Hyperinflation or just high inflation?

23
Merentes
Our BCV President Merentes

Is Venezuela headed towards hyperinflation?

A few days ago, Quico dismissed allegations of runaway hyperinflation in the country. He used a report put out by Francisco Rodriguez and his team at BofA using over five thousand regressions to estimate the annualised inflation rate of Venezuela based on the few economic indicators we have. His conclusion was that we’re not yet into the abyss. Rodriguez estimates that the inflation rate in Venezuela may be hovering around 100%, which is probably true, shocking, but yet in the realm of hyper-inflation.

Is that where we’re headed?

It’s difficult to overstate the trauma that hyperinflation represents. About 7 years ago I had the opportunity to attend a Summer School Program at the London School of Economics. As the world was about to fall apart into the greatest economic crisis since the Great Depression, I befriended a Zimbabwean lad who gave me a 5 billion Zimbabwean dollar bill as a gift. By that time, Zimbabwe’s currency was worthless, and the economy operated mainly on bartering. This was an economy with high chronic inflation, which led to the first case of hyperinflation in the XXI century: in July 2008 the inflation rate reached over 230 million %! Pretty soon, the currency collapsed altogether and the US dollar was introduced as legal currency.

Some of you think we are already in Zimbabwe territory. Truth is, we’re not yet. Will Venezuela ever enter an hyperinflationary economy?

The answer may lie in a report made by the IMF a decade ago. In it, economists Carmen Reinhart and Miguel Savastano studied the hyperinflationary crisis-and-stabilization episodes to yield some insightful conclusions. This report claims that hyperinflations have certain common features.

Modern hyperinflations take place in countries with a history of high chronic inflation, although high chronic inflation episodes don’t necessarily lead to hyperinflation. Also, hyperinflation is fueled by an uncontrolled monetary expansion which is usually prompted by fiscal imbalances and severe economic distortions ranging from financial repression to capital controls. Sound familiar?

The worst part of it all is that hyperinflations, contrary to the conventional wisdom, may last longer than previously thought, given that economic output does not jumpstart quickly enough due to an array of issues. Whether we like it or not, dollarization appears to be a lasting legacy in each case of hyperinflation.

So you see here folks that the regime is on sound footing towards the abyss. If the heads of the BCV, Maduro’s economic policy team, or someone (including the opposition) wishes to pay attention to our macrodisasters, please bear in mind these 7 lessons to learn from this report:

1. Hyperinflations seldom materialize overnight and are usually preceded by a protracted period of high and variable inflation (check).

2. Stabilization may take years if fiscal policies are not adjusted appropriately. Even when fiscal adjustment is implemented, it takes time to achieve low inflation, especially when money is used as the nominal anchor.

3. Sharp reductions in fiscal deficits are always a critical element of a stabilization program, regardless of the choice of monetary anchor.

4. Unifying exchange markets and establishing currency convertibility are often essential ingredients of stabilization, irrespective of the choice of main nominal anchor (Simadi, SICAD, anyone?).

5. Output collapses during, and sometimes in the run-up to, hyperinflation. Although stabilization measures cap the implosion in economic activity, there is little evidence to suggest that they kindle a robust rebound in economic activity.

6. Hyperinflations are accompanied by an abrupt reduction in financial intermediation.

7. Stopping a hyperinflation does not restore demand for domestic money and domestic currency assets to the levels that prevailed before the hyperinflation began.

We may not be in a hyper-inflation just yet, but can anyone doubt where we’re headed?

23 COMMENTS

  1. Great summary Carlos! Check 5 and 6 as well, where are there. I agree that we are going through is not hyper, and that hyper is highly unlikely in an oil country (I am sure chavismo can make it), but… can anyone warn Quico that there are another forms of life (economics) beyond the BofA reports?

  2. Hi all! Another interesting aspect of this is the complete breakdown of relative prices, especially when a few products have regulated prices and the rest don’t. Search for #preciosquesorprenden on Twitter, it’s absolutely incredible. .

