Photo: Vicepresidencia

In the strangest policy speech of his presidency so far, Nicolás Maduro just announced a broad set of reforms that, on their face, make no sense at all. The minimum wage is to rise 60-fold, from BsF. 3,000,000 to BsF. 180,000,000 (remember, the bolivar fuerte replaced the bolivar, and will be replaced on Monday by the bolivar soberano). Aware this would bankrupt what remains of the private sector, Maduro pledged the government would cover the entire private sector wage bill for three months, while also somehow vowing to bring the budget deficit down to zero. It. Made. No. Sense.

The implications are staggering: the Central Bank will need to print a tsunami of bolivars to pay the public sector payroll, which will grow to basically everyone-with-a-job overnight. Stores will react to the anticipated increase in money supply with an even bigger increase in prices.

In other words: higher wages will cause an unprecedented inflation instantaneously.

Nicolás Maduro just announced a broad set of reforms that, on their face, make no sense at all.

The practicalities of the government’s private-sector wage giveaway are clear as mud. No one knows how this would work in practice, suggesting it won’t work at all. If aid to the private sector isn’t forthcoming quickly, private sector workers will just take an enormous cut to their real wage, as inflation sprints ahead even faster.

Make no mistake, this will be extraordinarily disruptive to the economy, which is already falling apart.

The logic beneath the increase is pure madness—100% bonkers-batshit-crazy. The new minimum wage is meant to be worth half a petro (the new cryptocurrency token), which is supposed to have a notional value of a barrel of Venezuelan oil (or $60). But then it’s also supposed to float freely, but be anchored.

Calling this heterodox would be doing heterodox economists an injustice: it’s just gibberish, really.

Let us recall: the petro doesn’t exist in practice and it isn’t “backed” by any barrels. Even if it were, the oil is underground in a failed State with no rule of law, so it isn’t recoverable. Maduro is trying to set the wage level for the whole country based on… hot air.

Squint hard and try to think this through from their point of view, and you realize they seem to believe the problem is simply of price alignment. In their view problem isn’t the controls, the budget deficit or its financing by the Central Bank, it’s that they didn’t adjust when they should have. Now they want to make these overdue relative price adjustments in one swoop, increase wages, the official exchange rate (both lagging relative to other prices), increase government revenues and close the fiscal gap with more taxes.

Let us recall: the petro doesn’t exist in practice and it isn’t “backed” by any barrels.

They’re hoping that after the initial shock, with all variables properly “aligned” and the mismatched figures corrected, the economy will stabilize.

Although Maduro talked about eliminating deficit financing, he didn’t actually announce any measure — besides raising tax rates on a devastated fiscal base: the very soul of too-little-too-late. He didn’t mention gasoline prices. As he was announcing “Deficit Cero”, he actually announced a new reconversión bonus for public workers. Peak chavismo: pledging fiscal responsibility while handing out budget-busting populist goodies.

There were other announcements on the black market rate for dollars, some new USD auctions and some tax increases. Too much to take in. The headline is straightforward, though: Maduro managed the not-inconsiderable feat of ending the night with even less credibility as an economic policy-maker than he had going in.

Make no mistake: tonight’s exercise in dadaist economics will go down in history. This was the worst national cadena broadcast since Chávez came back from Cuba “alive.”

There was no room for sanity tonight.

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55 COMMENTS

  1. So, we’re looking at Venezuela being completely and utterly wrecked for how many years? 50? 100?

    May God have mercy on the Venezuelan people, nobody deserves something like this.

    • It took most Western European countries just 5 years to recover from WW2 in terms of GDP. Venezuela’s problems can be fixed fairly quickly with a more rational government

      • Yeah, no. I want to see sources on your claims. Most estimates I’ve seen about the German ‘miracle’ talk about 20 years to be again on par with the allies, economically speaking. This for a country which had always been a leader in science, technology, research , and with a well educated and highly productive workforce, that means,one order of magnitude better than Venezuela, so the estimate of WZ of 50-100 years is not crazy at all.

      • Hahahahahah funnyyyyyyy, at least 2 if not 3 generations will have to suffer utter poverty before they’ll come close to a normal way of life.

