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.

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  1. Frightening. But let’s not forget that this decision also eliminates any hope of the Chinese providing additional loans to keep this boondoggle afloat. It’s over. Toast. The Chinese will never loan a single Yuan to help prop-up this incredible farce of an economy. Wow.

  2. In the moment of the countrys greatest economic crisis the economy will be managed by a man whose experience is that of a theoretical academician and radical doctrinaire………no experience in public management at all ……….its going to get ugly real quick !!!

  3. Yes, I just read Luis Britto Garcia’s “What’s to be done?” It seems to be so internally contradicting that I find him to be suffering from framing blindness while he is advocating more debate and exchange with the left.

    As I understand it, framing blindness is when one’s world view is so severely constrained that you cannot find solutions to your problems. After reading Luis Bitto, I don’t even think he understands what socialism is! He seems to think that “wealth” is the sole problem with Venezuela’s economy! More governmental control is the solution to preventing and destroying wealth. Period!

    There is no bandwidth for communicating with this man. Period!

  4. Well, in fact, it’s interesting that Jesús Farías ended up in the cabinet after all. He has been calling for currency unification (and devaluation) for sometime now. We’ll see how he gets along with Salas.

  5. Y’all are so easily discouraged.

    Of course, if you are a communist madman and you feel the end is near, your only thought is to throw all your chips into your imagined utopia.

    This is a good sign. I still think the best course of action is to inpeach Maduro over the BCV thing. If there is one unforgivable crime for el pueblo right now, it’s a crime against the economy.

    A half-decent speech writer, hell, a drunk half-decent speech writer will do to frame it in a way that guarantees the country’s support.

  6. I´m only interested in one thing: Will this accelerate the end of the gov? will it cause a caracazo? will it cause a coup?

    With policies like this, I only see apocalyptic scenarios.

    The outcomes are not merely economic, but really political and social.

    Do you agree? what do you see?

  7. This is also good news: The sinking will be more Titanic. The undertaker won’t only dig their own graves but the whole “ismo” and the implosion we’ve been seeing, will reach us faster.

    As a cold shower at 5 am the faster the better

    • Instead of Titanic I think it as a James Bond movie, particular the final showdown between Bond and whichever villain. They are in a ferocious fight inside the intercontinental ballistic missile control, as they take blows at each other, the missile will take off and destroy the world in ‘T – 30 seconds’, ‘T – 29 seconds’….

      I guess that makes Allup criollo Daniel Craig or Sean Connery. Maduro, of course is Dr. No would be Maduro. I’ll let you choose the woman of prominence in the plot 🙂

  8. Okay, I just read some Luis Salas. Inflation is an invention of fascism.

    For the longest time, as between thinking they were just pretending not to know, while they delayed the hard decisions, or thinking they just didn’t know, I presumed the former. Luis Salas has just shown me that clearly, at this point, they just don’t know. They are now promoting the few who insist that wishing it were so makes it so.

    When you boil it right down, Mr. Salas’ line of “thought” is the expression of a level of decadence, insularity and indifference to the daily reality of others rivaling the shoe collection of Imelda Marcos.

  9. El argumento de la “guerra económica”, como toda teoría de la conspiración, es circular: nunca la política económica del gobierno va a fracasar porque el fracaso siempre será culpa de la guerra económica. No tomarán medidas. Dentro de unos mese oiremos a Salas diciendo que la guerra económica ha arreciado y por eso hay hiperinflación (o la ilusión de ella)…

  10. En la edad media trataban algunas dolencias con sangrías, un tratamiento inútil que implicaba extraer sangre del paciente. A veces se usaban sanguijuelas para este fin.
    ¿Qué podemos esperar de este equipo económico y su jefe? Ya no sangrías sino hemorragias, que no serían solo inútiles como las sangrías sino claramente impactantes en la salud de la ya débil Venezuela.
    Cuánto atraso.

  11. That one goes for the folks that say that there’s no ideology behind all this madness, the “it’s just corruption” people. If they were only interested in corruption, Venezuela would be like the UAE today, not Cuba.

  12. In a way, I am kind of glad to see this. It means that the end of this nightmare is coming sooner, rather than later. However, it bodes ill for the peaceful change we would all prefer.

  13. Venezuelanalysis has a “What is to be done” article, which is pure comedy gold.

    A few samples:

    – Establish a price for fuel that at least recoups the cost of production.
    – Restructure the public media system to uproot its merely reactive practices and convert it into a generator of debate and perspective.
    – Stop mimicking the vulgar formats, interruptions, insertions, decorations, conning, and user abuse characterized by capitalist media in our socialist media.

    And my favorite:
    – Act instead of declaring that action will be taken.

    I recommend reading it, if you can stand it’s idiocy. Laughter is said to be the best medicine.

  14. “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”.

    I really doubt Maduro will purge them when failure becomes evident; their mere appointment indicates you a lot of where this man (Maduro) is mentally standing.

    I agree that this seems to bring the end closer. I also agree that the end will be nastier than we want it to be. I mean, if there’s a good side to all of this is that finally chavismo will crash. The bad side is that it’s a big shit sandwich, and we’re all gonna have to take a bite.

