Venezuela Officially Defaults; Annual Inflation 2689 Percent: When Does the Military Take Over?

Electricidad de Caracas, a Venezuelan state-owned electric company, officially defaulted on a $650 million bond payment. The company was already a month late on its payment before the trustee, Wilmington Trust, issued a statement. Meaanwhile, Professor Steve Hanke notes annual inflation is 2689%.

Venezuela's Electricidad de Caracas — a state-owned electric company — has defaulted on a $650 million bond payment, Wilmington Trust said Friday.

The default comes as the International Swaps and Derivatives Association (ISDA) prepares to decide next Monday whether state-run oil giant Petroleos de Venezuela (PDVSA) experienced a credit event earlier this month.

PDVSA missed a $1.12 billion bond payment on Nov. 2. If ISDA decides that PDVSA did experience a credit event, that could lead bondholders to declare a default, which could trigger an avalanche.

"We expect if holders do declare a default then that could be used to trigger cross default across the whole US$28bn of PDVSA bonds," Stuart Culverhouse, chief economist at Exotix Capital, said in a note. He noted, however, that bondholders "may simply give the government more time to make the payment, as the intention seems to be there, but coordinating a large group of holders with different incentives could prove challenging."

Food Shortages

President Nicolas Maduro erased any remnants of democracy in late July, stripping political opponents of power and establishing a new legislature filled with his cronies.

But Maduro’s cemented regime still faces the same problems it started years ago: An exodus of its educated class combined with mass shortages of food, medicine, money and -- most importantly -- time.

Shortages of basic medicine and proper medical equipment are common. More than 750 women died during or shortly after childbirth in 2016, a 66% increase from 2015, according to the Venezuelan health ministry. Nearly 11,500 infants died, a 30% jump. Malaria cases soared to 240,000, a staggering 76% increase. That last one is especially telling: Venezuela had already eradicated malaria more than 50 years ago. I met three paramedics in a week who all said they’re low or out of gauze, gloves and bandages.

Nearly three-quarters of Venezuelans polled said they had lost at least 19 pounds last year, one poll found.

A domino effect has created a worthless currency. On July 24, the day I arrived in Venezuela, a dollar equaled 8,820 bolivars. As I write this on September 6, a dollar fetches nearly 20,000 bolivars. In other words, the bolivar is worth less than a hundredth of a penny.

Venezuela Annual Inflation

Such are the benefits of socialism run wild. When does the military take over?

Mike "Mish" Shedlock

"Socialism leads to famine. Happened in USSR,China,Cuba,Zimbabwe,N Korea now Venezuela. How can the left not see the pattern." The pattern the left sees is "Three Americans Now Own More Wealth Than Bottom Half of US Combined." When some 75% are living from paycheck to paycheck, 3 owning more than bottom 50% COMBINED, doesn't go over very well with people. Extremes lead to opposite extremes.

Not just Socialism "run wild." Socialism, period. Some may last longer than others, but none will last long in the big scheme of things. Including the US.

Maduro = Stalin = Hitler ... !!!

Maduro = Hitler = Stalin = Mao ... !!!

The article left out the part where Venezuela passed gun control measures in 2012. 5 yrs later and they are starving and no longer live in a democracy. When they try to change things by force they are reduced to throwing rocks and molotov cocktails at govt forces who are armed with guns.

Guess which side wins those engagements?

Hint: not the startving citizens

Yeeesh! Bet they were counting on a HRC win

Professor Steve Hanke made a calculation error; the true Venezuelan inflation is only 2688%, but that does not damage his credibility. /s

The military is already running everything. Chavez came from the military, and it has always been the military ever since who kept the Chavistas, including Maduro, in power. Chavez purged the military long ago of any dissenters. The military has siphoned vast billions of dollars out of Venezuela, hiding it God knows where. They have also been living it up in Venezuela while the country collapses around them. The question is not when will the military take over, it is what will the military do next? In Cuba in a very similar situation (although Castro largely replaced the existing military with his own military) the Castro-created new military continued to support the Castro Brothers while Cuba fell from being the richest country in Latin America to being the poorest.

