Hyperinflation – Venezuelan edition

All posts discussing the tragic and avoidable collapse of the Venezuelan economy into hyperinflation are combined here in this page.

The overarching question behind all these posts: What economic system produced these humanity-crushing results?

 

Instead of reading about hyperinflation and economic collapse in history, you can watch it play out live. Tune in to Venezuela.

ten trillion Zimbabwe dollars. Not the largest currency in circulation, but close.

Ten trillion Zimbabwe dollars. Not the largest currency in circulation, but close. Tragedy of hyperinflation is playing out again, this time in Venezuela.

The hyperinflation in Zimbabwe resulted in a ten trillion Zim note being worth four cents in American dollars. That would be:

  • Zim$10,000,000,000,000  =  US$.04

When that level of financial devastation happens, it is the result of government policy. Usually socialists pull it off, but German also did so before WWII.

Previous posts:

Venezuela

If you are so interested, you can now watch the sad story as it plays out in Venezuela.

2/3 – Wall Street Journal – Inflation-Wrought Venezuela Orders Bank Notes by the Planeload – Usually governments deal with out-of-control inflation by adding two or three zeros to the currency. Instead of the largest bill in circulation being a 100 unit note, the next run of currency is for a 10,000 unit note. In six months or a year there will be a 500,000 or 1,000,000 note in circulation.

Article says the Venezuelan government isn’t doing that because to do so would acknowledge the astronomical inflation. As the saying goes, denial isn’t just a river in Egypt.

Instead of acknowledging that inflation is running out of control, the government of Venezuela is flooding the economy with the same denomination note. In the last several months of 2014, the article says there were three dozen flights of 747s into the country hauling nothing but currency. Over 30 cargo holds filled with currency.

Hyperinflation is a result of government policies. It is not the cause of economic turmoil. Let’s see what symptoms are showing.

Keep in mind the population of the country is about 30 million. In the last half of 2015, the government released over 5 billion notes into the economy. That would be 167 pieces of currency per person.

Article says there are reports the central bank is negotiating to have another 10 billion bills printed. That would be an additional 333 bills per person. In under a year that would be around 500 bills per person introduced to the country. That would be comparable to releasing $30 trillion of $100 bills into circulation in the U.S. Even the US Fed would have to struggle to pull off that stunt.

Article says the International Monetary Fund is estimating inflation will hit 720% in 2016.

The exchange rate has broken through the 1000 bolivar to one US dollar level on the black market. The official exchange rate is 6.3 bolivars to a dollar.

Article provides the following indicators of inflation. Here are the prices in bolivars for a month’s supply of various foods:

  • 12/14 – 12/15   –   %    – item
  • 2,632 – 14,138 – 437% – meats
  • 3,066 – 12,118 – 295% – fruits and vegetables

In a hyperinflation world you pay for things with “bricks” of currency. If you’ve ever worked in a bank you know you wrap 100 of a currency into a bundle and then put a rubber band around five of those for a “brick” of 500 bills.

In Venezuela now, if you want to have dinner at a nice restaurant, you need to take a brick of currency to pay for the meal.

2/3 – Powerline – For Venezuela, the End is Near – Post points to an article atFinancial Times, which is behind a pay wall.

A few tidbits:

  • GDP declined by 4% in 2014 and another 10% in 2015.
  • Inflation was 200% in 2015.
  • On the freely exchanged black market, the bolivar value has dropped 92% compared to the dollar over the last two years.

As you should fully expect, there are shortages and long lines to buy basic staples. Photo accompanying the article looks like the bad old days of the Soviet Union, except people are not wearing parkas as they stand in long lines.

Article points out the government has no strategy to deal with the looming catastrophe.

Laugh and cry

As you laugh at the foolishness of always-failing socialist economic policies, cry for the suffering and misery those policies create for the overwhelmingly vast majority of people in the country.

posted 2/5/16

 

Suffering increases in Venezuela, all as a result of official government policies

Shipwreck standing on the beach with the sea in the background. Margarita Island. Venezuela. Photo courtesy of DollarPhotoClub.com

Shipwreck standing on the beach with the sea in the background. Margarita Island. Venezuela. Photo courtesy of DollarPhotoClub.com

The level of suffering in Venezuela is increasing. All of the blame for the current and future suffering can be laid at the feet of the socialist government.

Previously mentioned Venezuela is in the early stages of hyperinflation:  Instead of reading about hyperinflation and economic collapse in history, you can watch it play out live. Tune in to Venezuela.

(Cross-post from my other blog, Outrun Change.)

Some more discussion on the increased suffering:

2/6 – The Economist – The endgame in Venezuela – A few stats from the article:

Government acknowledges that for the 12 months ending 9/2015, inflation was 141% and the economy shrank 7.1%.