  3. FASB 52 was the standard for hyperinflation… 100 points in 3 years and you need to change all your financial reporting. I’d expect every business to use this or a similar approach for at least the last 5 or 7years… But no, given some notorious corrections ( a la Ford, impacting results due to our situation) it seems that we were and are living in Fantasyland

    A gozá que el mundo se va a’caba!

  4. I have two questions for the experts. Or even the informed. If price controls are eliminated, does that exacerbate inflation in this context? And if an economy is not diversified (i.e. its manufacturing and agriculture are near dead, and oil is the only major productive activity), how does a barter economy (which tends to be the response as I understand it) develop? What are people going to trade to keep themselves afloat and is that a particular worry in this instance?

    • It all depends on how they remove the controls. I think it is critical that they do so after first reforming their monetary and fiscal policies. If they keep printing money, it will keep inflationary pressures regardless of price controls or their removal. It also depends on how quickly they remove the controls. Gradual reductions in controlled products might be best to allow for the lag in the economy to adjust, such as Ghana in 1983 to 1985 (125% inflation the first year followed by 39% and then 10% for the three years). Essentially, they need prepare the market for the shock. Failure to do so, as seen in the past removal of price controls in planned economies as they transition to a market economy usually results in an initial high burst of inflation the first year or so, with the greatest spike shortly after the removal. Thereafter, it inflation slowly subsides and tapers off to more normal levels (Poland and most other Eastern European economies post-communism).

      The hard part, for producers is dealing with the initial shortages, market uncertainty, and the lag. When you aren’t sure what to do and you can’t quantify/identify the risk levels, you raise your prices. No one buys? Lower them.

      As far as non-diversified economies, essentially you barter whatever you can, but eventually, in the event of the failure of a currency, and the lack of availability of an actual money alternate (dollars, in most cases), people look for something serves the function of money as both a means of exchange and a retainer of value. An anecdotal example from the Zimbabwe experience is the use of prepaid phone cards as a medium of exchange. The failure of a fiat currency is one of the main reason goldbugs set so much stock in precious metals.

  5. I dunno that we’re saying anything different: inflation is high, rising, the pace at which it’s rising is accelerating, and if the trend continues it’s perfectly obvious it’ll tick over into straight out hyperinflation, which is not the same thing as saying it’s at hyperinflationary levels now.

  6. I don’t know why economists insist on making these issues so mysterious. Its pretty simple… The economic distortions created by the currency controls produced huge disincentives to domestic production. As a result, Venezuela productive capacity has been destroyed or crippled. Once the disincentives are removed, production will start to improve. BUT… Even once a positive environment for investment is restored, it will take a long time to reconstruct the productive infrastructure, including replacement and repair of physical plant, training of employees, and reconstitution of management organizations. Rome was not built in a day, and will not be rebuilt in a day. Regardless of what political and economic improvements are implemented by whatever new government comes to power, Venezuela will continue to be “poor”, for many years to come.

    As for the inflation, I remain baffled by this arbitrary distinction between ordinary and hyperinflation. It seems to me like the difference between “sick” and “really sick”. We have been informed of various quantitative definitions for hyperinflation, but none of them provide for any qualitative differences.

  7. Just to be clear, when C. Reinhart mentions that “Hyperinflations are accompanied by an abrupt reduction in financial intermediation”, she is really saying that what ussually drives hyperinflations (a collapse in the demando for money) is also the factor behind deposit runs and banking crises. So expect a bumpy ride.

    • Indeed, given that confidence by economic agents may not fully be restored in the short run. That’s way dolllarization is a lasting legacy of hyperinflations as well. Also, a reduction in financial intermediation is a consequence of a plausible banking crisis.

  8. DEFINITION of ‘Hyperinflation’
    Extremely rapid or out of control inflation. There is no precise numerical definition to hyperinflation. Hyperinflation is a situation where the price increases are so out of control that the concept of inflation is meaningless.

    http://www.investopedia.com/terms/h/hyperinflation.asp
    ——————————————-

    According to this and many other definitions, this entire post is rather pointless. Especially in today’s Corruptzuela.

    A far more important, meaningful, and interesting concept would be “Poder Adquisitivo”.