  2. Is this simply a shadow dollarization of the economy? I can’t see how any transaction can take place in Vz for the foreseeable future in any other currency.

    • Some people say rather it’s statization.
      Private enterprise is gone in one swoop, government takes over? Insanity….

    • The problem is that it’s a notional dollarisation (yes, it took the black market rate value of a dollar as marker) but the whole point of dollarisation is voluntarily giving up your money-printing powers in order to attain credibility, and to force yourself to close your fiscal deficit. In order to make sure you are giving up your monetary policy powers for good, you use a foreign currency (or allow citizens to freely exchange your currency for the foreign one you are tethered to).

      In this case, he didn’t give anything up, because the petro is a Bolívar 2.0, a meaningless currency that is not freely redeemable for anything at all, and that is 100% controlled by Maduro. Why is the utterly random $60 value any more credible than the equally random Bs. 10 = S1 rate of yore? Unless Maduro allows people to exchange a petro for a real barrel of oil or $60 in cash, then the petro is just another regular fiat currency that, in the hands of a hapless moron like him, can be (and will be) devalued at will.

  3. The unmentionable went to 5.9, next to 10. Even at 5.9, the new min wage is only $1/cal. da.=$30/mo. Hyperinflation will just get more hyper (even without factoring in coming gas hikes). The Petro “anchor” is a lame attempt to “dollarize”, without mentioning the hated Gringo Imperialist Economic War $. Dollars are scarce in Venezuela (don’t believe remittances are very strong-most Venezuelan emigrants are in S.A. countries earning min. wage there-a few $ hundreds/mo.-and are just scraping by). Some $ pickup will come from increased gas pricing, but to be more than compensated by declining production. Businesses will be seriously hurt by increased: wages/corp. taxes-collection/VAT. No way the fiscal deficit can close, maintaining Misiones/Petro-Caribe/other giveaways. Fresh hard currency money will avoid Venezuela like the plague. Finally, good luck with Govt. promise to pay businesses for as much as 3 months of their (increased, as I heard) wage costs in an effort to hold down prices on 50 major consumer products….

  4. It is sad, it is criminal, it is, well unbelievable, the destruction to come next week.

    But the front row seat we all have is better than an unlimited moviepass Card.

    If you are “older” like me you will remember Casey Kasem would say, on his weekly top 40 broadcast

    “and the hits just keep on coming”

    • “and the hits just keep on coming”

      I remember him well from 1970’s. An endearing and annoying voice, both at the same time.

  5. “Maduro pledged the government would cover the entire private sector wage bill for three months”

    Dateline – November 20, 2018
    As promised, today the National Bank has made good on it promise to reimburse the Business Community.
    Polar industries has been compensated 2,000,000,000,000 Petros

    Viva las vegas !!!

    • So close. Yes, Vz will reimburse employers in petro(s) but only after they have been falsely revalued to thousands of USD each. Thus Polar might get a few which cannot be exchanged for anything not even bolivars. A desperate (& profitable) attempt to create a market for the kleptocurrency.

      (How did Vz pay for the new currency?) Probably Russia fronted the cost of the new billetes in exchange for a public policy to force some value into the klepto that may recoup their investment in its creation.

      • Polar Industries, or sellers of Polar Bears or Polaroids, large, small, BFD

        The point was that the compensation was in (worthless) PETRO’s

        I mean, if paid in SAND they could at least make Concrete
        well, if they had cement, that is

  6. Look, everyone. This is good news. This is so bat shit crazy that it has to accelerate an end to the regime. You have people who apparently really believe they can just declare a value of made up money. If that worked, 8 billion of us on this planet would be doing it. But, no arguing or speculating is needed. Just give it toTuesday, maybe Wednesday.

  7. So they’re ostensibly pegging Bs.S. to the Petro which they’re pegging to the dollar at something close to the current black-market rate. I guess that can be interpreted as simply a move to distract from the devaluation of Bs.S?

    Was there any indication as to whether Bs.S. will be freely convertible into Petro, and Petro freely convertible into dollars?

    • Convertible to dollars?

