Venezuela What Does It Mean For Global Markets | Steve Hanke and Jimmy Connor

Venezuela, US Foreign Policy, and Global Economic Concerns

Key Concepts:

• Regime Change: The act of overthrowing a government and replacing it with another.
• Monroe Doctrine/Roosevelt Corollary: US foreign policy principles concerning intervention in Latin America. The Roosevelt Corollary expanded the Monroe Doctrine to justify US intervention as a police power.
• Chavismo: The political ideology associated with Hugo Chávez, characterized by socialist policies and anti-imperialism.
• Enemy (in legal context): A state of lawlessness, where laws are disregarded even if they exist.
• Money Illusion: The tendency to focus on nominal (face value) prices rather than real (inflation-adjusted) prices.
• Hegemonic Operations: Attempts by a dominant power to establish control and create vassal states.
• Hyperinflation: Extremely rapid and out-of-control inflation, typically exceeding 50% per month.
• Quantitative Tightening/Easing: Central bank policies related to shrinking or expanding the money supply.

I. The Venezuelan Operation & US Intervention

The discussion centers on the recent US-led operation in Venezuela resulting in the arrest of President Maduro and his wife. Steve Hanky, an expert with extensive experience in Venezuela and Latin America, characterizes the operation as a meticulously planned and flawlessly executed “inside job,” suggesting widespread bribery within the Venezuelan security apparatus. He dismisses the notion that the US can effectively “run” Venezuela, citing the complexities of governing the country and drawing parallels to failed interventions in Afghanistan, Iraq, and Libya. He emphasizes that military operations, while seemingly straightforward, are only the first step, and far more challenging aspects lie ahead.

II. Historical Context of US Intervention in Latin America

Hanky provides a historical overview of US intervention in Latin America, beginning with the Monroe Doctrine of 1823 (originally intended to keep European powers out) and its subsequent expansion under the Roosevelt Corollary in 1904. The Corollary essentially asserted US dominance over Latin America. He cites numerous instances of US “gunboat diplomacy” (approximately 600 between 1904-1930) and direct invasions of countries like Cuba, Mexico, Guatemala, Honduras, Haiti, and the annexation of Puerto Rico, as well as the creation of Panama. He argues that, from a US legal perspective, these actions have historical precedent and are considered constitutional, despite being widely viewed as illegal under international law. He defines this disregard for international law as “enemy” – a state of lawlessness.

III. Types of Regime Change Operations

Hanky categorizes regime change operations into three types:

1. Offensive Operations: Attempts to overthrow military regimes or break up alliances (typically covert).
2. Preventative Operations: Efforts to prevent the establishment of military regimes or alliances.
3. Hegemonic Operations: Actions aimed at establishing dominance and creating vassal states. He positions the Venezuela operation within this third category, referencing the long history of US influence in the region.

IV. The Current Situation in Venezuela & Economic Crisis

The discussion highlights the current political landscape in Venezuela, with the Vice President assuming the presidency. Hanky notes that the new leadership is more ideologically driven, adhering to “Chavismo.” He details the severe economic crisis in Venezuela, citing an annual inflation rate of 923% (as of the interview date) and episodes of hyperinflation (234% monthly in April 2018 and 151% in April 2020). He reports a 63% decline in GDP per capita since the 2008 financial crisis. He attributes the prolonged rule of Maduro, in part, to the “rally around the flag” effect created by US sanctions. He points to Cuba as an example of a regime sustained by US sanctions.

V. The Role of China & Resource Depletion

Hanky notes that 85% of Venezuela’s oil exports go to China, with a significant Chinese presence in the country (estimated between 100,000-200,000 nationals). He suggests China’s primary interest lies in being repaid for loans made to Venezuela. He also discusses the economic implications of Venezuela’s vast oil reserves, noting that the current low depletion rate (0.1% annually) renders them essentially valueless given standard discount rates. He contrasts this with the depletion rate of major oil companies like Exxon (8%), highlighting the need for privatization and increased investment to unlock Venezuela’s oil wealth.

VI. Geopolitical Implications & Concerns

The conversation touches on the potential implications of the Venezuela operation for other countries, specifically raising the question of whether it could embolden China to take action against Taiwan. Hanky acknowledges the precedent set but emphasizes the different context, noting Taiwan’s historical connection to China. He also expresses concern about the potential for further US interventions in Latin America, referencing past actions in Panama (1989) and Grenada (1983).

VII. Domestic US Economic Concerns & Inflation

Hanky expresses greater concern about the US domestic economic situation, particularly regarding inflation. He predicts that monetary policy will likely loosen due to pressure from the Trump administration and a weakening labor market. He details upcoming changes in bank capital regulations that will further expand the money supply. He warns of “money illusion,” where people focus on nominal prices rather than real prices, and believes affordability will become a major political issue, potentially damaging Trump’s economic ratings. He estimates inflation could rise significantly in the coming year. He notes the official inflation rate of 2.7% is likely skewed due to a 43-day government shutdown that disrupted data collection.

Notable Quotes:

• “Lots of luck, baby. You know, they got enough trouble governing the United States, let alone Venezuela.” – Steve Hanky on the US attempting to run Venezuela.
• “Sanctions kill more people than wars kill combatants.” – Steve Hanky, referencing a study published in The Lancet.
• “The idea that they’re a rich nation, no, the way they’re exploiting things, they’re a poor nation.” – Steve Hanky on Venezuela’s oil reserves.
• “Trump says he’s going to run Venezuela. Well, that’s that’s a little bit delusional.” – Steve Hanky on the feasibility of US control over Venezuela.

Data & Statistics:

• Venezuela inflation rate: 923% (year-over-year, as of interview date).
• Venezuela hyperinflation: 234% (monthly, April 2018); 151% (monthly, April 2020).
• Venezuela GDP per capita decline since 2008: 63%.
• Venezuela oil exports to China: 85%.
• Venezuela oil depletion rate: 0.1% annually.
• Exxon oil depletion rate: 8% annually.
• Venezuela GDP: $82 billion.
• Maine GDP: $90 billion.

Conclusion:

The discussion paints a complex picture of the Venezuelan situation, highlighting the historical context of US intervention in Latin America, the economic challenges facing Venezuela, and the potential geopolitical ramifications of the recent operation. Hanky’s primary concern, however, lies with the US domestic economic landscape, particularly the risk of rising inflation and its potential political consequences. He suggests that the US intervention in Venezuela, while seemingly decisive, is only the first step in a long and uncertain process, and that the US lacks a clear understanding of the complexities involved.