In addition to estimating the inflation rate will be 720% in 2015, the IMF estimates the economy will shrink 8% this year after shrinking 10% in 2015.

Check out the article for details on how the supreme court there has been packed.

2/12 – Wall Street Journal – Venezuela’s Collapse Brings “Savage Suffering” What does life in Venezuela look like today?  Infants dying in hospitals because of the lack of medicine and function respirators. Empty shelves in the stores. Long lines to buy what little is available. Actual exchange rate is 1026 bolivars to the dollar. A murder rate of 90 per 100,000 residents in Venezuela in contrast to 4 per 100,000 in the US. Preventable deaths from illness are on the rise.

The cause, according to the government? Economic war that has been waged by private companies and the Obama administration. Capitalism is also to blame.

That the government has nationalized hundreds of companies, imposed price controls on most (if not all) consumer products, imposed currency restrictions, wasted decades of oil surplus, and only has $3 million of reserves in the oil fund has nothing to do with the economic devastation.

While oil prices were running so high, up $100 a barrel, the federal budget put $40 per barrel on the books with the remainder put into an off-budget fund. Rainy day reserve is essentially empty now.

Article suggests entire spread between $100 and $40 has disappeared. Let’s do some exquisitely simple math for one year when oil was around $100. Let’s assume $90 for the year. That is a spread of $50 per barrel unaccounted for, times 90,000 bopd as I recall, or $4.5M per day, times 365 equals $1.64B for one year. Venezuela ought to have a sovereign reserve fund that is a huge multiple of North Dakota’s.

Just as a wild guess, I think the Swiss banks might have an idea where the money is.

The president’s official response to complaints that people can’t get enough to eat? They should start farming in the backyard. Seriously. Get a couple of chickens and raise your own food.

If you sense I am rather upset, you are correct. All the widespread suffering across an entire country is due to intentional government policies. This is the government’s chosen path.

Can someone far smarter than me please explain how socialism can ever be considered as having the merest shred of morality in it?

In what alternate universe is this level of suffering considered moral?

posted 2/13/16

 

Continued deterioration in the Venezuelan economy

Image courtesy of DollarPhotoClub.com

Image courtesy of DollarPhotoClub.com

The citizens of Venezuela continue to suffer at the hands of their elected officials.

Question for you to ponder: Is there a particular economic system that is causing all the suffering?

2/29 – AP at Fox News – Inflation-hit Venezuela to print bigger bills – Central Bank president says Venezuela will start printing 500 and 1,000 bolivar notes sometime. No date mentioned.

Largest bill in circulation is currently the 100 note. At exchange rates in effect a month ago or so, that would be worth about US$0.10. Largest bill in circulation is equal to about one American dime.

How can an economy function in such circumstances? Not very well.

3/4 – According to dolartoday.com, the exchange rate is 1,105 bolivars to the dollar. That means 100 bolivars is 9.05 cents.

3/18 – Exchange rate is 1,211, or 100 bolivars is 8.25 cents.

3/18 – Foundation for Economic Education – What Did Venezuela Use Before Candles? Electricity.

Article starts with an old joke, but it’s the first time I have heard it:

Q: What did socialists use before candles?

A: Electricity.

In Venezuela there is a two-day holiday after Easter. To conserve water that drives a major hydroelectric plant, the government will give everyone in the country three extra days of vacation after Easter.

The plan, or hope, or dream, or fantasy is shutting down all economic activity in the country for a week will build up enough water behind the dam to generate electricity so the rolling blackouts, which can last for a couple of days at a time, will come to an end.

There are already massive shortages of electricity, food, medicine, and even toilet paper. Don’t count on shutting down the country for a week to solve electricity or any other troubles.

4/3 – Wall Street Journal – Water Shortage Cripples Venezuela – In additions to shortages of food and medicine, Venezuela is now facing shortages of drinking water. One pundit observes the lack of rain, caused by El-Nino effect, is affecting Venezuela but not its neighbors.

4/7 – Wall Street Journal – Venezuelans Get Fridays Off in Government’s Latest Bid to Save Energy – All workers in the country will be staying at home on Fridays for April and May. This is an effort to conserve energy.

Just as a wild guess, I’ll stake a claim that shutting down the economy 20% of the work days will have an adverse impact on the economic performance for the country and increase the inflation rate.

Immediate symptom visible in the article is the already existing electricity blackouts are becoming more common.

Underlying issue is the water level in the main reservoir driving the main hydroelectric plant in the country is at a record low.

Underlying cause, visible if you want to see it, is nationalization of the electricity industry in 2007. Many promised infrastructure projects have never been completed. Imagine that.

posted 4/12/16

 

Ongoing deterioration in the Venezuelan economy

The soon-to-be condition of working light bulb in Venezuela. Photo by James Ulvog.

