Venezuela: Dismantling a Weapon of Mass Destruction

By Mark Weisbrot

Mark Weisbrot is co-director of the Center for Economic and Policy Research in Washington, D.C., and the president of Just Foreign Policy. He is also the author of the new book “Failed: What the ‘Experts’ Got Wrong About the Global Economy” (2015, Oxford University Press). Cross-posted at our sister blog, Triple Crisis.

The government of Venezuela has often denounced an “economic war” against it, and of course this is part of the current situation. The primary weapon of mass destruction in this war is the black market for the dollar. It is no coincidence that the main source of information for this market — the extreme right-wing “DolarToday” — is run by someone who played an important role in the U.S.-backed military coup in 2002. He was then an army officer — Colonel Gustavo Díaz Vivas — and he now resides in Alabama, with DolarToday operating out of the U.S.

This is also no coincidence. Washington has been trying to topple the Venezuelan government for at least 15 years, and almost every journalist I have talked to during this time — including from every major international media outlet — has been well aware of this effort; although they almost never write about it.

The black market for the dollar is especially destructive because it is part of an inflation-depreciation spiral that has been growing since the fall of 2012. When the price of a dollar on the black market rises, importers must pay more for the dollars that they need, and this increases inflation. But then the higher inflation encourages more people to buy dollars on the black market, as a store of value. This pushes up the black market dollar price, which increases inflation, in a continuing spiral. In October 2012, inflation was at 18 percent and the black market dollar was at 13 Bf (Bolivares Fuertes). At the end of 2015, inflation hit 181 percent, and the black market dollar had passed 800.

The main reason that the current spiral does not get even worse is that the economy is in recession. It shrank by 5.7 percent last year. But attempts to stimulate the economy through government spending would likely feed the inflation-depreciation spiral. This means that the economy is currently trapped in recession.

The government must therefore incapacitate this weapon of mass destruction. The only way to do that is to unify the exchange rate.

Many people are afraid of this vital change. Some think that everyone’s savings would suddenly rush into dollars, and the equilibrium rate would be even worse than today’s black market. It is true that many Venezuelans prefer to save in dollars (this is also true in Peru, Uruguay, and other Latin American countries). But they do not want dollars at any price; that is why the black market rate settles at an equilibrium price, e.g., at the current rate of about 1,000. If the government let the currency float — which is what it would have to do in order to terminate the black market — it would also settle at some equilibrium price, and it would be far less than the current black market price.

Others say that the government has no dollars to sell on a floating exchange rate market. But that is not true. Although its current oil revenues are not enough to pay for all of the country’s imports, it has tens of billions of dollars in international assets (and even more internally) that it could sell for cash. It would need to auction off about 9 to 10 billion dollars a year (about $36 million per day) in order to adequately supply the foreign exchange market. Last year it sold about $12 billion, but about 95 percent of that was sold at extremely low prices of 6.3 and 10. Much of this money was never used for imports, since it could be sold for superprofits on the black market. The whole system creates enormous incentives for corruption.

Interestingly, President Chávez allowed the currency to float on February 12, 2002. In the year prior to this move, there had been a lot of capital flight, and therefore falling Central Bank international reserves. But despite the political instability — this was just two months before the military coup —reserves actually grew after the float, until the oil strike near the end of the year.

Others argue, from the left, that a floating exchange rate is “neoliberalism,” and that keeping the fixed, overvalued rate is “socialist.” But this is also deadly wrong. The worst economic crises of the late 1990s — in Argentina, Brazil, Russia, Indonesia, Thailand, and other countries — were brought on by fixed, overvalued currencies. Most of these fixed, overvalued currencies were strongly supported by the International Monetary Fund and other neoliberals until they collapsed.

It is the black market that is “savage capitalism” — uncontrolled and unregulated. And it is a way of subsidizing capital flight, and feeding the government’s enemies. You give them cheap dollars and they take them out of the country, worsening the balance of payments problem. By contrast, letting the currency float is a way of taxing capital flight: Whoever wants dollars must pay more for them.

