Exclusive: Venezuela, sick with hyperinflation, engages the ‘money doctor’ Steve Hanke for a dose of dollarization medicine

Over four decades, Steve Hanke has pursued a worldwide quest to tame the hyperinflation that so frequently ravages developing nations. His solution: tying their currencies to the U.S. dollar so their governments are no longer free to unleash an avalanche of pesos or sucre to fund their giant overspending, at the expense of their citizens, who pay for the blowout in rocketing bills for rent, medicine and groceries that way outpace their incomes. 

The success that the professor of applied economics at Johns Hopkins University has had in advising governments across three continents — whether achieving straight “dollarization” or establishing Hong Kong-like currency boards that fix their monies to the greenback — has won him the title, you might even say the “brand,” of globetrotting “Money Doctor.” 

Now, the doctor’s making the most important house call of his career. Venezuela’s National Assembly has just named him Special Adviser on Economic, Monetary, and Energy Affairs, tasking him with curing hyperinflation now running at a 400% annual clip — the worst in the world — as the country tries to rebuild after the ouster of Nicolas Maduro. Hanke’s fix: a full dollarization law that would abolish the bolivar and the central bank outright. He told Fortune he puts the odds of passage at 50% to 80% — the best shot that sound money has had in Venezuela since the country rejected the money doctor’s last surgery attempt, three decades ago.

What does a money doctor have to do with oil? The problems are deeply interconnected. The nation of 29 million boasts arguably the greatest “underground” wealth in Latin America via holding the world’s largest crude oil reserves and immense wealth in minerals from copper to lithium, and still harbors a highly-sophisticated professional class. Meanwhile, an exiled intelligentsia numbering in the millions stands ready to return and rebuild their stricken homeland. 

They won’t return until the oil-driven economy revives and Venezuela is producing just 1.1 million barrels per day, around 1.3% of the world total and one-third the pre-Chavez mark of 3.4 million in 1998. Shockingly, it’s only a little over 7% more than before Maduro’s exit, not what the administration hoped after the U.S. Special Forces raid on January 3rd that removed Maduro, the dictator who savaged the economy. 

“Taming inflation is the key to restoring stability in Venezuela, and all the other progress flows from that,” Hanke told Fortune. “Stability isn’t everything, but without stability, which means stable prices, you have nothing. And there’s no better case study showing that’s true than Venezuela.” 

Ramping oil output is the ticket to restructuring Venezuela’s mountainous $250 billion debt load, equal to roughly 150% of GDP, the highest number in Latin America and fourth in the world. It was sending crude to China as part of a repayment program for as much as $15 billion in loans from Beijing.

The U.S. and other foreign enterprises that could make it happen remain on the sidelines, fearing the kind of expropriations inflicted under Maduro and his predecessor, Hugo Chavez. The government led by President Delcy Rodriguez has so far failed to pass new laws that sufficiently safeguard private property rights, progress essential to attracting heavy overseas investment. 

Today, U.S. oil majors are purchasing Venezuelan oil, shipped mostly to China only a year ago, for their Gulf Coast refineries specializing in its staple heavy crude. But none has committed capital to reviving the country’s devastated petroleum infrastructure, even though the Trump Administration is basically now decision-maker for the state-owned oil enterprise, PDVSA. Exxon Mobil CEO Darren Woods expressed his concern that Venezuela won’t “uphold the sanctity of contracts” and slammed its past record of “steal[ing] investments,” concluding that the sleeping oil colossus is currently “uninvestible.” 

In short, Venezuela is facing the biggest lender-borrower workout ever. Crude is the country’s life blood, accounting for as much as 98% of the country’s exports. In any new agreement, petroleum production would provide virtually the entire flow of dollars required for paying principal and interest to its creditors. The faster that Venezuela generates petrodollars, the better the deal it will get from the lender group comprising the governments of Russia and China, distressed debt hedge funds, ConocoPhillips and Exxon Mobil, and the quicker an accord gets signed. 

By Hanke’s calculation, prices measured in Venezuela’s coin of the realm, the bolivar, are now rising at a 400% annual clip. That’s down from 700% before Maduro’s capture, but it’s still 6x the figure in Iran and tops in the world by far. It’s an 8% weekly increase in prices for eggs, beef and rent paid by consumers, along with electric bills, salaries and taxes by companies, and in turn it’s crushing purchasing power and profits. 

As Hanke points out, the stalled oil industry and raging inflation have a seesaw, cause-and-effect relationship. “When oil revenues dried up because the government let the infrastructure fall apart, it paid its bills, including paying government employees and pensioners, by printing money,” he observes. And even post-Maduro, that’s still the practice. It’s the punishing option Hanke wants to totally eliminate. 

Hanke has drafted a full “dollarization” law that would shelve the bolivar and replace it with the world’s reserve........

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