Venezuela's tragedy: self-inflicted hyperinflation

Venezuela's tragedy: self-inflicted hyperinflation

by Joshua Curzon
article from Monday 12, November, 2018

HYPERINFLATION in Venezuela has reached astonishing levels, making life extraordinarily difficult for ordinary people and causing immense economic damage. Inflation is currently running at some 200,000 per cent and is projected by the IMF to reach 1 million percent by the end of the year.

The effects of hyperinflation at such levels are extreme, and radically different from the levels of 2 per cent or 3 per cent experienced in Europe in recent decades. Money becomes almost entirely worthless shortly after one receives it. There is no point in saving as the value of savings is wiped out, and thus little is invested. There is also no point in lending money as interest and capital repayments soon become valueless. Instead there is capital flight, as ordinary people are desperate to get their money out of a worthless currency. What people receive in pay does not keep up with the ever-increasing price of goods.

Using the salary of a full college professor as a benchmark, in the 1980s it took around 15 minutes of earnings to pay for one kilo of beef. In July 2017, this professor needed to work for 18 hours to pay for the same quantity. In mid-2018 he must work longer still, in the unlikely event beef can be found.

Prices are increasing at an ever faster rate. A large coffee with milk cost at least Bs.S.80 (Bs. 8,000,000) in Caracas on the 11th of September 2018, 78 per cent more than the price of week before, and double what it cost 15 days ago and 220 per cent more than five weeks ago.

It is evident that hyperinflation is caused by the government printing more and more money. Venezuela’s monetary base – the amount of money printed by the government – increased by an extraordinary 30 per cent in one week alone at the end of August. The move by the regime to remove 5 zeros from the currency and place greater emphasis on its Petro cryptocurrency (since revealed by a Reuters investigation to be largely imaginary) seems to have been a smokescreen for even greater money-printing.

In fact, it seems that physically printing money is beyond the means of the regime. As Venezuela’s banknotes are printed abroad, they have to be imported at significant cost to the government, which has led to severe shortages of physical cash. Since 2014, the number of active ATMS has plummeted to around 9,000, while card readers have multiplied.

The regime is printing money because it has little other means of staying afloat. It has largely destroyed the private sector through nationalisation and price control. Oil output is at its lowest level in more than 50 years and foreign reserves are at the same level as 1974 and plummeting downwards.

Regime supporters and cronies get privileged access to foreign currency at preferential rates. A small group of Venezuela’s elite, also known as the ‘boligarchs’, have made billions ouf of unrealistic exchange rates which are deliberately rigged to make astronomical profits in currency transactions. But ordinary citizens, 90 per cent of whom are suffering in extreme poverty, have no alternative to spending much of the day searching for food with a currency that by the hour is worth less and less.

Venezuela’s economic woes remain a cautionary tale about how foolish policies lead to economic ruin. Venezuela is a country with vast natural resources, but it has resorted to printing money to try and make ends meet. This is economic mismanagement of the highest order.

More information on the Venezuela Campaign can be found on its websiteThis article first appeared on the ASI blog.

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