IT ALWAYS DOES: Printing Money Goes Haywire in Venezuela.
Part of the answer is that in the early days, inflating does make the government a little more money, and the point at which it starts to lose money is also the point at which the freight train is traveling 120 miles an hour, and it has a choice between slamming on the brakes and killing everyone instantly or waiting to hurtle over the cliff. Embezzlers and accounting frauds often start this way — they fudge things just a little to cover a temporary shortfall. Only the underlying problem doesn’t go away, and they need to fudge even more the next quarter to cover up both the gap they have now and the gap they covered up last quarter. They tend to be uncovered when the gap is so big that it can no longer be fudged. This is what happened to Bernie Madoff when the market collapsed.
The larger answer is that this is the end game of Chavismo. For about a decade, some sectors of the left hoped that Hugo Chavez represented an alternative to the neoliberal consensus on economic policy. Every time I wrote that Chavez was in fact direly mismanaging the economy, diverting investment funds that were needed to maintain oil output into social spending, I knew that I could look forward to receiving angry e-mails and comments accusing me of trying to sabotage his achievements for the benefit of my corporatist paymaster. And in fairness (though without minimizing his appalling authoritarianism), those policies undoubtedly did improve the lives of some incredibly poor people.
The problem was that the money he was using was, essentially, the nation’s seed corn. Venezuelan crude oil is relatively expensive to extract and refine and required a high level of investment just to keep production level. As long as oil prices were booming, this policy wasn’t too costly because the increase offset production losses. But this suffered from the same acceleration problem that we discussed earlier: The more production fell, the more the country needed prices to rise to offset it. Between 1996 and 2001, Venezuela was producing more than 3 million barrels a day. It is now producing about 2.7 million barrels a day. In real terms, the price of a barrel of oil is barely higher than it was in August 2000, but Venezuela is producing something like 700,000 fewer barrels each day. Policies that looked great on the way up — more revenue and more social spending — became disastrous on the way down as the population was hit with the double whammy of lower production and lower prices.
This was predictable. Indeed, many people predicted it, including me, though I was just channeling smarter and better-informed people, not displaying any particular sagacity. But the Venezuelan government either didn’t listen to the predictions or didn’t believe them. Now falling oil prices are crushing government revenues at exactly the time the country most needs money to help the people who are suffering great misery as the oil cash drains out of their economy. In the beginning, printing money may have looked like the best of a lot of bad options. By the time it became clear that the country was not fudging its way out of a temporary hole, but making a bad situation worse, it was committed to a course that is extremely painful to reverse.
Sooner or later, you always run out of other people’s money. On the other hand, this compassionate egalitarianism has made Hugo Chavez’s daughter a billionaire.