Venezuela is a complete mess that it should stand as a stark warning of the dangers of inflationism. I've written an article about this on my website:

So, RonJ, let's confiscate all the wealth of the top 0.001% and write checks to the bottom 50%. Nothing would change, except the bottom would be 50.001% and the markets would tank as so many assets would be liquidated at once. Socialism/Fascism leads to the disproportionate wealth as Govt and business ( mega corps ) rig the system. Socialism is not the fix. Free markets ( which we don't have at this point ) do a much better job.

The silliness of RonJ's comparison is this. How does the standard of living of the bottom 50% in the US compare to the standard of living of the bottom 50% in Venezuela? Are they better off? How about the bottom 50% in Cuba? Then, in a related question, is it possible to rise from the bottom 50% to the top 50% in the US? Is it possible in Venezuela?

As Malcolm points out, Venezuela is already a military and police state. As become all totalitarian dystopias towards the end of their life.

Once governments, arbitrary laws and regulations, central banks and other forms of officially sanctioned plunder; of which overtly expressed socialism is just one of many examples; replace unfettered free interaction between ALL households as the manner by which spoils are distributed, wealth creation will always get slower and slower. Simply because: Why bother producing? When joining the loot beneficiaries is so much simpler and more lucrative.

Until one day, wealth creation has slowed to the point where the stream of new value created by the ever-dwindling productive classes, is no longer enough to sustain neither themselves nor the looters. At which point, the only thing left for the looters, is clinging to ever more expansive and self-righteous interpretations of “property rights” and/or privilege; in order both to hang on to their own loot, and to attempt using the force of government to grab some from fellow looters. Both of which puts the onus on strengthening the government’s coercive apparatus, and on petty court intrigue aimed an ingratiating oneself with the guys with guns.

America is on the same trajectory. Just not as far along as Venezuela yet. But policies are, plus minus random detail, the same. Hence so be the outcome.

Venezuela, Zimbabwe, Weimar Republic, and other corrupt govt's experience hyperinflation because they can't sell their debt. The dollar haters and gold bugs have lied or sold their ignorance that the dollar would crash and we would experience hyperinflation due to QE1-4, ignoring the fact that as the reserve currency, we have had no problem selling our debt aND banks are not forced to lend. Our turn will come when the financial system resets in a few years due to a rising dollar and rates, and it forces us to truely compete for jobs and capital. Collectivism of any kind is ALWAYS less competitive than free market capitalism, which we have not had in a very long time due to the unequal enforcement of the rule of law, largely due to not having term limits.

"So, RonJ, let's confiscate all the wealth of the top 0.001% and write checks to the bottom 50%."

That is what happens when things get pushed to extremes. The recklessness of the 1920's lead to the New Deal. Action, reaction. The 2008 Housing crash lead to onerous Dodd/Frank legislation. In Saudi Arabia how many billions were just confiscated in the current purge? I remember Martin Armstrong writing about what was done to the rich when the Roman Empire fell. How long will Maduro eat well, while the people starve?

"The silliness of RonJ's comparison is this. How does the standard of living of the bottom 50% in the US compare to the standard of living of the bottom 50% in Venezuela?" There is no silliness in my comparison, as it is a comparison of 3 people to that of half the population in the same country. Venezuela has no bearing on what i said. From here i can drive to skid row, Los Angeles and over to Beverly Hills- a night and day difference, if ever there was one. A new record 95+ million Americans are not working as of last months unemployment report. But Charlie Munger, right hand man of one of the 3, said nearly a decade ago, that people should just suck it up and cope, something he has no worry of having to do. There are consequences to extremes and that is not silliness at all, as history has well documented.

MISH: Is this the currency crisis you've long since warned about cropping up somewhere in the emerging markets?