Rocketing past Parity

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Six years isn't really such a long time, is it?

Six short years ago, the bills on the left of that image were worth about the same as the bills on the right. In 2010, 50,000 Colombian pesos were worth about $25, and so —more or less— were 50 bolivars, at least at the official rate.

And mind you, back then “the official rate” had not yet become the evanescent dreamscape it has become in the years since: normal people had access to it. Yes, you had to fill in some endlessly annoying carpetas to maddeningly exacting standards, but you could do it. People did it all the time.

This week, the bolivar and the peso reached a different kind of parity, as the bolivar first caught up to and then almost immediately zoomed past the peso on the black market. And the black market is, for all but a tiny handful of mafiosi, the only market there is. The bills on the left are now worth one thousand times more than the bills on the right.

Today in Venezuela people are frankly scrambling to spend any money they come near as quickly as they can.

As I write this a peso is worth 16% more than a bolivar, but you just gotta keep checking because when a currency goes into the sort of free fall the bolivar is experiencing, these things don’t stay true for long.

Today in Venezuela people are frankly scrambling to spend any money they come near as quickly as they can: a desperate dash to protect its value by turning it into something, anything that’ll hold its value beyond this week.

It’s a textbook case of a phenomenon economists identified long ago —a collapse in the demand for money— as the proximate cause of hyperinflation. Once that mindset sets in, once people internalize the idea that holding money is harmful to you, what happens next isn’t hard to work out.

For all the economic disorder Venezuela has suffered these last few years, for all the dislocation and pain and hunger, we’re on the doorstep to something much different and much, much worse. We know persistent high inflation, but hyperinflation is to persistent high inflation what an atomic bomb is to a machine gun. It just creates misery on an entirely different scale.

You’d think we’d be ready by now. We’re not.

40 COMMENTS

    • They’ve had the presses going for a long time now.

      Every time they issued internal (backed by who knows what) debt they printed tons of bills.

      Coupled with an economic policy that can be defined as destroying an economy from within while claiming the destruction comes from without….

      Chickens coming home to roost……..

  1. Might it have something to do with the fact that ANYTHING worth less here because it is subsidized is being transported for sale outside of the country. Also the GN is mass exporting diesel and gasoline. It’s all going out to the islands. Hence more spent on subsidization NOT being consumed within Venezuela. Christmas is coming and there’s always the inflation from that. Plus articles like this that remind people in mass to invest in anything even toilet paper is an EXCELLENT investment. Obviously the paper of choice is the US dollar, as we all know, direct inflation buying dollars with Bs, strengthens the Dollars weakens the Bs. It’s all exponential, hello hyper inflation.

  2. Now that the opposition has been tamed Maduro will discover that the opposition isn’t his biggest problem, it’s the economy.

    Hyperinflation is bad but on the other hand it may be the only way to effect a regime change.

    • Will hyperinflation bring down this regime? Remember it still earns oil income in dollars. As long as it can still sell food staples at affordable prices it can still survive. However hyperinflation will rocket up the prices of all non-controlled products and prices in the black market so the people will be even more dependent on govt stores.

      It’s going to get ugly for the people as govt stores can’t provide everything they need.

      • Yes, hyperinflation can cause a regime change. It usually ends with the fall of the current regime and a return of confidence.

        Hyperinflation almost collapsed Mugabe’s regime but he was smart. He dollarized the economy and shared power with the opposition until the next election.

        Will Maduro take such action to save himself? No, he is not smart enough. His response will be control, control and more control which pours fuel on the fire.

        Hyperinflation may do what (neutralized) the opposition failed. Let’s wait and see.

  3. I think there are three key things that have changed the game completely. The first, and most important, is the change of monetary policy to an even more expansionary one by reducing the mandatory reserves banks most hold. If you draw a plot of dolar today’s FX rate you’ll see massive spike from October on (the measure was taken in September and this blog discussed about it in an article by Daniel Urdaneta). Furthermore, there are restrictions in the amount of cash people can hold. Therefore, reducing the incentives to use money as a means of exchange, which makes it rather useless.

    Furthermore, the government keeps financing nominal deficits through money printing, and approved a budget that it’s certainly too ambitious.

    Thirdly, expectations of a change of gvt in the near future have almost evaporated with the fact that 2016 is practically over and no recall is in sight. So, there are even more pressures for people to take their money out, or change investment for consumption whenever possible. Making the bolívar even more useless. It’s going to be a really hard ride.

  4. If monetary and economic policies are going to continue in the same hands of those that have produced this national catastrophe crushing our lives there is little reason to believe that things will not grow steadily worse than they are now ……if there is not trust in the currency then its value is going to continue falling at an even rate speed than before ….. All hope of an improvement in the countrys dire oil income situation has dissapeared ….were in free fall going down the abyss and there is no visible end to our misfortunes….!!

  5. My guess is that Chavistas thought that they could destroy the economy and private enterprise in slow motion while controlling the country, which they have done so far. But I cannot see how they will control the situation once the exponential monster of hyperinflation and devaluation kick in…

    It seems that the situation is going to get out of their control soon. They have to be dialing Mugabe’s number to see how he coped.

    • About right… I think it is “trading” on the streets/black market at around $1USD = 2000 BV. so maybe 50 cents as of now.

      They are looking at denominations as high as 10,000 Bolivar notes. one news report had it at 50,000 bolivar notes.

