Hyperinflation Pushes Venezuela to Print 1M-Bolivar Bills
bloomberg.com
bloomberg.com
They've repeatedly reprimanded businesses for raising prices or increasing pay, and have already tried passing weird consumer laws to try to curb prices. These are 19th century understandings of inflation - it's pretty clear that either the powers in charge reject reality or frankly don't care enough about their citizens to even lie believably.
They are a late 20-century understanding of inflation, if we take as our pragmatic yardstick actions by the chief executive of the world’s most powerful state:
https://www.econlib.org/archives/2016/12/nixons_wage_and.htm...
Edit:
>lie believably
Thing is, the lies are believed, by many. From link above, Nixon’s Treasury Secretary:
>Connally [August 12, 1971]: ”To the average person in this country this wage and price freeze–to him means you mean business. You’re gonna stop this inflation. You’re gonna try to get control of this economy. ...
Oh, and a quick followup: I don't think most Venezuelans have been actually voting for this system since 2005 or so, and those that do have basically been blackmailed into it.
* https://clintballinger.wordpress.com/2021/01/12/the-myth-of-...
People are so distracted by the gradual erosion of wealth caused by the magic money printer that they fail to appreciate the risk of rapid devaluation triggered by political and social disintegration.
Check out what happened to the exchange value of the ruble after the collapse of the USSR, and that wasn't even caused by losing a war.
The last two decades, and especially the last year, should be telling us that our political, financial, technological and social systems and supply chains have become brittle.
I'd guess that the probability of a USSR-style collapse of one or more large western nations in the next five years is in the low double digits.
Edit: they are in default on many of those debts, and that’s why the sanctions happened, which caused further damage. And we already tried to coup them. And now confidence in the currency has been lost, causing the death spiral to accelerate. Sorry, had my timeline wrong
https://en.wikipedia.org/wiki/International_use_of_the_U.S._...
Look, I’m not defending Chavez (he was the one who took out the loans) and I’m not defending money printing as a way to pay debts, but that’s what happened. They got huge loans from the IMF, and then when the price of oil tanked unexpectedly they tried to print their way out of it. Then they defaulted on most of those debts, and the USA slapped sanctions on them and tried to coup their government. None of that helped.
> Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output... A steady rate of monetary growth at a moderate level can provide a framework under which a country can have little inflation and much growth. It will not produce perfect stability; it will not produce heaven on earth; but it can make an important contribution to a stable economic society.
Increasing the money supply by a great deal doesn't always lead to inflation, but nearly every case of extreme inflation coincided with a large increase in the money supply.
The government printed too much money, effectively making it worthless. It's like trying to get more pizza out of a pie by slicing it into more slices. This also increases transaction costs and destroys value. To give a silly example: imagine if you're running a store and the price of your goods changes every hour. You'd have to pay someone to constantly go around w/ a price change gun and update the prices in a continuous loop
So it's more like you are slicing a pizza into 8 slices but each slice is now the size of a postage stamp.
MMT response to hyperinflation will be: tax more, Gvt borrow more, and guaranty more jobs (as job security is supposed to protect against inflation in MMT). I don't know if it will work, but i think its time we tried this instead of printing more money.
Increasing money supply though is an effect of another cause:
* https://clintballinger.wordpress.com/2021/01/12/the-myth-of-...
Amongst others, the above article cites Roche:
> In this paper I will argue why the common misconception that “inflation is always and everywhere a monetary phenomenon” cannot be used to explain most historical hyperinflations. I will argue that “money printing” is often the response to exogenous and unusual events and not the direct cause of the hyperinflation.
* https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1799102
Further, Friedman, as a Monetarist, assumed the velocity of money is/was constant, which is definitely the case:
* https://fred.stlouisfed.org/series/M2V
Keynesians generally say that V is not constant, and the evidence supports their view.
Why is inflation supposed to be such a problem, if stock splits aren't? Cutting a pizza into more slices doesn't make it bigger, but doesn't make it noticeably smaller either. Changing prices isn't that hard now we have computers, and most people don't keep their savings in cash, either electronic or paper.
I'm not saying inflation is not a problem, but I think the standard explanation has a lot of holes. One has to come up with a more subtle analysis.
And also, how come you quote Friedman as saying that money supply growth causes inflation and then you say no it doesn't, although it's correlated? Do you think that inflation causes the money supply to grow? Or is it a third "X factor"?
