Red Friday: Anatomy of a Mad Adjustment
In a bizarre, rambling address, President Maduro announced a genuinely weird, heterodox economic adjustment that left Venezuelans at a loss for words.
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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