    Maduro, Salas et al will try to wash their hands, of course. Prohibido olvidar.

  15. A small devaluation from 6.30 may be coming to take some pressure off finances. Larger devaluations will probably not be forthcoming, not only from economic troika opposition, but from the terrible short-term hit to Venezuela’s 70+% poor (90+% by developed world standards). All of this is good from the Oppo’s standpoint, by accelerating the forthcoming economic/political collapse, so long as they can avoid blame for the same, while clearly placing the blame on the Govt. via interpolations in the AN of Govt. ministers/figureheads to be covered by newly-freed up media.

    • Agree that a small devaluation may be coming. But, from reading these guys, I think there’s also another option: 6.30 remains, and they add another rate above that (could be by changing/removing SICAD or SIMADI). Their view is that it’s absolutely necessary to have multiple exchange rates. They want at least two rates: one for most things and public imports (the 6.30 rate), and another one for luxury/non-vital goods. I’m not sure if they add a third rate between 6.30 and SIMADI, or change SIMADI. SIMADI is vital for the oil industry in Vzla. Foreign oil companies operating in the country use the rate to get bolivares to pay expenses in Vzla. At 6.30 they simply can’t operate. PDVSA will push for SIMADI to stay, or a similar rate.

  16. Needless to say, there’s a premonitory air in this note. As harsh as it may sounds, I agree it sounds exprofeso the fact of the appointment of these dark characters to Maduro’s economic team. All the ministers have an air of a closing government, one that it is just about to say so long and blame somebody else for having to leave. This team will never be redeemed by history.

  17. So, basically, like when a fly is trapped in your car end keeps banging its head against the window again, and again, and again, and again, and it does not matter if you opened all the other windows it will keep banging on the one that is closed…

  18. Excellent job, Pedro.

    I really (really) liked this post, you succinctly achieved the sense of urgency of the moment.

    I only disagree with you in one thing: You´re giving too much credit to those who think that hyperinflation is close to impossible in our country.

    The argument that they use (that the a dollar-generating government can buy huge amounts of the unwanted bolivares), while partially right, reveals a flagrant misunderstanding of monetary dynamics and the very concept of money demand.

    Dollar-generating governments do buy large amounts of BsF, but governments do not keep permanently those BsF, they buy those BsF to pay for things, and they re inject those BsF into circulation, so there is no such a thing like a ´government demand for money´. They confuse flows and stocks.

    Unless, of course, they keep those BsF from circulating (keeping them in Treasury accounts at BCV), which only can be achieved by a huge fiscal adjustment. So, their key assumption is not only that the government will carry out a large devaluation at some point, but that they will carry out a large enough fiscal adjustment.

    So, the ´structural´ barrier against hyperinflation of our economy is a large devaluation followed by a fiscal adjustment. Genius.

    Is a minor point, that does not diminish your otherwise excellent post,

    • Thanks for the comment!

      I didn’t want to get into the full details of the “Hyperinflation is impossible in Vzla” argument to keep the length manageable, so I just summarized with the devaluation issue (which is a necessary condition for the dynamics they propose, it’s their first step) and didn’t mention the fiscal adjustment. Furthermore to what you say, they also ignore the role of expectations in the hyperinflation dynamics, like hyperinflation is just an issue of macro accounting. There’s little use in absorbing a huge amount of bolivares if people still expect money to keep losing value. Not only a fiscal adjustment is needed, but also the policy has to be credible (as you explain in your article).

      I think the problem with their argument goes beyond economics (I said this on twitter today). They’re basically saying that hyperinflation is impossible because, either A) The Maduro government will at some point open their eyes and enact some mildly-sane economic policies, and avoid hyperinflation, or B) Maduro will be replaced, and the new government will enact some at least mildly-sane economic policies. The first one is just a gross misunderstanding of Maduro; they’ve learned nothing about Maduro since 2013. And on option B, well, I’m still waiting for the “Year of political change” of 2014, and the “Year the exchange controls explodes” of 2015.

      (It’s funny how we keep taking in plural about the “impossible hyperinflation” proponent, when we all know is basically just one person pushing this)

      • …and you are right on all accounts.

        I guess we’re about to find out ’empirically’ who’s right in this debate. And believe me, I’d change my rightness for avoiding HI pelo a pelo right now.


  19. […] 現在のマドゥロの経済政策の背後にはスペイン人アドバイザー、アルフレド・セラノの存在があると言われており、インフレの存在を否定していたサラス副大統領の辞職後は、彼が直接マドゥロを導いているようです。セラノはスペインのポデモスに近いシンクタンクのCELAGの研究者で、このCELAGには以前はポデモスの創設者の一人、フアン・カルロス・モネデーロも名前を連ねていました。 […]

  20. […] Alfredo Serrano, the Podemos-linked looney-left “economist,” has long had Nicolás Maduro’s ear. But while his influence on the President has always been known, his effect on actual policy has been limited to the brief tenure of his equally crazy minion, Luis Salas. […]


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