      Nobody can find a legit place to buy Petro, let alone sell something so fraudulent.

      My question: how did Maduro stumble through all of this without asking his handlers, “hey… what does this word mean?”

  8. I do not believe something this galactically stupid could come from Maduro. We have to look for motive, who benefits? Just like the last failed bank note introduction (because of ineptitude) this to will likely also be canceled. How does this help China or Russia get repaid?

    Someone forced this on Maduro and China and Russia will have to block it. (Who benefits?). If this does go through, chaos will reign supreme. Again, who benefits?

    Venezuelans could be about to live in even more interesting times.

    Colombia, Brazil and others may be forced to close up the borders because of the coming exodus. Great for the criminal actors, human smuggling may become more profitable than all other crimal activity combined.

    • Cui bono is the appropriate Latin word you seek. Latin, though a dead language is awash with always appropriate words and quotes from antiquity.

      History ALWAYS repeats itself. The stupidity of Maduro today will be matched by another despot years from now.

    • It doesn’t. It’s literally going to force more people to leave the country or kill them by starvation.
      This is meant to lower Venezuela’s population and force what’s left into servitude.

  9. Unemployment is going to skyrocket.
    First the companies who are already struggling will simply not open.
    Some employees thinking of huge bonanzas in prestaciones will quit.
    Good luck with that – by the time they get paid it will be worth nothing again.
    Inflation is going to explode and the black market rate will be right behind.
    How are they going to pay for these new card readers at gas stations to force people to get a carnet de patria – it’ll take them years to install them. It’ll be like the Bs.100 bill.
    I could go on and on.

    • yeah my money is that this is another still born joke. We are never going to see any of that new cash. If we do it will be in 3 to 6 months and just like the old new bills, we’ll all have a chance to have one in our hands before they vanish into thin air. Minimum wage increase subsidies to be paid out in pedros? That bird won’t fly for a multitude of reasons. Does he really think he can ram this petro down our throat? Force everyone to use what they know to be worthless? Or is this a scorched earth policy as they see the end coming. Or are there enough complices to the process that those who are willing to play ball and in the long run be the only ones in the game will jump through any hoops necessary to be the only game in town?

      • Marc,
        In the comments of this and other internet sites, there is (and has been for years) this ongoing debate over whether “Maduro et al know exactly what they are doing, and are doing this to decimate and control the population” versus “Maduro et al are clueless incompetent assholes who have no idea what they are doing.”

        You live there, I don’t. But, can the answer be they are both (even though these seem like mutually exclusive options)?

        • I think it’s both. I think he really believes in the process. Has endured the brainwashing and come out addicted to the purple koolaid. He actually believes most of what he says, he thinks that they can get it right if they could only get the corruption out…therein lies the detail. However he has lots of powerful “advisors” that must be obeyed. I think there is a power struggle there between foreign (mafia/cartel) power and his own legitimacy as the “chosen successor”. I think he’s dumb but not that dumb but most certainly ill informed and probably purposely misguided. Again, just my opinion.

  10. The Petro has always been a promise to manipulate exchange rates. Those supposed 58,400,000 pre-sale petro sales for $5 billion carried an implied promise of an exchange rate of 24,921.18 VEF/$ to maintain international value. At 6 million VEF/$, the imaginary petro purchasers would be holding Petros worth $0.04, effectively losing all their money through 12 decimal places.

  11. The Petro can maintain its value against the bolivar or it can maintain its international value. It cannot do both. If the $/Petro ratio declines at the rate of inflation, the Petro will track the bolivar in domestic value.
    If the Petro is to hold its international value, the $/Petro exchange ratio must diverge from the $/VEF ratio. A VEF/Petro exchange rate set to accord with a fixed VEF/$ foreign exchange ratio to maintain the Petro’s value in dollars would provide a fixed number of future bolivares, as those bolivares lose value.

    Letting the Petro/VEF exchange rate truly float is a perverse “adjustment package,” without the package part (new real resources).

    Although it is not at all clear, it may just smoke and mirrors to hide the fact that they are indexing wages and prices to inflation, using the real exchange rate disguised as the Petro.