ELI10: Venezuela's economy shrank, then they played funny business with their exchange rate to pretend business was usual. But now almost nothing is for sale in Bolivars, so if the government wants to pay people (something like 40% of their GDP was government spending), they have to pay people more to chase fewer goods. Which makes people raise prices. Which makes the government have to pay more.
https://en.wikipedia.org/wiki/International_sanctions_during...
But a big part of their problems are self-inflicted. When they nationalized several foreign-owned industries (beyond oil), that severely reduced confidence in doing business in the country. Most of the industries taken over were "western" (US, French, British), but they also took over steel mills owned by Argentinians, and homes owned by wealthy Venezuelans were turned into a government-run resort area.
Ford still has a vehicle assembly plant in Valencia [0], but production is spotty due to parts shortages. And I suspect that the currency exchange rates aren't helping matters.
[0] Disclaimer: My grandfather (a lifelong socialist and union man) helped open the plant in the early 1960s.
There is a strong Venezuelan presence in the Nano community.
Gold vs. cryptocurrency is somewhat controversial. Gold is stable and has a long history of value. Cryptocurrencies are volatile and speculative in comparison. Gold is secure, but a private key or seed is easier to cross borders with.
Both have their advantages. Be wary of absolutists.
Cryptocurrencies are still too volatile and untested. Maybe Bitcoin behaves like gold during a crisis, or maybe it's everyone's play money and when times get tough everyone will sell their Bitcoin first. We just don't have historical precedent for it.
Compared to 1000% monthly inflation?
I know by 2018 they straight up had an app where you could just order anything entirely in crypto.
My only recourse to keep money that won't devaluate in a matter of days if not hours is to either have it in cash (dangerous and need to know the "right people"), make use of foreign currency-denominated accounts in national banks which would be an extremely foolish endeavor for reasons that should be patently obvious, a tiny amount of frankly dodgy international banks that still do business with Venezuelans... or crypto. In spite of the wild price swings, crypto remains the most reliable alternative among everything I've mentioned.
(Just like if they'd buy Euros or USD, I should add. Not as if this is a good reason for Bitcoin to continue existing.)
Venezuela said it will introduce new large-denomination bolivar notes as hyperinflation renders most bills worthless, forcing citizens to turn to the U.S. dollar for everyday transactions.
The country’s central bank posted a statement on its website Friday saying it would begin circulating the new 200,000, 500,000 and 1,000,000 bills to “fulfill the current economy’s requirements” without providing further details. The 1,000,000 note -- the largest in the nation’s history -- is worth only $0.53 cents.
As Venezuela’s economy shrank for a seventh straight year in 2020, the government turned a blind eye to a growing number of dollar transactions, kick-started by rolling power outages that prevented credit and debit card purchases and fostered the use of cash. About 66% of transactions across the country are estimated to be made in foreign currency, according to Ecoanalitica.
While the dollar has gained ground, Venezuelans continue to rely on bolivar bills for public transportation and to purchase subsidized fuel. The Caracas subway recently issued an electronic payment system after it routinely stopped charging passengers due to cash shortages.
President Nicolas Maduro has said he plans to move to a fully digital economy this year, following three years of hyperinflation that have prompted the nation’s mint to issue higher-denomination notes that are quickly rendered all but useless. Inflation soared 3,000% in the last 12 months, according to Bloomberg News’s Cafe con Leche Index.
In October, Venezuela imported banknote paper with plans to issue a 100,000 bill that quickly became outdated. It last issued new bills in 2019, after chopping five zeros of the previous bills in circulation in 2018.
If you had to flee your country gold/silver will be far more trouble than BTC.
A currency with built-in functionality to track everything, forever and making that data public seems to be good for funding illegal activities?
I would like to think just cash in various currencies would be the best for that. Washing cash is not exactly a new thing and sometimes boring technology is best.
If I wanted to, right now, buy drugs online, engage in illegal online gambling, ransom someone's data, etc it will most likely be done in BTC or maybe Monero.
Meanwhile, people in Venezuela who diverted some assets into bitcoin can actually transact for food or medicine at prices less volatile than the local fiat currency, even including high transaction fees and verification times. Things they can’t do with precious metals held by custodians that transact in the fiat currency, let alone the fiat itself.
But by all means, let’s hear some more specious “Bitcoin mining uses X amount of (largely renewable) energy and I personally happen to think X is too large for what I perceive to be no benefits” diatribes.
