Caracas Chronicles

Ever since Maduro took the presidency we’ve been hearing of internal debates in the government about economic reforms. There’s a “pragmatic” wing calling for some common sense economic measures and a loosening of controls, without dismantling them. And there’s a “radical” wing pushing for more controls, regulations and nationalizations.

Increasingly prominent in this last group are three names: Tony Boza, Alfredo Serrano and Luis Salas, the man Nicolás Maduro just appointed minister without portfolio and Vicepresident in charge of coordinating Economic Policy.

For most of the last couple of years, Maduro has sided mostly with the radicals, but not decisively. Inaction remained his default economic policy. But after 6D there were rumblings that the radicals were winning the battle, and tonight’s cabinet appointments confirmed this. Maduro’s announcements and the reform of the Law of the Central Bank point to dark days ahead.

These radicals are not the same ones we’ve come to know and mock over the years. They are not your regular Giordanis, Arreazas or Jauas. The new cadre of economic advisors comes from a hard-left fringe within chavismo, as scary as that sounds. If their policy proposals are enacted, they will bury Maduro and chavismo under a mountain of worthless paper money. But not before unleashing havoc and pain on our economy and society.

The most prominent of The Undertakers are Tony Boza, Luis Salas, and a Spaniard linked to Podemos, Alfredo Serrano. The first two have been around chavismo for years, without gaining much influence. They held posts in obscure government institutions and universities, appearing frequently in the chavista media, and writing books and pamphlets on the “economic war”. Salas just broke into the limelight, as the new Vicepresident for Economic Policy and minister without portfolio for Economic Productivity.

Serrano, who is the Director of the Spanish geopolitics research institute CELAG, was recently brought to Venezuela and seems cut from the same cloth as the other two. The Minister of Planning, Ricardo Menéndez, sits on the Board of Advisors of CELAG, and Salas is a researcher there. When Maduro announced the new cabinet, you could hear Serrano’s phraseology reverberate through Maduro’s words. His emphasis in a productive culture, the production revolution, and productive industries; all come straight from Serrano’s work.

Their views are a mess, full of misconceptions and laced with a dose of conspiracy theorizing. Did you know that Dolar Today is an act of war by Colombia, and that the economic war started in 2000 with a decree by Colombian President Andrés Pastrana? No? You should read this threesome more often.

They favor controls on basically everything. For them, existing exchange controls have been a resounding success, with just a few minor details to adjust. Their craziest proposals include nationalizing all foreign trade and the banks, controlling every price in the economy, – all of them – and seeking ways to involve all citizens in the enforcement of official prices.

In a country struggling through an economic depression and on the brink of hyperinflation, their views on inflation and the exchange rate – the two must pressing issues today for the Venezuelan economy – are genuinely dangerous. Their proposals, if enacted even half-heartedly, can be expected to push Venezuela over the hyperinflation edge.

They believe inflation in Venezuela is caused by the “speculative profit margins” of private companies (Boza), the power of private importers (Serrano) and selfishness (Salas). More importantly, they claim that the massive financing of the government’s deficit by the Central Bank is not the problem. Judging from Maduro’s recent decision to essentially expropriate the Central Bank, they intend to speed up the money printing madness.

Something that would reduce the need for the Central Bank’s financing is a devaluation, which would increase the government’s revenues in bolivares. Unfortunately, The Undertakers don’t believe in devaluations. Salas recently wrote a long hate-letter to the moderates inside chavismo who were calling for a devaluation in the PSUV’s economic congress of December. These are the same moderates that Maduro pushed aside.

This mixture of denying the real root cause of inflation and opposing a devaluation, is what makes their ascent into influence and government positions so worrying. A small devaluation might still be coming, to help ease the pressure on PDVSA. But don’t expect any measure on foreign exchange policy that could help ease inflationary pressures.

A real risk of hyperinflation

As long as the exchange rate remains too low, the government will need the Central Bank’s presses working 24/7 to pay its way.

It’s a death spiral: the more money the government prints, the more the prices will rise, and thus the government will need to print even more money to pay for stuff. That’s why economists’ warnings about hyperinflation started in earnest in January of 2014, when Maduro announced that the 6.30 VEF/USD rate would remain for the foreseeable future. Things have only gotten worse since then: monthly inflation in December was 16.1%, which equates to an annual pace of 500%.

Hyperinflation is not more than a side note in modern Economics textbooks, an academic and historic curiosity. It’s a very rare occurrence and a fully understood phenomenon. Its main cause is a very large, rapid and sustained expansion of the supply of money. In other words: massive money printing. This view is akin to “Smoking is bad for your health” in Medicine: a belief challenged only by fraudsters, charlatans or idiots.

As Distortioland has cogently argued, hyperinflation is the economic equivalent of a nuclear bomb. It destroys everything: salaries, savings, jobs, capital, investments and confidence. Under hyperinflation the main worries are no longer output or jobs. Better worry about severe political instability and hunger.

For the last few months, some Venezuelan economists have been arguing whether hyperinflation is a real possibility in an oil-rich economy as ours. Hyperinflation involves a collapse in money demand, with people spending money almost as soon as they get it, since they don’t want to hold on to a fast depreciating asset.

Those who think that hyperinflation is close to impossible in our country point out that the government, with its large income in dollars from oil revenues, can buy huge amounts of the unwanted bolivares. It can devalue the currency, and thus use its dollars to absorb an increasing amount of bolivares, and avoid hyperinflation.

I don’t agree with that argument, but it’s nonetheless grounded in mainstream economic theory. The claim rests on a key assumption: that the government will carry out a large devaluation at some point. But as mentioned above, The Undertakers think devaluations, especially large ones, are useless and unnecessary. The barrier against hyperinflation, if there was one, just disappeared.

Hyperinflation is not impossible in oil-rich Venezuela, but it requires such a degree of incompetence and ignorance that it almost has to be caused on purpose. Apart from massive money printing, hyperinflation requires another ingredient: an enormously stubborn and incompetent economic policy team. The first ingredient was there already, the second part seems to have been added to the mix with the arrival of Boza, Salas and Serrano.

In a way, we know what will happen. Their policies will fail miserably and spectacularly, and the trio of undertakers will wash its hands. They will give interviews saying how it’s some else’s fault, how their recommendations were badly implemented and their warnings ignored. Giordani-style.

The chance of avoiding hyperinflation rests on the result of the current political struggle, both between MUD and chavismo, and inside chavismo itself. They could at any point be purged by Maduro once their policies start bearing terrible results. The Undertakers could also hasten the end of the government they were tasked with saving.