The soon-to-be condition of working light bulbs in Venezuela. Photo by James Ulvog.

One old joke and two new ones:

  • What did socialists use before candles? Electricity.
  • Before tree leaves? Toilet paper.
  • Before the telegraph? Telephone and email.

Was planning to hold on to this post for a while, but the bad news is piling up too fast. Need to print this while it is still of readable length.

Bonus question for the day: What economic system is in place in Venezuela that is producing these results?

4/15 – Yahoo News – In Venezuela, no toilet paper and now lousy phone service The government distributes dollars as it wishes. It has not provided enough dollars to telephone companies and cable companies for them in turn to pay their providers. As a result several international telecoms have cut off long-distance services to the country. In addition vendors providing cable channels are cutting their services because they haven’t been paid.

As a result, telephone service is deteriorating and the number of channels available on cable TV is dropping.

4/12 – Wall Street Journal – Schlumberger Curtails Operations in Venezuela Amid Cash Crunch – The oil field services company isn’t getting paid so they are cutting back operations. That will not help crude oil production which will further slow the economy.

Article says that 10% of Schlumberger’s total worldwide receivables are from Venezuela. One would tend to cut back operations when one is giving services away.

4/20 – AFP at Yahoo News – Venezuela to ration electricity in power crisis – Now electricity will be rationed in the country’s 10 largest cities and industrial states.

The country gets most of its electricity from hydroelectric generation and most of that is from one dam at one reservoir.

The country also has one of the world’s largest proven reserves of crude oil, yet does not use crude oil to generate electricity.

Why? The government does not want to do so, claiming it would be inefficient.

Let me translate that: the socialist government has chosen who the winners and losers are in the economy. They choose hydro over crude because they feel like it. Maintaining an adequate supply of electricity to power the economy is not a factor in decision-making.

Expected result? The people suffer.

4/22 – BBC – Venezuela cuts power for four hours a day to save energy – For the next 40 days, power will be cut off four hours a day.

The country’s largest brewery will halt production because it doesn’t have dollars to buy grain, leaving 10,000 workers without a job.

Thus, you may soon not enjoy drinking a beer after dinner while the lights are not on.

4/26 – Yahoo News – Fridges go off as Venezuela power-rationing hits – Photo for the article shows a woman cooking at a bakery by candlelight.

As the power goes off, stored meat in restaurants starts to spoil. Electronic payment machines stop working, so customers can’t pay for purchases.

When power returns, there is a surge in electricity that can damage or destroy electronics. One restaurant owner has already lost a refrigerator and meat mincer.

4/27 – Bloomberg – Venezuela Doesn’t have Enough Money to Pay for Its Money – The government is in such distress that it is unable to pay the foreign companies that are printing cargo-airplane-volumes of new currency. As a result, the printers are backing away from printing. The Venezuelan economy may run out of currency because the government has no money to pay for more currency to put into circulation.

In 2015, the Venezuelan central bank ordered 10 billion new notes. In contrast, the U.S. Federal Reserve printed a mere 7.6 billion notes last year.

To illustrate the inflation, a 100 bolivar note is the largest bill in circulation. That is barely enough to pay for one loose cigarette. Typically at this point in the hyperinflation cycle, a government starts adding zeros to the notes. For example, there should be 10,000 and 100,000 bolivar notes in circulation today with plans for the 10,000,000 and 100,000,000. The Venezuelan government refuses to do so because they think larger notes would cause inflation.

To give you a visual of the impact, article says that paying for dinner out requires gym bags full of currency. Gym bags. Plural.

Consider the disruption. At the end of the evening, a small restaurant has a volume of currency equal to 100 or 200 gym bags. How do you close out at the end of the day? How do you dispose of that much currency?

Article says that people are already moving around town with wheelbarrows full of currency which they will need to pay for things.

Zerohedge has a recap on 4/27 – This Is the End: Venezuela Runs Out of Money to Print New Money – Very good summary of the last year or two.

Article suggests the sad next step:  if the government refuses to add zeros to the currency and can’t pay for a flood of 100 bolivar notes, there simply won’t been enough currency in circulation for the bolivar to be usable for exchange.

I will guess there aren’t enough U.S. dollar notes in circulation for the US$ to be used as medium of exchange, the economy may collapse to barter-only. That is the author’s guess on the end point.

Article closes with an unattributed photo of a man pushing a wheelbarrow filled with currency. I am guessing the photo is from either Zaire or Zimbabwe. That is the tragic situation expected in the near future for the innocent citizens of Venezuela.

posted 4/30/16

 

Copyright (c) 2016, James L. Ulvog

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