Trevor Dobbs, Staff Writer
Previously considered the richest country in South America, with an abundance of natural resources including the world’s largest oil reserves, Venezuela is the poster child for countries that can reach the top yet fall completely into chaos later.
Venezuela, like many countries that produce oil, originally found huge economic growth and prosperity as a result of finding oil reserves on their land. Venezuela nationalized the oil industry, so most of the profits that came from the oil industry went into the government coffers. They were able to not only produce a strong middle class and a great gross domestic product (GDP) for their country with this arrangement, but they were able to use this oil revenue to fund many of their government programs without running huge deficits. Venezuela had little to no diversification in their economy; in short, their main source of revenue was this oil industry, and thus, their entire economy depended on the performance and volatility of the energy markets.
With the increased use of fracking by oil companies in the U.S. and other countries, this led to a surge in oil supply in the market and thus the price per barrel of oil began to fall. Greater supply of oil meant that Venezuelan oil companies would have to sell their oil product at a cheaper cost, which meant that their entire countries economy essentially would begin to experience a steep decline in revenue. The Venezuelan government’s response under President Nicolas Maduro, the current socialist despot that rules Venezuela, was to keep their spending more or less the same despite the decreases in revenue, and thus they began to run fiscal deficits.
As supporters of the regime, creditors such as Russian banks and the People’s Bank of China were happy to step in and purchase Venezuela’s Treasury bonds. As time passed and oil prices continued to drop, Venezuela found it increasingly difficult to service the interest on its bonds that was funding its deficits for its government programs. Venezuela did what many countries have done throughout history that has ultimately lead to their downfall, they began to digitally print the money to pay the interest on those Treasury bonds via their central bank.
As a result of possessing a bond market with an already weak amount of confidence, Venezuela was in no position to be doing this, especially since such a model requires mathematically exponential amounts of growth to be sustainable to adequately and realistically pay the debt. Venezuela did not have any sound prospect to produce the amount of growth required to pursue this kind of fiscal and monetary system or any international confidence in their currency as a reserve, such as the case in the U.S. So as a result, the added liquidity to the economy did not produce real added GDP value, but instead, it simply created a situation of staggering inflation by increasing the money supply in proportion to the goods and services that it represented. As they continued their policy of money printing, inflation began to be out of control; economists currently put their inflation rate well over a million percent. An inflation rate of a million percent is well over what economists consider to be “hyperinflation” which wipes people’s savings out and stagnates economic activity as people begin to lose confidence in the system. Historically, hyperinflation has also almost always lead to a period of political instability and this is exactly what has happened in Venezuela.
As a result of this dramatic situation of hyperinflation, over a million people have left Venezuela for better economic opportunities abroad. Venezuela is among the top five least safe countries on Earth, and there is massive political instability. It appears that there is an added factor into the mix of chaos that was already plaguing the country.
At the start of 2019, Venezuela has democratically elected a new leader to represent the country, a young politician by the name of Juan Guaidó. With a strong populist message, Guaidó is promising to address the many failures of the Maduro regime and to reverse the situation of hyperinflation that is leaving so many Venezuelans poor, starving and without access to health care. While this initially sounds like great news, it should come as no surprise that this might make the situation more complicated before it ultimately gets better in the end. President Maduro has no intention of letting go of power, so there is a conflict brewing between the two factions, those that support Maduro against those that support the newly elected leader.
Countries such as the U.S., Canada and other Western nations have come out in recognition and support for the newly elected Guaidó. But countries such as Russia have expressed hints that they do not approve of these recent measures, Russia being a longtime supporter of several authoritarian regimes around the world. Russia has warned the U.S. and other western powers not to get involved in the situation and has even accused the U.S, of “planting and orchestrating” the election win of Guaidó.
With many questions still unanswered, the world watches as we hope to soon figure out what will happen from this horrible situation. As Venezuelans watch with anticipation as their country’s political system falls into uncertainty, it is clear that the landscape in Venezuela’s political system is about to change dramatically. Will the United States invade, will Maduro crush his opposition, or will Guaidó ultimately prevail? Only time will answer these dire questions.