No, the Petro Won’t Save Venezuela
Maduro’s “Formula for Recovery” Misunderstands Cryptocurrency
During the Great Recession, critics of newly-elected President Barack Obama claimed that the steps he took to rescue the United States from financial ruin opened the door to potentially “severe inflation”. The dollar had experienced, by the end of his first term, about 9 percent inflation over 4 years to validate critics’ fears.
So you know you’ve royally screwed up your country when your currency is worth 1/250,000th of the dollar (1/630,000th counting black market value) and was worth almost 60 times less than World of Warcraft gold in May 2018. Venezuela’s Bolivar fits this bill, but its president believes that he has found the solution.
Cryptocurrency: the Economic Panacaea?
Realizing that his nation’s currency is approaching a ludicrously high 1,000,000 percent yearly inflation, Venezuelan President Nicolas Maduro has come to a stunning realization: the notoriously volatile cryptocurrency market is now more stable than his own national currency. Backed by oil, the Petro, or “Petromoneda”, would be a state-run cryptoasset backed by Venezuela’s “abundant” oil reserves. This would be an attempt to establish a stable currency outside the scope of the US dollar. In Maduro’s own words, “They’ve dollarized our prices. I am petrolizing salaries and petrolizing prices.”
The move has drawn criticism, as the new Sovereign Bolivar’s tie to the Petromoneda would devalue the currency by about 96%. This would have the same effect as 2,500 percent inflation. In theory, if the cryptoasset remained stable, this would actually be a good decision that tries to put the brakes on Venezuela’s hyperinflation. A restructuring of the currency could work similarly to the Rentenmark’s replacement of the Papiermark to stop inflation in the 1923 Weimar Republic. For crypto fans worldwide, this is a historic moment.
But there’s a problem. Venezuela’s economic crisis is far more complex, and has far more dimensions than can be fixed with “let’s change the currency.” Maduro seems to think that adopting the “wave of the future” will magically fix Venezuela’s problems. This isn’t a Harry Potter movie. You can’t fix something this horribly broken by waving around a blockchain like a magic wand.
Diagnosis: Hyperinflation
Venezuela’s hyperinflation, like most hyperinflation cases, began with government mismanagement of its currency. True, a slump in oil prices also triggered the crisis, but the same slump also impacted Russia’s economy, which, as Putin will kindly verify, does not currently face 1,000,000 percent inflation of the ruble. The root of the problem is with the government itself; while oil triggered the start of the hyperinflation cycle, it has little to do with its continuation.
The Venezuelan inflation crisis works something like this:
- The economy suffers, causing tax revenue to fall.
- The government prints more money to make up for falling revenue.
- The newly printed money triggers inflation.
- Inflation causes the economy to suffer.
- The economy suffers, causing tax revenue to fall.
- The government prints even more money to make up for falling revenue.
- The newly printed money triggers more inflation.
- Inflation causes the economy to suffer even more.
- (Repeat until a roll of toilet paper costs 2.6 million of your worthless currency)
One way to end this cycle is to replace your currency with a hard currency. Zimbabwe did this in 2008. The idea is that a hard currency is immune to government manipulation and therefore trustworthy enough to use, bringing life back into the economy.
At first, it seems like Venezuela’s Petro meets this mark. Aren’t cryptoassets immune to inflation? Let’s use bitcoin as an example. While bitcoin is not backed by anything, its structure makes it immune to any significant inflation, and hyperinflation is virtually impossible. A movement of the economy into bitcoin would have served Maduro’s claimed goals very well indeed.
Solution: Not the Petro
The petro, on the other hand, is theoretically backed by one barrel of state-pumped oil per coin. That oil, as of February, has yet to be pumped. To fulfill his promise, Venezuelan oil producers will have to extract and store 100 million barrels of oil. As of June, monthly production was about 1.5 million barrels a day and falling steadily since 2011. That includes international companies as well. The crashing economy could potentially drive that figure down even further, and is already unable to meet the supply commitments it has made to buyers. In theory, Venezuelan oil could back the crypto, but it would be very hard to produce the necessary amount to do so. During a hyperinflationary period and economic crisis, the nation is already experiencing a production deficit and struggling to meet existing commitments.
So if the currency is tied to something that doesn’t exist yet, what realistically is backing the currency? What is keeping its value stable? The answer — until the oil flows freely — will be the full faith and credit of the Maduro government. In short, the Petromoneda will have an extremely hard time distinguishing itself as a hard currency capable of the same stability as the US dollar.
Do we see the problem here? How do we know that Maduro’s government will not, somehow, manage to manipulate the Petro in the same way it manipulated the original Bolivar? The government, after all, still needs to fund itself, and introducing the Petro won’t make lost tax revenues magically reappear.
Of course, time will tell if the Petromoneda could actually succeed, and it would be very, very hard for the cryptoasset to fail as horribly as the existing currency has. To fail on that level, the government would have to trigger another hyperinflation cycle and exceed its stated production limit of 100 million tokens, at which point faith in the currency would fall anyway, defeating its purpose in the first place. The introduction of the Petro might be a historic moment for crypto/blockchain supporters around the world, but that doesn’t make it effective. Perhaps the Petro’s homecoming story will serve as an example of the right and wrong way to bring cryptocurrency into the mainstream.
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