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Andrew Henderson

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Why the Venezuelan economy is disintegrating into chaos

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Dateline: Cassis, France

On March 5, 2013, the death of Hugo Chavez was publicly announced. In response to the news, British politician Jeremy Corbyn tweeted the following:

“Thanks Hugo Chavez for showing that the poor matter and wealth can be shared. He made massive contributions to Venezuela and a very wide world.”

Corbyn, now the Leader of the Labour Party and Leader of the Opposition in the UK, identifies as a democratic socialist; and he’s not the only western leader who supports the ideas, policies and actions of people such as Venezuela’s Hugo Chavez.

In fact, there are more politicians in the West who support these ideas than you could imagine.

Yet, despite the ideological attraction to the late Venezuelan leader, Corbyn’s applause of the Chavez administration can be seen clearly now as a “total and complete lack of foresight.”

Fast forward three years and just look at what is happening in Venezuela.

Chavez’s handpicked predecessor, Nicolas Maduro, has called a 60 day state of emergency as the Venezuelan economy is falling apart at the seams. Inflation is already out of control and is projected to hit at least 720%.

Basic goods are impossible to obtain. People are standing in lines for hours just to buy toilet paper while others are bartering for medicine over social media. The Guardian reported that a 60-year-old women hasn’t been able to get sugar, milk or cornflour in at least four or five months.

Another man reported that they are now selling deodorant by the application. And, unless you can fork over a fortune at the black market, it’s almost impossible to find basic items such as shampoo, soap, flour, rice, pasta, baby formula, diapers, oil, beans and more.

In fact, diapers are now going for 11 times their original value, rising from 171 to 2,000 Venezuelan bolivars.

To make matters worse, the government-owned food store, Mercal, will only sell food to Chavistas, making life even more difficult for anyone who opposes the government. Looting has become commonplace and it’s not unheard of for people to punch each other in the queues at the supermarket over a bag of flour.

Yes, Hugo Chavez did so much for the poor.

As one woman put it, “this economic model of regulations is only making [Venezuelans] poor, without any groceries, and hungry.”

You Won't Believe What We Saw In Socialist Venezuela

When currency dictates your fortune

One man, however, was able to use the economic crisis to his advantage. He was fortunate enough to have a 100 euro note that he was able to convert into an absurd amount of Venezuelan currency.

He was able to live off that money for an entire month. His expenses included rent, food, a return plane ticket to Caracas, meals at five of the best restaurants in Maracaibo, massages, and acupuncture, a night’s stay at a five-star hotel, a luxury convertible rental, and giving everyone in his building a full tank of gas.

How could he do this with just €100 ($115 USD)?

Currency is a funny thing. If you are constantly thinking in terms of exchange values, the idea that you could be stuck with just one currency is an unfamiliar situation. But for most people around the world — including Venezuelans — the currency you’re paid in is the currency you’re stuck with.

If you’re a hotel operator working in Venezuela, you will get paid in the local currency. Correction, you have to be paid in the local currency. And if all you’re making is $92 a month, how are you going to pay back debts or buy food and pay the rent? How does anyone live with that kind of money?

Yet, that is how most people have to live in Venezuela these days.

How is it that a system applauded by guys like Jeremy Corbyn and Bernie Sanders — so-called “champions of the poor” — produce this kind of living situation?

Venezuela has the largest oil reserves in the world. How can the economic situation be this bad? Just last week we talked about the incredible advancements that were brought about in Dubai, aided in part by the country’s oil wealth.

Why haven’t Venezuela’s oil riches done the same?

It’s not a secret that, unlike Dubai, Venezuela hasn’t been very pro-business over the years. Venezuela used its oil wealth to pay for social welfare benefits; Dubai used its wealth to develop business-friendly policies that have secured the city-state’s future development, regardless of oil.

So who really helped the poor?

The dangers of the Venezuelan economy in Western thinking

Venezuela’s economic thinking, however, is what is popular nowadays in countries like the UK and the United States.

In the US right now, one candidate for the Democratic nomination supports these exact policies and ideologies; and he is actually winning states and giving Clinton serious competition. What does it say about the political mindset in the US when Bernie Sanders is doing so well in his presidential bid at a time when the Democrats are favored almost four to one to win the presidency?

The democrats basically have 220 electoral college votes locked up every cycle, which means they only have to pick off a few states every year to win. And now, their close second choice for nominee is a guy who admires Hugo Chavez and thinks that his policies are great.

You don’t think that things are going to go more in that direction in the US?

And the same goes for London where Jeremy Corbyn himself is the Leader of the Labour Party. Things are trending toward Venezuela-type thinking very quickly.

Just think about it, all the things you said wouldn’t happen five or ten years ago are now happening. Everything you thought wouldn’t happen here, is happening.

Venezuela could never happen in the US, right?

Well, the Obama MyIRA program was all about forcing people to hold treasury bills, for which they could conveniently set the terms. It may not be at the level where people are standing in line for hours just to buy toilet paper, but the government is increasingly in control of these things.

They set the terms.

But what’s the point of talking about all of this? As I mentioned the other day, it’s not to talk about doom and gloom or to look for problems just for the sake of having something to complain about. Rather, it’s to recognize what’s going on in the world to know the trends and act before they can negatively affect you.

So how can you act?

“It’s better to prevent than to lament”

The lesson here — as is always the case — is to have assets that the government cannot control, whether by currency or by institution.

If you have US dollars, the government controls that. If you have euros, the ECB controls that. If you have gold, maybe nobody controls that, but if it’s stored in your back yard, the government essentially controls that, too. They also control buying, selling and transporting it.

Owning precious metals is a good way to distance yourself from the system, but you have to take the proper measures to ensure they can’t control that either.

People talk about how they want to get their money out of dollars or euros, and that might be a good idea because, when you have your money in a foreign account, at least it’s somewhere where your government can’t force you to exchange it to whatever suits their agenda.

Something I do recommend is to have non-reportable assets, like land. I will be writing more about this in the future since I am currently buying land as part of my long term portfolio. Overall, land is an attractive investment because it is a tangible asset like gold and silver, but has much greater profit potential, with or without an economic crisis.

Gold has the problem that it is more directly tied to fiat currencies. Even if the value of gold goes up ten-fold, your just going to have to exchange it back into worthless fiat. And if gold were to go to 10,000 dollars, it would probably be because fiat is in the tank. So why would you want to sell it? What are you going to do with it then?

It will just be another Venezuela-like situation.

Land, on the other hand, is different because there is more of a practical demand for it. On top of that, you have the legal advantage of not having to report your foreign real estate. And, don’t worry, having a non-reportable asset isn’t shady or illegal.

Unlike Venezuelans who got caught in the crisis and are forced to turn to the black market to put food on their table, you have the opportunity to prepare for potential crises now with perfectly legal strategies.

The Spanish rendering of the idiom “Better safe than sorry” is “It’s better to prevent than to lament.” Those words apply so well to the need to have a Plan B. If you do things legitimately now, you won’t be forced to do things illegally when things get worse.

If you don’t think that holding US dollars is the safest thing to do for your entire portfolio, but you keep it all in US banks anyway because “offshore” sounds illegal, when crisis hits you’re only option may just be to turn to “black markets” — as Venezuelans have discovered — because you weren’t prepared.

So be prepared now. Put your Plan B in place so that, whatever crisis may come, you will be ready.


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