    As I wrote on the previous post, in what mysterious ways people actually get by these days in Guisozuela… can only be explained in terms of Guisos, and HyperGuisos, if you prefer. (Everywhere and for everyone, not just the direct Enchufados).

    Regardless of the galloping Inflation, Super-Inflation, MegaInflation or whatever, esos abastos siguen Full !!
    Even the freaking Malls are overflowing with customers, fighting to buy just about anything.
    Don’t ask, don’t tell, but even the poor people seem to have plenty of cash to spend, even buying from Bachaqueros at any price. “Screw Inflation”, they must say to themselves, “I need a bigger bag to carry the paper bills, and a gun for protection.” Go Figure..

    Now Purchasing Power.. That’s where it’s really at. After all the paper has been printed, the International loans exhausted, the Trillions stolen safely overseas, it comes down to what can I do with my regular income. Pay rent? Buy bread or steak? Regardless of the inflation, if my filthy job with the Revolusion Bolibanana keeps increasing my bribes, my under-the-table deals, and various “benefits”, who cares about “inflation” or currency exchange? (there are special deals and foreign banks for those “savings” too).

    The day we have to look forward to is not when “HyperInflation becomes “ZimbawenMegaInflation”, or whatever. It’s the day even the poor people can no longer eat arepas or fruit. It’s all relative to actual Purchasing Power.

    It’s when the “clase-media” or whoever is on “minimum salary” (no one, it’s impossible, as I wrote before) has to shut down basic cable TV, and forget about any small restaurant lunch or little vacation in Margarita. The day women can’t buy more shoes or fancy “compotas” for their babies. No, breastfeeding or cheap formula only. The day the cars people drive break down, much more than they do today, and are 15 years old or more. The day you can’t buy Fish or Meat, only pasta and chicken, if you’re not a Top Enchufado (not like the 20 Million other semi-enchufados).

    That’s when Cubazuela will really hit Sudden “Deflation”: Social Explosion.

  9. And I’m positive continued Inflation and lower Purchasing Power are part of the Cuban Macro-Economic plan Cuba is teaching Cubazuela. That and the ‘escasez” and long lines. And the strangulation of Private Enterprise. All part of the plan: Popular Complicity.

    You see, the less stuff people can buy, the more they struggle to cover their basic needs, the more pressure to find alternate sources of income. And where? Private companies are mostly dead by now, so it has to be connected, somehow, to the Populist Dictatorship. Or, to supplement the few meager, honest incomes still left, after the erosion from mega-inflation, some special “deals” under the table, or Tigrito. Mordidas, as they call them.

    That’s Guisozuela’s true bread&butter, and that’s exactly what the Totalitarian Regime wants: to create not only Dependency of the Massive, corrupt Government (World-Record 32 Ministries with 3000+ on payroll), no, they want Complicity. They want everyone to be involved, one way or another in the Filthy Government “programs”, public works, or whatever they do these days.

    If you were a regular “cajero”, or teller at a bank, you have no almost choice but to engage in some scam, or at least, to look the other way, shut up, and find your own “special deals” elsewhere. If you’re a motorizado, a Panadero, a Hotel employee, a Sales Rep, a small business owner, any job.. the Plan is to force you to “rebuscarsela”, exchange shady favors, obscure cash tips, anything.

    Next thing you know, after a few years, even the most honest, hard-working, anti-Chavistas, opposition or MUD people end up .. in the Mud. One way or another, leeching from somewhere, cheating ever-so-slightly somewhere, “as everyone else does”.. Insurance company scams, holding merchandise for future sale, anything.. If you don’t do what everyone else does, how can you survive with any honest, but laughable “salary”. You become part of the system, part of the problem, it’s contagious and you get hooked on easy money, fast, shady deals, everywhere.

    The Cuban system hasn’t been in power for over half a century, 16 years in Cubazuela without such Plans.

