How Bad Economics Destroyed Venezuela

Summary

The video script explores Venezuela's economic collapse despite its vast oil reserves. It details the country's reliance on oil exports, which led to economic instability and hyperinflation. The script highlights peculiarities like cars not depreciating and supermarkets with fingerprint scanners, illustrating the dire situation. It also discusses the government's mismanagement, including printing more money and complex exchange rates, which contributed to the crisis. The video concludes with a call to invest in education, featuring Brilliant.org for learning math, science, and computer science.

Takeaways

• 🚗 In Venezuela, cars maintain their value, allowing owners to sell them for the same price they initially paid after several years of use.
• 💸 Gas prices are extremely low, making it very affordable for consumers to fill up their vehicles.
• 🏦 Venezuelan banks offer loans for cosmetic surgery, reflecting the country's unique economic priorities.
• 🚕 Taxi drivers earn more than doctors, indicating a skewed income distribution in the country.
• 🛒 Supermarkets have fingerprint scanners to control purchases during shortages, showing the extent of the country's economic crisis.
• 🏨 Some people find it more economical to live in luxury hotels than to rent apartments, a sign of the distorted cost of living in Venezuela.
• 📉 Venezuela, despite having the world's largest oil reserves, has experienced a severe economic collapse, with a third of its economy vanishing in a single year.
• 📈 The country's economy is heavily dependent on oil, with 96% of exports related to petroleum, making it vulnerable to oil price fluctuations.
• 💰 High oil prices lead to currency appreciation, which in turn makes Venezuelan exports more expensive and imports cheaper, contributing to a reliance on imports.
• 📉 The fall in oil prices and U.S. sanctions have led to a prolonged economic crisis, with hyperinflation reaching 130,000% in 2019.
• 💵 The government's response to the crisis has been to print more money, leading to further devaluation and economic instability.
• 🛂 Venezuela has multiple exchange rates based on who you are, which has led to corruption and economic distortion.

Q & A

Why don't cars depreciate in value in Venezuela according to the script?

In Venezuela, due to the hyperinflation and economic instability, the value of the currency has drastically decreased. This means that the purchasing power of the currency is so low that the cost of a car, when adjusted for inflation, remains relatively stable or even increases over time, making it possible to sell a car for the same price after several years of use.

What is the significance of the low gas price in Venezuela mentioned in the script?

The low gas price in Venezuela is a result of the country's vast oil reserves and the government's policy of heavily subsidizing fuel costs. This has led to gas prices being incredibly low, making it economically feasible to fill up a car's tank for less than one U.S. Dollar.

Why do banks in Venezuela offer loans for plastic surgery?

The script suggests that in Venezuela, there is a high demand for plastic surgery, possibly due to cultural factors or as a means of social mobility. Banks offering loans for such procedures could be an indication of the financial sector adapting to the consumer demands and economic peculiarities of the country.

How does the script explain the high salaries of taxi drivers compared to doctors in Venezuela?

The script implies that the economic crisis in Venezuela has led to a situation where traditional professions like doctors, who would typically earn higher salaries, are now earning less than taxi drivers. This could be due to the collapse of the healthcare system, the devaluation of the currency, and the fact that some services are more immediately lucrative in the current economic climate.

What role does the oil industry play in Venezuela's economy according to the script?

The oil industry is central to Venezuela's economy. The script states that in 2013, 96% of Venezuelan exports were related to petroleum, highlighting the country's heavy reliance on oil for its economic stability and growth.

How does the fluctuation of oil prices impact the Venezuelan currency, the Bolivar, as described in the script?

The script explains that when oil prices are high, there is more demand for the Bolivar, causing it to appreciate. This makes Venezuelan exports more expensive for the rest of the world. Conversely, when oil prices fall, the Bolivar depreciates, making imports more expensive and affecting the country's economy negatively.

What was the impact of China's rise on Venezuela's economy as mentioned in the script?

The script mentions that during China's rise in the early 2000s, the demand for oil increased significantly, which led to an economic boom for Venezuela. The country even began importing doctors, indicating a period of wealth and prosperity.