Would love to see an updated map, but I'm not sure I understand how I could update the data behind it.
This isn't anti-crypto. This is anti-bitcoin as a practical asset if things hit the fan.
Precisely which economy? The world?
You're going to have a lot more problems than just spending money if the world economy crashes.
Well we could always look at the names of the 36 people sanctioned...
Take North Korea for example.. I like to imagine this is how it plays out in the people heads: "like, it's so sad that the people there suffer.. our hearts go out to them..
should we lift sanctions..? Hell no, let them burn to the ground, let them realize who they're messing with.."
No, because who's doing the printing doesn't care. They're printing it (the government) to pay their own debts
If The Venezuelan government can’t pay foreign or domestic obligations then they need to print money or default. They may not have the ability to default.
(i have some (likely half-baked) ideas, but throwing the question out there for discussion)
They owe $100 but don't have $100. They find someone willing to exchange $100 for 100 Bolivars. But instead of using Bolivars the government has on hand (reserves), they print them. This devalues the Bolivars, meaning the next time they try to buy dollars, they'll have to put up more Bolivars than before.
The counterparty in this case, is anyone who thinks they can buy something with Bolivars equal to $100 worth of goods. Chances are that they can. But they have to act quickly before another devaluation.
This is overly simplified but covers the gist of it.
certainly this can only work if the country has enough various goods worth more in other currencies than they have debt in their currency. it's almost like an arbitrage, but it's not entirely riskless (which by definition, arbitrages are).
additionally, the government may not have rights to the beans. In cases where governments can expropriate assets and goods from individuals, they have used them to directly raise foreign currency. A notable example of this is the Ukrainian famine.
yes, but it doesn't cost 1M bolivars to print a 1M bolivar note. you just stop printing the 10 bolivar notes.
https://www.google.com/amp/s/markets.businessinsider.com/amp...
Printing money does cause inflation, proportional to the amount printed. But hyper inflation is caused by money printing to pay external debts.
In Venezuela's case, they haven't even been paying their debt, so it's hard to make the case that it matters here.
If the country isn’t making what it needs to either consume locally or export in exchange for foreign goods, it’s operating in something like siege conditions and of course prices are going to go through the roof as people (and often the government) try to outbid each other for what little remains.
Venezuela’s exports of everything but oil collapsed in 2008. By 2012, 96% of exports were oil. Then the oil industry collapsed due to severe underfunding.
(Of course at this point, due to sanctions, trade is even harder, but the crisis started before that.)
Its like a run on the bank. Great till everyone thinks everything is okay, but the moment confidence shakes in the bank, and bam you've got a collapse on your hands.. unlike a bank, if countries start dumping the dollar there is no higher authority that can step in and pause things for a bit so everyone settles down...
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Ben Bernanke (ex-FED Chairman) - The dollar’s international role: An “exorbitant privilege”?
https://www.brookings.edu/blog/ben-bernanke/2016/01/07/the-d...
> A great deal of U.S. currency is held abroad, which amounts to an interest-free loan to the United States. However, the interest savings are probably on the order of $20 billion a year, a small fraction of a percent of U.S. GDP, and that “seigniorage,” as it is called, would probably still exist even if the dollar lost ground to other currencies...
> The safe haven aspect of the dollar is actually a negative for U.S. firms, since it implies that they become less competitive (the dollar is stronger) at precisely the times that global economic conditions are most difficult.
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The ‘reserve currency’ myth: The US dollar’s current and future role in the world economy
https://www.ussc.edu.au/analysis/the-reserve-currency-myth-t...
> This safe-haven bid for US dollar assets means that the US dollar often behaves in ways that seem counter-intuitive relative to US economic fundamentals. As Figure 2 shows, the US dollar appreciates in response to economic policy uncertainty. A 1 per cent increase in the Global Economic Policy Uncertainty Index raises the real value of the US dollar by 0.2 per cent, controlling for relative interest rate, inflation and economic growth differentials with the rest of the world.
> The appreciation exacerbates trade tensions between the United States and the rest of the world by weighing on US export competitiveness, setting in train a protectionist spiral.
What do you think they're going to say? We love that we can print as much funny money as we want and we're proud it's our top export to the world?
I am sure they also think it is a huge burden that the whole world money routing is done through american systems. That is too much of a burden to implement and enforce sanctions. They probably want to 'get rid' of that too..
After the exceptional leadership in the 2008 crisis, I believe everything Ben Bernanke says..