  10. We dont need the Cuban’s to teach Venezuelans the ins and outs of corruption or to work on sinister soap operatic plans to increase corruption on a wholesale scale , gaming the system is part of survival in any economy which is in tatters , here and every where ,its part of the culture and now its not just a treat but a necessity , Shortages , scarcity, hyperinflation always foster the need for gaming a system that doenst operate according to normal rules , Giordani is not saying that this is done on purpose , just that its the result of incompetence as never seen ( of which he participated) .Cuba doenst want a social explosion which can do away with the govt which supports it with oil supplies , it wants it to endure

    I wager that Cuba is now probably less corrupt than Venezuela because some politically inocuous forms of corruption have just become standard . In other words lets not confuse breaking rules to survive with breaking rules because of profiteering and a lucious love of gain.

    • “…Giordani is not saying that this is done on purpose…”
      Yeah, sure, because saying the oppossite would drive a bullet straight throught chavismo’s brain and heart at the same time, killing it forever as a political movement, and by extension killing for good any chance any commie or leftie could have to reach power by elections for like 50 years in the future.

      Dude, the old bastard was evil, he isn’t stupid, nor it is any of the douchebags controlling this mess.

      Also, that thing about “everybody’s corrupt” doesn’t apply to every person in the world, and proof of that are the most developed countries, which if they had the same value system that a lot of venezuelans have (Extaltate the criminal lifestyle above work) they would be in the same situation that Venezuela and many other third-world countries are today.

      • Sometimes people we like despising ( and with reason) hit it on the mark , this is the case with part of Giordanis criticism of Maduros govt You have to look at what people do or say as separate from the kind adverse jugement they personally deserve from us. Not judge opinions solely on the basis of our like or dislike of the person who state those opinions . We mustnt let our passions govern and distort the objectivity of our judgments on the accuracy of what someone says.

        My point being that however much we enjoy thinking in terms of dark sinister conspiracy theories , and evil cartoonish evil men organized in comic book type cabals to destroy and conquer the world I dont think the Cubans and their Chavista followers designed to have the current crisis happen . They took measures which they thought would have certain effects , but they lost control of what they wanted to achieve through incompetence and hubris and now have a hot potato on their hands, one which threatens their control of power . I think this is pure common sense . This is not to say they are innocent babes, far from it , but that even if they didnt want even by accident to create a middle class capable of adopting values and positions which countered their pursuit of total power , they also didnt want to have a crisis of the kind we are living now. They vastly overshort their mark. !! I find dark melodramatic conspiracy theories usually delusional and puerile.

        I am however a bit paranoid with people who keep hammering away at the message that almost all of the oppo is deeply corrupt and totally venal , that no one deserves our support in whatever efforts is made to confront the govt because in the end it wont make a difference or that whatever is done will be futile. This paranoia stems from my suspicion that behind that kind of messaging there are people who might be part of that cohort of paid infiltrated trolls whom the govt has hired to disemminate defeatist attitudes among the opposition in blogs like this or in socia media. Also I think the talk of oppo groups venal corruption is vastly exagerated !!

        On the corruption bit , there is too much simplification in trying to understand it , there are people who are corrupt because they like the venal or emotional rewards obtained by actively engaging in it, others that engage in it , or at least participate in some of its processes simply as a way of surviving very harsh living conditions imposed from without, or who are extorted by a corrupting melieu or by those that dominate it to participate in corrupt activities simply to defend their livelihood or survival . The former are corrupt by choice , the other by external imposition, that makes for a big difference. Ignoring that difference is in my view unfair and thoughtles.!!

        The inclination for corruption exists in every society because all men are naturally venal and if the opportunity and enticements are there quite a few of them will fall for it , but there are cultural factors that can foster or inhibit it. native individual character factors that also influence its manifestation and finally external conditions (among them a state of general social discontrol and disorder) which promotes its ocurrence , Venezuela is socially chaotic , institutions are weak , impersonal authority is despised or loathed because its seen as impinging on our tough proud maleness (not now but from way back) , our culture is deeply nomophobic , these traits of our culture have become much worse these last 15 years and have been exarcerbated these last 15 years by a model of governance which has lead to the destructive crisis we all now experience.

    • How much is an average salary for a teacher or a construction worker, and, more importantly what can they do with it in Bogota? Buy a house, pay rent, buy meat, or just chicken and pasta?

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