Why did Venezuela experience a prolonged economic crisis as described in the script?

The script attributes the prolonged economic crisis to a combination of weak oil prices and U.S. sanctions imposed after the Venezuelan president manipulated elections. These factors led to a severe economic downturn, with a third of the country's economy disappearing in one year alone.

What measures did the Venezuelan government take in response to the economic crisis, according to the script?

The script describes several measures taken by the Venezuelan government, including printing more money, implementing price controls, and creating a multi-tiered exchange rate system. These measures were intended to manage inflation and stabilize the economy but often led to further complications.

How does the script describe the impact of the economic crisis on the Venezuelan population?

The script states that since the crisis, 7 million people, a quarter of the entire population, have fled the country. It also mentions that professionals like doctors, lawyers, and professors were effectively working for free due to the hyperinflation, leading to a high proportion of these professionals among the migrants.

What role does the sponsor Brilliant.org play in the context of the script?

Brilliant.org is presented as a sponsor of the script's content. It offers an interactive platform for learning math, science, and computer science, which the script suggests can be a way for individuals to invest in their education and diversify their skills during tough economic times.

Outlines

00:00

🚗 Venezuelan Economy: Unbelievable Facts and Oil Dependency

This paragraph introduces several surprising aspects of life in Venezuela, such as cars retaining their value, extremely cheap gas, and peculiar banking practices. It also sets the stage for discussing Venezuela's severe economic crisis, despite its vast oil reserves, and highlights the paradox of a country with immense resources suffering from shortages of basic goods. The narrative underscores the extreme contrasts in Venezuela’s economy, drawing attention to the reasons behind its financial collapse.

05:01

💰 The Rise and Fall of Venezuela's Oil-Dependent Economy

This section delves into Venezuela's economic history, noting its past wealth, largely driven by oil. It explains the country's vulnerability to fluctuating oil prices and how this has led to repeated cycles of economic boom and bust. The paragraph also touches on the government's failure to save during prosperous times, exacerbating the impact of economic downturns. This cyclical pattern is identified as a key factor in the current prolonged crisis, worsened by external factors like U.S. sanctions.

10:01

💸 Hyperinflation, Money Printing, and Economic Mismanagement

This paragraph explores the disastrous consequences of Venezuela's government printing more money in response to financial shortages. It describes the resulting hyperinflation, which devalued salaries and savings, and led to a severe economic downturn. The government's implementation of price controls is discussed, showing how these measures further destabilized the economy, leading to shortages and black market activities. The text also highlights the government’s role in creating and perpetuating the crisis through mismanagement and corruption.

Keywords

💡Depreciation

Depreciation refers to the loss in value of an asset over time due to wear and tear or obsolescence. In the context of the video, it is noted that in Venezuela, cars do not depreciate in value, meaning they can be sold for the same price they were bought for after several years of use. This is unusual because typically, cars lose value as they age.

💡Inflation

Inflation is the rate at which the general level of prices for goods and services is rising, and subsequently, the purchasing power of currency is falling. The video describes Venezuela experiencing hyperinflation, with the central bank printing more money, leading to a drastic devaluation of the currency and a skyrocketing price level, as exemplified by the 130,000 percent inflation rate mentioned.

💡Economic Crisis

An economic crisis is a period of financial instability that results in a sharp contraction in economic activity usually over a relatively short period of time. The video script describes Venezuela's situation as the worst peacetime economic crisis in modern history, with a significant portion of the economy disappearing and a large population fleeing the country.

💡Oil Reserves

Oil reserves are the quantities of petroleum that have been discovered and are estimated to be recoverable using current technology and economic conditions. The video highlights that Venezuela has the largest proven oil reserves on Earth, which should theoretically provide significant economic benefits, but the country has struggled due to various factors.

💡Currency Appreciation

Currency appreciation is when a country's currency gains value in relation to other currencies. The script explains how high oil prices increase the demand for Venezuela's currency, the Bolivar, leading to its appreciation. This makes Venezuelan exports more expensive and imports cheaper, which can impact the country's economy.

