Venezuela: Out of gas, using dollars – and taking its first step to recover
Imagine, if you will, Hugo Chávez's worst nightmare. The weapon he used to shake dollars out of the hated gringo, oil, is gone. Venezuelans cannot even get gas for their cars from their gas stations these days, and oil production has dropped to historic lows. The money is gone, too. Venezuela is under default and sanctions and can no longer pay its bills. Its foreign reserves have fallen below $10 billion. Chávez, before his death in 2013, ranted about the primacy of the dollar, even as he kept the dollars from Venezuela's oil profits to himself and his cronies. Now, the people have the dollar – and they are using it to fight the failures of Chávez's socialist regime.
This explains why the new phenomenon of dollarization now happening in Venezuela is actually a spark of light for a post-socialist future.
Dollarization happens whenever something goes very, very, very wrong with the local currency. In Venezuela, annual inflation today, on 12/27/17 is 3,920%. Monthly inflation is 36%, meaning the Venezuelan currency loses value pretty much by the hour. People carry bolivars, the local currency unit, around by the wheelbarrowful. What's more, currency controls mean you can't even get your own money out of the bank except in very limited amounts, the equivalent of about $8 a day at most.
You can't do business like this. Nobody can, whether the grocer, the automobile dealer, the airline, the florist, the junk-peddler, the arepa-seller, or the pharmacist. The natural solution is to use U.S. dollars instead. Venezuelans are now doing this because dollars retain their value, are widely available even in currency-controlled Venezuela, and have the added benefit of being recognized internationally, meaning you can use them with no trouble if you get the heck out.
It's something that happens to every country that prints money like toilet paper and renders its currency worthless and unusable as a result. It happened in Ecuador in 2000. It happened in El Salvador a few years after that. It happened in Zimbabwe. (It also happened in Panama more than a century ago for a different, but related, reason: to attain independence from Colombia.)
With dollarization (which, by the way, doesn't hurt the U.S. in the slightest when it happens), Venezuela can finally find its economic footing. Prices have meaning, and the money to purchase things has value. It's all happening spontaneously and right under the government's baleful nose, as if the people themselves are taking their own economic futures into their own hands – which they are.
It has an added value in Venezuela, given that so much of its economy is based on oil, which is traded only in dollars. Tons of dollars rolling into the country from oil exports tend to make the rest of the economy uncompetitive because smaller businesses can't competitively sell products abroad, given the dollar's impact on the local currency. This is why we see very little Venezuelan coffee and chocolate on the markets in the U.S. despite their superb quality. Dollarization nullifies that issue and enables Venezuela to diversify its economy. It's an idea that has been advocated by both Steve Hanke, who's the world's expert on the matter, and one of Venezuela's smartest bankers, Miguel Octavio.
Dollarization has a way of making people independent. With economic matters stabilized, it's only a matter of time before political footing can be found, too. The Maduro regime currently in power knows this, which is why it will probably try to crack down, and crack down ineffectively, given the widespread use.
What we are seeing here is the first small step toward freedom from socialism in Venezuela. Let's hope this dollarization in Venezuela accelerates like fire when gas is poured.