Venezuela is on the brink of civil war.
Its economy has collapsed, its people are starving, and its government is to blame — although its grip on power is still strong enough that, as we'll get to in a minute, Goldman Sachs sure seems like it's betting that it will continue. Which is to say that things are about as dire as could be. The people are desperate, but so is the regime since it's terrified of facing any consequences for what is has done. The result has been a crescendo of state violence against the backdrop of a humanitarian catastrophe.
So much for la revolución.
It's hard to describe the scale of Venezuela's suffering. Despite having the largest oil reserves in the world, the International Monetary Fund estimates that Venezuela's economy is set to shrink for the fourth straight year, this time by 7.4 percent, and that its inflation rate is going to get all the way up to — this is not a typo — 1,134 percent. If that's right, then its economy will finish the year 32 percent smaller than it was at the start of 2014, and its prices will be 105 times higher. Going by black market rates, Venezuela's currency has lost 29.9 percent of its value in the last month, 83.4 percent in the last year, and 99.8 percent in the last five years. Venezuela has gotten a Great Depression-style crash at the same time that it's gotten Weimar-style hyperinflation.
How has a country that should have been so rich ended up so poor that it can't even feed itself? Indeed, according to a recent survey, three-quarters of Venezuela's adult population lost an average of 19 pounds the past year. Not to mention that the country's infant mortality rate has shot up 30 percent during this time because of malnutrition and a lack of basic medical supplies.
Well, the answer is the regime's brand of Bolivarian socialism. The government mismanaged the economy during the good times, doubled down during the bad ones, and would apparently rather declare war on its own people than give up its monopoly on dollars. Think of it as a three-step process. First, the government resorted to the printing press to pay its bills after the cronies it had put in charge of the state-owned oil company bungled things so badly that oil revenues came up short even when crude was at $100-a-barrel. Then, to try to wish away the resulting inflation, the regime instituted a series of price and currency controls that told businesses what they were allowed to charge, and what the bolivar was supposed to be worth. Finally, the government nationalized factories that refused to sell things at a loss like they'd been told to — that's why there are so many shortages — but that, of course, only added to the regime's money-printing needs when it then sold them itself.
It's a vicious circle of bad policies and worse luck — or is it bad luck and worse policies? It's hard to tell. In any case, though, the government's initial incompetence has become the justification for more of it. This might have been merely a disaster, but not a life-threatening one, had oil prices remained in the triple digits. But now that those have halved, Venezuela has basically become a failed state.
This doesn't seem sustainable, and yet it might be. Just look at Zimbabwe. Its government engaged in an even more economically destructive orgy of money-printing a decade ago, which, at its peak, saw prices doubling almost every day, but it still managed to hold onto power. The Chavista regime might too, despite the escalating protests against it. Why? For the same reason it was able to win in the first place: by taking advantage of the divisions between the haves and the have-nothings. The working-class neighborhoods that propelled the Chavistas to power have been slow to turn against the government that brought them free housing and health care and education even though they're worse off now than they ever were before. That might be starting to change as hunger eats away at old allegiances, but it might not — especially if the government threatens to withhold what little food there is if they do.
Goldman Sachs, for its part, seems to be counting on something like this. It recently bought $2.8 billion worth of bonds that had been issued by Venezuela's state oil company for the bargain basement price of $865 million. Whatever it might say, this looks a lot like a bet that the Chavistas will be around for a lot longer — and might even make that more likely considering that Caracas says the government used $300 million of this money to buy weapons.
Now, in its defense, Goldman maintains that it didn't buy these bonds from Venezuela's government directly, and that it only did so in the hope that a new government would be able to end the crisis and be in a better position to pay back what it owes. But there are a few problems with this story. While it's true that the bonds passed through at least one intermediary on their way from Venezuela's central bank to Goldman's funds, it's also true that Venezuela's reserves went up right after Goldman completed its purchase. The implication being that Caracas was just using a middleman. Nor is it clear that Goldman really would prefer a new government to the current one. While the opposition was probably bluffing when it said it wouldn't honor this debt, we know that the Chavista regime would pay its bills. It is now.
There's a grim irony to it all. It's not every socialist government that pays its Wall Street creditors in full while it watches its own people go without food. The Chavista regime is an exception, though, because it needs dollars to buy people's loyalty, and the only way it can accomplish that is by selling oil overseas. But here's the catch: If Venezuela defaults on its debt, then investors would most likely seize its oil shipments as a form of payment. That'd destroy the government's ability to borrow without improving the government's cash balances. It's such a bad idea that even the Chavistas don't want to do it.
They prefer to use tear gas instead.