💡Imports and Exports

Imports and exports refer to the goods and services a country brings in from abroad (imports) and sends out to other countries (exports). The video script discusses how Venezuela's economy is heavily reliant on imports due to the strength of its currency when oil prices are high, which can lead to a lack of domestic production and self-sufficiency.

💡Sanctions

Sanctions are measures imposed on a country to make it comply with international law or to change its policies. The video mentions U.S. sanctions on Venezuela following the manipulation of elections by the president, which have exacerbated the country's economic problems.

💡Price Controls

Price controls are government-imposed limits on how much can be charged for goods and services. The script describes how the Venezuelan government implemented price controls to combat high inflation, but this led to shortages and a thriving black market due to prices being set below market rates.

💡Exchange Rate

The exchange rate is the value of one country's currency in terms of another. The video explains that Venezuela has a complex system with multiple exchange rates, which can be manipulated by the government to favor certain groups or individuals, leading to economic distortions and inequality.

💡Hyperinflation

Hyperinflation is a term used to describe a situation where a country's inflation rate is extremely high, often exceeding three digits. The video script mentions Venezuela's inflation rate reaching 130,000 percent, which severely erodes the purchasing power of the currency and leads to an economic collapse.

💡Smuggling

Smuggling is the illegal transportation of goods or people across borders. The script refers to the smuggling of Venezuela's subsidized gas, which is sold internationally at higher prices, as an example of how price controls and economic mismanagement can lead to illegal activities.

Highlights

In Venezuela, cars maintain their value, potentially being sold for the original price even after years of use.

Gas prices in Venezuela are incredibly low, costing less than one U.S. dollar to fill a tank.

Venezuelan banks provide loans for cosmetic surgery, indicating unusual financial priorities.

Taxi drivers in Venezuela earn more than doctors, reflecting a skewed income distribution.

Supermarkets in Venezuela use fingerprint scanners due to economic instability and shortages.

Some Venezuelans find it more cost-effective to live in luxury hotels year-round than to rent apartments.

Venezuela, despite having the largest oil reserves, faced a severe economic crisis with shortages of basic goods.

A third of Venezuela's economy disappeared in a single year, a scale of loss comparable to Ukraine in 2022.

7 million people, a quarter of Venezuela's population, have fled the country due to the crisis.

Venezuela's oil is exceptionally easy to extract, contrasting with more challenging conditions in other countries.

Venezuela's economy is heavily dependent on oil, with 96% of exports related to petroleum in 2013.

High oil prices lead to currency appreciation in Venezuela, making exports more expensive and imports cheaper.

Venezuela's reliance on imports is so high that even its currency, the Bolivar, is imported.

The economic boom in Venezuela during China's rise in the early 2000s led to an influx of wealth and even importing doctors.

Venezuela's economic mismanagement has led to a cycle of boom and bust, impacting domestic production negatively.

The Venezuelan government's response to economic issues was to print more money, leading to hyperinflation.

Inflation in Venezuela reached 130,000% in 2019, severely devaluing the currency and impacting professionals' salaries.

Price controls imposed by the Venezuelan government led to empty shelves and a reliance on the black market.

Venezuela has a complex system of exchange rates that vary based on who you are and what you need.

The Venezuelan government blames individuals for the economic crisis rather than acknowledging systemic issues.

Brilliant.org is highlighted as a resource for self-improvement and diversifying skill sets amidst economic challenges.

Transcripts

In Venezuela, cars don’t depreciate.

You could buy one today, drive it for five or six years, and then sell it for the same

price you paid.

And you can forget about gas.

At just over six cents a gallon, you can fill up your tank for less than one U.S. Dollar.

In Venezuela, banks offer loans for plastic surgery.

Taxi drivers earn higher salaries than doctors.

Supermarkets are equipped with fingerprint scanners.

And some find it cheaper to live year-round in luxury hotels than rent an apartment.

