The Venezuela Lesson
If you’ve been following the news at all, you may have seen a multitude of articles about the crisis in Venezuela. It’s absolutely tragic over there with no food, 500% inflation, a declining government, and most recently, no electricity as government mandated blackouts sweep the country. An average day begins with walking down the dangerous, dark streets to spend the morning standing in line waiting for a bit of oil, tortillas, and a bit of canned food. After braving the lines, you make your way to the barren grocery stores, duffel bags full of worthless cash, in an attempt to find something that can supplement the government rations. After that, you head home. After all, the government has decreed that the work week shall be two days a week.
Venezuela has had this carnage looming over the horizon for some time now. Venezuela has been one of the largest suppliers of oil and still owns the world’s largest proven reserves (proven reserves are oil deposits that are able to be recovered economically with today’s technology). With the last decade of $100 a barrel oil, they should be incredibly wealthy. But they’re not. In fact, they don’t even have enough money to print more money.
Sadly, Venezuela will be an economists dream for the next few years. A crashed country looking to rebound for the foreseeable future is the perfect place to run models and attempt to prove theories about political economy. But why let the economists have all the fun. What can the average consumer learn as well?
The Calm Before the Storm
For all of Venezuela’s oil, they actually use an incredibly small amount of it. Over 60% of the country’s electricity through hydroelectric power. This was an economic move in order to sell as much oil as possible. The oil proceeds were supposed to be reinvested into non-renewable energy sources to ease the burden on the dams during droughts – the same droughts that have are sending dam water levels to critical lows – as well as supplying subsidies to the people of Venezuela. Therein lies the problem. In order to stay in power, the now deceased Hugo Chavez increased the subsidies to the people each year; a tool their current leader Nicolas Maduro is using. However, the energy sources never got developed and the money forever disappeared to corruption and mire. Venezuela faced a spending and cash flow problem that will top the history books.
Now that oil prices are sub $50 and the market is flooded with Saudi and American oil, Venezuela’s revenues have been crippled due to their reliance on the oil exports. Oil is their only export and because, outside of oil they are incredibly resource poor, they import nearly everything else they consume. Now the country has no money to pay for the imports, let alone the subsidies their citizens have benefitted from; and rather than cut the subsidies, Maduro has gone to rolling blackouts and asking women to not use hair dryers. That’s no joke either. The country is in such a problem the president has actually asked women to only use hair dryers for “special occasions” and to line dry all clothing. To top it all off, the blackouts are forcing the oil rigs to slow down production. The country is currently only producing at 25% capacity! Their economy is quickly turning into a death spiral.
Learning from Venezuela
As I mentioned, economists will be studying Venezuela for a very, very long time. Luckily for us though, there are some very concrete things that we can learn right away from this tragedy.
- Don’t Rely on a Single Income Stream – Creating multiple sources of income reduces future risk – had Venezuela invested in manufacturing or a service economy, they wouldn’t have been so dependent on oil. For you, investing in cyclical and non-cyclical dividend stocks, rental property, day jobs, and consultant or hustle jobs on the side are all great ways to diversify your monthly income so that in the event that you get unexpectedly laid off or suffer a bad accident your family won’t suffer.
- Keeping a Budget – As someone who makes practices what he preaches for multiple income streams, I bring in a portion of my yearly income through budget and cash flow consulting. Venezuela, even facing a budget shortfall a decade ago, continued to pay out large subsidies to their people, in spite of the fact that they couldn’t afford it. Making sure your income > expenditures is the simplest and most effective way to ensure your financial health.
- Don’t Count Credit as Income – Venezuela considered the money brought in through foreign debt as income rather than a temporary loan that needed to be paid back. That’s how people get into credit card problems. Credit is a powerful tool used to leverage big tickets and manage your cash flow to maximize your personal utility. However, many people found out in the Great Recession, when you lose on credit, you lose big. Don’t gamble your future away for temporary happiness.
- Invest in the Future – Hugo Chavez faced a large drought in the 90’s while he was president. At that point, he set aside money to upgrade the infrastructure to decrease reliance on hydroelectricity. Sadly, the full amount of the money didn’t make it into their coal and oil fired power plants and what was constructed hasn’t been maintained and are now useless. Direct deposit a portion of your money directly into an IRA every month. If you don’t see it, you won’t spend it. That way, when the time comes for you to retire, you will have a substantial nest egg that has accrued over your working career.
I encourage everyone to read more about Venezuela. I felt some very powerful emotions reading the articles and seeing the pictures of the destitute and frustrated. While America is a long way off from ever facing the magnitude of plight current hitting Venezuela, it’s not something that should be considered impossible here.
Readers, have you been following this news story? What other things could we learn from the economic climate facing Venezuela? Be sure to share in the comments below. And don’t forget to “like” and share my articles with your friends on Facebook. Show them you’re on track for financial prosperity!