And Venezuela is very lucky compared to other countries that have faced this problem: the vast majority of the country’s dollars come to the government through oil revenue. This means that the government will have much more revenue to spend, in domestic currency, when the currency has been floated. It can use this revenue, as well as other funds in domestic currency, to finance subsidies for food and medicine.

This makes much more sense than trying to subsidize food or other essentials through the exchange rate. And the price controls on food are not working very well: Food inflation for 2015 was 300 percent, nearly twice the (181 percent) rate of overall inflation.

Unifying the exchange rate is thus the first and most important step toward economic recovery. Once that is done, it will become possible to address other imbalances and problems — including shortages, price controls, inflation, and economic growth. But first things have to come first.

Links on SYRIZA-Eurogroup Agreement

Boston--"Caution--Falling Ice!" signsLinks on Greece:  Now that the Syriza government has reached an agreement with the powers that be in Europe to extend its bailout for four months, there seems to be a lot of disagreement about how to assess it, even among commentators and sources that I trust. Most people seem to think the outcome is bad for Syriza and Greece, but some people think the jury is still out and the agreement may give Syriza some breathing room to make more headway later; others think it’s bad but Syriza was forced or even blackmailed into it; others blame Syriza’s strategy and call for it to admit failure and try a new strategy; others speak of betrayal or capitulation by Syriza. (At least none of my left trusted commentators are praising the Troika (now renamed “the Institutions”), which would really leave my head spinning!) Here is a list of links, with minimal annotation from me–I will let readers sort it out.

John Cassidy, The New Yorker, Greece Got Outmanoeuvered. His position is that Greece was outmaneuvered, did a “U-turn” in exchange for little. “In retrospect, it is clear that Tsipras and Varoufakis overplayed their hand.” But “the game isn’t over yet” because it’s just an interim agreement.

Costas Efimeros, The Press Project, “Europe trashed democracy”. The title is taken from a question that Paul Mason of Britain’s Channel 4, asked of Jeroen Dijsselbloem, president of the Eurogroup: “”What do you say to the Greek people, whose democracy you’ve just trashed?” This is a bit old–from Sunday–but it cites an anonymous Greek official as saying that “the Greek delegation were yesterday subject to outright blackmail” (the quote is of Efimeros, not the anonymous official).

Yves Smith, Naked Capitalism, ECB and IMF to Greece: No Escaping the Austerity Hair Shirt. The latest of her posts since 2/20 arguing that Syriza caved and Greece is screwed.  What really puzzles me is the commenters to this post who are comparing Syriza’s leadership with Obama’s betrayals (prompted by Yves remark that Syriza’s slogan “Hope Is Coming” is a “subconscious echo” of Obama’s “Hope and Change”). This strikes me as ultra-leftism.

Manolis Glezos, MR Zine, Before It Is Too Late.  A short statement by a Syriza member of the European Parliament; apology to the Greek people and call for Syriza supports to fight back against the Troika and Memoranda.

Stahis Kouvelakis, Jacobin, The Alternative in Greece. The “alternative” in the title is explained (sort of) in a section subtitled “How to Avert Total Defeat”:  it is to be “honest” and admit that the party’s strategy failed (“to present a defeat as a success is perhaps worse than the defeat itself.”). Cites the Glezos apology approvingly; very critical of the Syriza strategy. More from him at the website of his publisher, Verso.  One of the pieces at his author page at Verso says that the Syriza leadership was “trapped by its mistaken strategy: though I wouldn’t say it was a ‘betrayal’ or ‘capitulation’, since these are moralising terms that are of very little use for understanding political processes.” But calling for them to be “honest” isn’t moralizing, mind you.

Richard Seymour, Lenin’s Tomb, Syriza’s mauling at the EU negotiations. Another dismal view of the agreement; Seymour calls Tsipras’s account of the agreement “deluded.” A sample: “Tsipras said that the deal creates the framework for Syriza to address the humanitarian crisis.  Not with the commitment to a primary surplus and troika oversight, it doesn’t.”