Sponsored by Brilliant.

Learn math, science, and computer science the intuitive way with the link in the description.

In 2015, the country with the largest proven oil reserves on earth — enough to meet all

of America’s demand for forty years — ran out of toilet paper.

Hotels even asked guests to bring their own.

Facing shortages of rice, sugar, milk, and shampoo, on top of rolling blackouts, 30 million

people struggled to survive without the most basic of basic goods.

Venezuela, once the richest country in Latin America, was experiencing the worst peacetime

economic crisis in modern history.

A third of its entire economy disappeared in one year alone — the same number as Ukraine

in 2022.

Since then, 7 million people — a quarter of the entire population — have fled the

country.

This is the equivalent of the Great Depression, the hyperinflation of Zimbabwe, and the Syrian

migrant crisis — all at the same time.

And it’s happening in a country with 300 billion barrels of oil.

That’s 11 times more than China and nearly four times that of Russia, a place once referred

to as “more a gas station than a country”.

Even this understates its good fortune.

Venezuelan crude is practically begging to be extracted.

It’s not far off-shore like Norway’s.

It’s not way up in the arctic, like Russia’s.

And it’s not deep underground, like American shale.

Instead, it just naturally bubbles to the surface.

And, as the Gulf States prove, one does not need smart technocratic governance, liberal

democracy, or even remotely favorable geography.

Oil and oil alone can turn the barren Arabian Desert into the Swiss Alps.

So, how did Venezuela go so terribly wrong?

In 2013, a staggering 96% of Venezuelan exports were related to petroleum.

It’s not hard to see how oil prices could make or break its economy.

Lower prices, lower revenue.

It’s very simple.

Less intuitive is the effect this has on its currency.

You see, it’s not just about how much money it generates.

It’s also about what kind.

When oil prices are high, there’s more demand for Venezuela’s currency — the Bolivar

— so it appreciates.

And the more one Bolivar is worth, the fewer you can get for the same Dollar or Euro or

Yen, making its exports more expensive for the rest of the world.

Say, for instance, 10 Bolivars were worth one U.S. Dollar.

At this rate, someone in Florida could buy a pound of 20 Bolivar Venezuelan coffee for

two USD.

Not bad.

But then, oil prices cause the Bolivar to appreciate.

That same pound of coffee now costs four U.S. Dollars.

Through no fault of their own, coffee farmers are now half as globally competitive.

Now, this isn’t necessarily as bad as it sounds.

When exports are effectively twice as expensive, imports are effectively 50% off.

Those 10 original Bolivars are worth two dollars, not just one.

It’s no wonder virtually everything in Venezuela is imported.

From appliances and cars to simple things like food and apparel.

Even Bolivars themselves arrive on 747s.

All of this is to say: in Venezuela, the highs are high.

Strong oil prices not only bring in loads of cash, but they also make foreign goods

that much cheaper.

In 1970, Venezuela had a higher per capita GDP than either Spain or Greece.

Nearly 60% of the population was middle-class.

And the Concorde flew direct flights to Paris.

Another explosion of wealth came during China’s rise in the early 2000s.

As demand for oil soared, the country even began importing doctors.

But with such high highs come extraordinarily low lows.

Because no smart politician withholds riches from voters, nothing is ever set aside for

a rainy day.

And in the oil business, there are always rainy days.

Remember: When oil prices fall, the state both loses revenue, and the imports they’ve

come to depend on become more expensive.

That’s a brutal combination.

Those coffee farmers from earlier go bankrupt when oil prices are high, leaving Venezuela

without domestic producers of… frankly, anything, when they aren’t.

This cycle of boom and bust has been going on since the first well was drilled over a

hundred years ago.

But this latest crisis is especially prolonged thanks to a potent mix of weak oil prices

and U.S. sanctions, imposed after its president manipulated elections.

Things got so bad that the country once ran out of money to pay its supplier of that money.

So what was the government’s solution?

Print.

More.

Money!

Since 2007, the central bank of Venezuela is no longer independent, giving politicians

direct control of the money supply.

