backed by some oil, totes legit." This couldn't have worked before today, but it double extra can't work now.)
Which leads to more questions:
(0) The purpose of Bitcoin, and by extension blockchain-based currencies, is "an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party" (Nakamoto, 1998). Third parties such as payment processors and governments. How does the Venezuela petro relate to this purpose?
(1) Bitcoin, Etherium mining is continuous to process transactions. Each time a transaction clears, there is some mining required, as the blockchain is changed. In contrast, this indicated that the "petro" was "pre-mined" by the Venezuelan government. How is petro BOTH a cryptocurrency based on blockchain AND "pre-mined"?
(2) What is the process for redeeming petro in barrels of oil? How is the currency "backed" by oil?
So this buys the economy somewhere between 1-3 months while everyone figures out how to game the new system effectively. Then they'll change it all up again!
So the government just begged bolivar to the government's own cryptocurrency, the petro.
We already know that this does nothing.
Venezuelan government refuses to reduce the government spending to match the government income. In fact they just announced 3,000% wage increase at the same time. No matter what the name of currency, as long as it's Venezuelan government issued currency, it's going to lose value.
There is no way this peg will hold. They just alter the way pedro is calculated or do other shenanigans.
Is there betting market for this? I want to bet several thousands against pedro/bolivar.
Incidentally that would have prevented Venezuelan currency and debt crisis in the first place.
I seriously doubt that any bank would give out bolivar-denominated loans with fixed interest rate that is below 100%. I could take a two year debt with 10% interest easily.
Venezuelans are already earning more gold farming RuneScape than actually farming.
Petrodollar's importance for US economy is not that important.
The net financial benefit from petrodollar to the United States in a good year is something between 0.3 to 0.5 percent of US GDP. On crisis years it's fraction of that.
The main cost from petrodollar is that that the dollar exchange rate is an estimated 5 to 10 percent higher than it would otherwise. This hurts exports.
However this turns out it's going to provide an interesting and multifaceted case study for economists in the future. As far as I'm aware pegging currencies tends not to work well unless there's consensus among countries (see bretton woods system). Further, pegging to an "oil-linked" currency sounds dubious at best. Even ignoring the CC aspect of this; I'm deeply curious to see what falls out.
Does anyone have a cogent explanation of why they chose to go this way instead of a somewhat orderly default on debts denominated in foreign currencies? It seems to have worked for Argentina, so I'm always surprised when countries don't go that way. (Looking at you, Greece)
> Devalue Venezuela’s currency, the bolivar, by a whopping 95%. The new currency will be renamed the "sovereign bolivar."
> Instead of an exchange rate of 250,000 bolivars per US dollar, it will increase to around 6 million.
This is not a devaluation by 95%. The math doesn't add up.
> The petro is valued by the Venezuelan government at around $60, or 3,600 sovereign bolivars.
So 60 sovereign bolivars are one USD? Previously it said 6 million sovereign bolivars are one USD.
> To make things more complicated, the new sovereign dollar will also be re-denominated, which will remove about five zeros from its unit measurement.
Oh, okay. I assume they mean sovereign bolivar, not dollar (did nobody proofread this?). That makes the above point make more sense.
> At the same time, President Maduro also announced a huge 3,000% increase to the minimum wage.
> So in the new re-denominated currency, a person on the minimum wage will receive around 1,800 sovereign bolivars a month, instead of 1.8 million.
Is that 3000% increase in bolivars? In real terms? And again, I can't see the math adding up, even taking the supposed 95% devaluation.
And I haven't gone into any of the cryptocurrency stuff...
There's probably a lot of stupidity going on in this new Venezuelan policy, but that article makes a total mess of it on top of it. It's context-free reporting, by somebody who doesn't seem to care to understand what they're reporting, and the numbers just don't fit together.
The best I can make of it is:
1. The Venezuelan government still refuses to let the Bolivar float freely, which means that black market currency exchanges will continue to operate.
2. The Venezuelan government is changing the official exchange rate of Bolivar to USD.
3. The Venezuelan government is replacing the bolivar by the sovereign bolivar, where 1 sovereign bolivar = 100,000 bolivar.
4. They're increasing the minimum wage by an effective factor 100 in domestic currency. (The value of the minimum wage internationally will change by a different amount -- and not 3000% -- because of point 2, but any numbers you're getting out of the article are likely moot anyway because of black market exchanges.)
5. They're introducing some weird cryptocurrency gimmick that isn't explained properly.
> According to Bloomberg, the latest measures are unlikely to provide a quick fix for the economy, and there are risks that inflation will climb even faster
The only thing that would help Venezuela is Maduro's government falling, the socialist experiment being called off and a lot of international help.
It's not just the corruption, you can't really cap the prices for the sake of socialism and pretend that business won't fail.
The timing seems off on that. That article dates from Sep 2017, at which point the Venezuelan economic crisis had been going for 7 years, and been serious for 4. Inflation was 69% by 2014, well before this announcement.
I think a more likely explanation is that Chavez instituted a number of policies that were extremely friendly to consumers and hostile to producers, with the result that the producers all left, which meant there were no goods for consumers to buy, which sent prices through the roof and instituted a (un)healthy black market.
'Pegging' currencies is a problem, because the country loses monetary policy controls, but maybe they're smart enough to realize that's the problem in the first place ... it's smart to peg it to something petroleum based as the economy is effectively based on that. Perhaps it's a desperate attempt to restore faith in the currency, i.e. it's 'crypto' and can't be tampered with, and attached to something rational.
This might actually be the first hard case use for a good crypto: to basically provide 'integrity' wherein the underlying political system has none ... of course, the only way it can work is if the regime has enough self awareness to recognize this and accepts the limitations of the crypto, and the fact it's an admission that they are so incompetent that they screwed up the entire economy and currency.
Of course, any smaller nation may still very well simply opt to use USD as it's considerably more liquid and just makes more sense for so many reasons, political populism aside.