    • I was hasty and lacked clear thinking here, mixing analysis of the Petro with fixed exchange rates and a Petro in a truly floating exchange rate regime. If the Petro’s value in bolivars is allowed to increase to mirror the devaluation of the bolivar, it will act as a dollar-denominated index. See below.

  12. Is there any other example of a government tying its currency’s value to a crypto currency? You know, one for which there is no record of it even having been used in an independent, good-faith transaction?

    • I believe that the answer to your question is “no.”

      The original petro was a short-term international financing scheme to fund Maduro’s re-election. He was to collect dollars ( and never bolivars) for its sale, and have the general population repay the financing (at exorbitant interest rates) through introducing the Petro to the domestic bolivar economy. That has failed.

      Now it appears to be something completely different–a currency fixed at $60/Petro (in its equivalent in bolivares), one which the government will payout directly to the populace without ever collecting international funds. The original White Paper would appear to be useless at this point as a guide to the operation of the Petro.

  13. There is an implied $/VEF exchange in the Bolivar denominator of the Petro/VEF ratio to equate the VEF to the Petro’s (now supposedly fixed) $60/Petro ratio. The true formula for a petro’s value in terms of $/VEF (the so-called “Acceptance Price of Petro/Bolivar[per dollar]” is (VEF/$)’/(VEF/$_Real)^2, where (VEF/$)’ is the implied exchange ratio in the term Petro/VEF=Petro/($/Brl x (VEF/$)’) and VEF/$_Real is the real exchange rate.

    Where (VEF/$)’=VEF/$_Real as VEF/$_Real depreciates against the dollar, the Petro becomes more and more valuable in VEF, and holds its its value internationally as VEF/$_Real depreciates. In short, where (VEF/$)’=VEF/$_Real, then (VEF/$)’/(VEF/$_Real) is simply the inverse of VEF/$_Real, that is, $/VEF_Real. A floating exchange rate Petro is thus indexed against the dollar in terms of bolivars. If this is what is comptemplated, it is dollarization of items paid in Petros.

  14. You guys seem to be lost again in complexity and smoke and mirrors. The real reason behind all this is scorched earth operations. The strategy remains the same, social control through chaos and distraction and strarvation and forced emigration and ….
    No changes here, 15 years + and counting, the only news is that the regime has doubled down the bets and seeing how the collapse ( intended collapse) is accelerating, has decided is timely to up the ante and add fuel to the fire.
    The objective of all these measures is to act as catalysts to the next major debacle, with the hopes of being able to survive it and remain in control.
    Qui prodest? The occupation.

    • I do not disagree with you, considering the overall package proposed. It will reek havoc, raising the real minimum wage to an unsustainable level at a micro- and macro level (percentage of national income), among other things. It will result in disaster if the policies are the end in themselves or as means of proving that there is no alternative to a more ideological economy–which will also result in disaster.

    • MRubio, don’t be so hasty. Within a week or two, the dollar will be up to around 1800 of these new Bs (180,000,000:1 of the current Bs), and prices will adjust accordingly.

      Do you really want to clean your own p o c e t a s?

  15. Orinoco oil – especially the thick gunk – does not represent a true vaule of 60 dollars while still in the ground. Lift costs and processing cuts that value down to around 20 dollars, if not 10, and all of that and much, much more is already pledged to debtors and bond holders to the tune of over 150 billion dollars. Attempting to pay off anything with petros is in this case like tryig to get the private sector to accept the Chavista’s debt as payment. In the process, whatever value that’s left in the private sector will be bled off overnight. This will likely be vastly destabalizing since the private sector still has some modicum of structure and functionality.

  16. shouldn’t vz’ians be shorting each and every note of rep/promise to only accumulate physicals that’re worthwhile in the int’l mkt? +and be doing that a.s.a.p?

    or have they reached the inflection pt. wherein nobody wants ownership (respoonsibility) over vz-state endorsed commodities?

    they could rip 666 heads of the arb devil within a cinco dozen sloc?

    $i pray for vz to avoid saltiness – there ain’t
    a foul which socially strong sapiens might not endure.
    Vz: get ‘well’ soon!

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