This, to everyone’s surprise, led to something called “inflation”.

At first, the government simply pretended it wasn’t happening, refusing to release

the data.

By the time it finally gave up the charade in 2019, inflation was at 130… thousand

percent — about 129,997% higher than its neighbor, Colombia.

While taxi drivers can easily raise their rates to adjust for inflation, the salaries

of professionals were reduced to nothing.

No wonder such a high proportion of migrants were doctors, lawyers, and professors.

In Venezuela, they were effectively working for free.

And when your savings today will surely become worthless tomorrow, there’s no reason not

to spend your paycheck immediately.

When they ran out of cash, people simply took out loans to buy everything from TVs to plastic

surgery.

So, the government took another page out of the “just-print-more-money” school of

economic thought — price controls.

After all, if prices are too high, why not just impose a ceiling?

In a sense, it works: state-run supermarkets are cheap.

Ridiculously cheap.

The question is: is there anything inside?

Because prices are set well below market rates, shoppers are incentivized to buy as much as

they can get their hands on.

Anything you don’t need can easily be resold for twice as much across the street or twenty

times as much across the border.

It’s estimated that up to 14% of Venezuela’s highly-subsidized gas is smuggled internationally.

In 2015, lines outside grocery stores got so long that everyone was assigned one day

of the week for shopping, based on the last digit of their national ID.

To prevent the same person from using their quota at multiple stores, fingerprint scanners

were installed at checkouts.

Soldiers even patrolled the aisles.

Here, once again, the government had a solution.

In Venezuela, there is no one exchange rate.

The value of your money depends on who you are.

What could possibly go wrong?

To encourage companies to import essential goods in short supply, for example, it offers

a special, favorable exchange rate.

The way it works is that a foreign company, say a Brazilian rice producer, wants to be

paid in the global currency of trade — dollars.

For a Venezuelan company to buy and import that rice, therefore, it has to somehow get

its hands on some USD.

That’s a problem because, until recently, the government carefully restricted access

to foreign currency.

Unlike most countries, you couldn’t just walk down to your neighborhood currency exchange

and trade some cash.

Huge multinational corporations like Pepsi had to apply for the chance to exchange their

Bolivars for U.S. Dollars.

Even when these applications were accepted — and they often weren’t — the money

might take months to arrive, making it hard for companies to import supplies.

So few new cars entered the country, for example, that used ones became highly prized commodities.

But, it gets worse.

The exchange rate offered by the government wasn’t the “real” value of the Bolivar.

Meaning, the government might give you one USD for 5 Bolivars, but nobody else would

give you a Dollar for anything less than, say, 50.

The official exchange rate was essentially a government handout — free money for those

smart or well-connected enough to get it.

By approving these requests for Dollars, politicians could reward their friends and family.

By rejecting them, they could punish or silence critics.

It also opened the door to a different, more sophisticated, form of arbitrage.

You might ask the government for permission to exchange 5 million Bolivars for one million

U.S. dollars to help ease the shortage of car parts.

But instead of using that money to import a million dollars worth of tires, you might

only import 500,000.

You could then sell the other half million dollars on the black market for far more than

the 2.5 million Bolivars you paid.

And just like that, you’ve created money out of thin air.

According to the government, you’re the reason the system is broken.

“If only people bought from stores what they needed and nothing more.

If only people stopped exchanging foreign currency.

If only they saved and invested rather than spending everything they have.”

At the root of Venezuela’s problems, the government claims, are individual opportunists.

A similar argument is that the country is plagued by a culture of selfish consumption

over prudent, long-term investment.

Voters favor politicians who promise handouts over those with the foresight to save for

the future.

After decades of gross mismanagement, Venezuelans have lost faith in the collective power of

the state.

But if growing the pie is an unrealistic pipe dream, the only rational response is to fight

for your and your family’s slice.

As the world enters a period of financial tightening and possibly even recession, today’s

sponsor, Brilliant dot org, can help us learn from Venezuela by investing in our education

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