William Blum, Counterpunch, The Greek Tragedy. Very interesting short piece (hat-tip Mike-Frank Epitropoulos) reviewing the history of post-WWII crushing of the Greek left (with British and American and CIA complicity and help), concluding that the Syriza negotiators may not have known what they were up against, and that: “Greece may have no choice, eventually, but to default on its debts and leave the Eurozone. The hunger and unemployment of the Greek people may leave them no alternative.”

Now for the more positive assessments:

Étienne Balibar and Sandro Mezzadra, Verso website, Syriza Wins Time—and Space. Rejoinder to the doubters. They speak of the formidable barriers that popular movements against austerity and this one left government face; “It would be naïve to imagine that the Greek government could break down these barriers all by itself.”

Mark Weisbrot, Center for Economic and Policy Research, Greek Bailout Extension Deal Represents a “Significant Retreat” by the European Authorities, CEPR Co-Director Says. This is a press release from 2/20 quoting Weisbrot, who took a much more positive view of the deal (or at least did on Friday–he may have changed his view since Monday or Tuesday).

James K. Galbraith, Social Europe, Reading the Greek Deal Correctly. Galbraith is friends with Varoufakis, who at some point taught at UT Austin where Galbraith teaches, and has been acting as an advisor to the new Greek government during the negotiations, which gives him some credibility (though maybe critics would say he’s over-invested in the same bad strategy). His reading of the deal hinges on the wording of the deal. For example:

[T]here was the lovely word “arrangement” – which the Greek team spotted in a draft communiqué offered by Eurogroup President Jeroen Dijsselbloem on Monday afternoon and proceeded to deploy with abandon. The Friday document is a masterpiece in this respect:

“The purpose of the extension is the successful completion of the review on the basis of the conditions in the current arrangement, making best use of the given flexibility which will be considered jointly with the Greek authorities and the institutions. This extension would also bridge the time for discussions on a possible follow-up arrangement between the Eurogroup, the institutions and Greece. The Greek authorities will present a first list of reform measures, based on the current arrangement, by the end of Monday February 23. The institutions will provide a first view whether this is sufficiently comprehensive to be a valid starting point for a successful conclusion of the review.”

If you think you can find an unwavering commitment to the exact terms and conditions of the “current programme” in that language, good luck to you. It isn’t there. So, no, the troika can’t come to Athens and complain about the rehiring of cleaning ladies.

Again, this was from right after the agreement was signed on Friday, but before the reform measures were submitted on Monday (Varoufakis got them in on Sunday, actually). So I wonder what he would say now.

Two interviews from the Real News Network that I haven’t watched yet, but look like they are more positive toward the agreement (and by economists whose views I trust):

Michael Hudson, Real News Network, European Banks vs. Greek Labour
Heiner Flassbeck, Real News Network, Greece Eurozone Deal a Setback or Tactical Win for Syriza?

Finally, I finally got around to reading the piece from a while ago by Varoufakis, reprinted more recently in the Guardian, How I Became an Erratic Marxist (hat-tip to TM and JFS). Not an easy read, in more ways than one: it’s pretty theoretical, and it’s depressing. He is explaining why he thinks it’s more important to save European capitalism vs. letting it crumble in the hopes that socialism will emerge from the rubble. He thinks (roughly) that the left is so weak that the right would seize power if European capitalism fails. So that goes a long way toward explaining why he seems to reject the so-called “Grexit” out of hand and doesn’t want Greece to act unilaterally.

(Note: This post’s “possibly irrelevant image” is of the falling ice signs that have proliferated all over downtown Boston (they are there every winter, but there are so many more this year). I understand what I’m supposed to do when I see a “Caution–Wet Floor” sign, but what am I supposed to do when I see a “Caution–Falling Ice” sign? Reader suggestions are welcome.  And if anyone can figure out a way that the image is relevant to the post, I’d love to hear that, too.)