      • Which in turn releases more inflation. Everything is being held back because people can’t spend efficiently. There is no cash. Power goes out all the time, Cantv too so the debit doesn’t work. Cash is worth 15 % more right now as it sits because its so hard to get. All commercial businesses are selling their excess cash to the public when they swipe the card. When the power goes out, I know of a liquor store that will sell at 25 % because he has a power plant. 20% if your a “buddy”

  6. Es lamentable que para mejorar Venezuela tenga primero que hundirse hasta el fondo (o lo más próximo a ese lugar) pero parece que no hay otra solución para el país. Reitero una vez más mis deseos de que todo esto termine pronto.

  7. Honest question: How does one sneak US Dollars into VZ and can you use them instead of local currency? I’ve heard they search wallets/money belts at the airports.

    Do you then exchange USD for local and buy only what you need? Not sure if EURO money is exchanged as easily in VZ as what I have been told is the case for USD.

    And precious metals/coins might seam like a good thing, but, the actual redemption value is worthless if they go by the silver/gold rates. I could fly to VZ, trade USD for local currency, buy up all the PM I could get my hands on, and then head back.

    • As far as I know you are allowed to carry 10000 USD. But yes hide it well on your person and don’t declare it to anyone. Check the box “no” you are not carrying more then 10,000 USD. If they find it tell them the truth: I was afraid to tell you because I was told you would steal from me. Im going to Aruba after this and need some US cash. Staying with buddies who are paying everything while Im here. Something like that. Might end up having to give them a c note, should shut them right the fuck up. Better still make some contacts in the aduanas.
      Everyone is hungry for buddies that may have something to offer them and will gladly sell their services for a little extra right of the top. US Cash is typically worth less then a direct wire transfer to a buyer here in Venezuela. Problem is to find people with enough cash to buy it as I just posted nobody has cash and if they do its worth 15 % more to them just cause its cash. Also you need a bank account to receive large transfers which are also severely limited and will take several days for daily limit problems. You run the risk of having your account shut down and your money frozen until you can prove to the bank that you earned it legitimately. And what exactly do you want to buy in Venezuela? PM what exactly is that?

      • PM is short for previous metals.

        When I was in Mexico, the 1oz Libertad was cheaper there than in the US. Not much savings but $0.50 less. The 2oz coin was more than $1.50 cheaper.

        We gave our host family payment in USD and a set of 3 2oz libertads as tip for giving us a great breakfast before our flight back.

        But It sounds like a person needs to find a money exchanger who is willing to handle large sums of cash and then find a bank to deposit the money into…

        Better to just use dollars and pay for what you need and only that.

        I assume hotels accept dollars but the rate is not worth it at 700bs to the dollar if it is going to cost me $1000/night.

        • Everyone accepts dollars, but it makes me cringe tho thing about a gringo wandering around town pulling out dollars to pay for shit. You can’t just make a go of coming here and checking shit out without some sort of umbrella of protection otherwise something very bad most likely will happen to you and then Venezuela will have an even uglier international reputation then it has and I for one am holding out that things will improve here one day and tourists will come again. The beaches really are world class.

  8. I was thinking of the fires Maduro is coping.

    1)-Hyperinflation started, this is devastating for those that have no access to hard currency, hence the poor. Chavismo’s base will be devastated with starvation.

    2)-The military took over food distribution a few months ago yet food is getting scarcer. Almirante pescado and General harina pan have failed which ought to be make Padrino have second thoughts of yelling on TV “Chavez vive…” bullshit.

    3)-The OLP has become on par to Colombian death squads.

    4)-Gas production is failing. “¿Pasar más de ocho meses con el palito parado?”

    5)-The government has proven that dialog es para limpiarse el culo and recall referendum is probable as the existence of la Sallona. Moreover, I don’t think the government will ever allow another election.

    6)-Venezuela is exporting Boat People as Nicholas Casey covered in the NYT. This ought to give those sycophant island countries in the Caribbean second thoughts on the wisdom of supporting Venezuela in places like OAS.

    7)-Mercosur expulsion is going to be plain embarrassing.

    And for 18 years I have repeated to myself as a mantra: And they still hold to power!!???

  9. In order to have hyper inflation, they need to print and deliver more notes. VZ doesn’t print their own money. And they are running out of ways to pay for new notes printed and shipped from overseas.

    Unlike Zimbabwe, VZ refuses to issue new high denomination notes (for example: the Zimbabwe 100 trillion banknote). That means that they have to put more and more current notes in to circulation, which increases the cost of paper, printing, and delivery.

    So wouldn’t that constrain inflation in this case?

    • Yes, there is no cash, you can’t get enough of it together to make a major purchase, and if you do you need a wheelbarrow and everyone is going to see and nobody wants to be caught with that much cash on them. That is whats literally holding inflation back.

        • Won’t stop it but it is slowing it down. It’s slowing everything down. There are just too many things we need to buy with cash, it has to be cash when you pay for those clap bags (the next ones for Christmas are going to be 20, 000 + Bs each). We need more cash for day to day things we need then we can get our hands on.

    • Not increasing the money supply won’t stop inflation. Basic economic theory say:
      Inflation = Money supply x Velocity of Money/Real GDP

      Velocity of Money is the number of times it changes hand per unit time. So increase in V and/or decrease in real GDP with a constant money supply also results in inflation.

      Hyperinflation occurs when the population loses confidence in the currency and spends it as soon as they can to exchange for something of value.

      Has Venezuala reached this tipping point?

    • I don’t think so, it just generates a new distortion which is cash scarcity. This can lead to a bigger use of electronic payments which tend to have a less predictable money demand. Or it can lead to a complete rejection of the bolívar as a means of exchange, which would make it worthless. You really don’t need to print cash to increase money supply.

      • Right now the low end is 3400 or so. 4200 on the high end, it has to stabilize a bit before people will pay that much cause there is always the hope that it will fluctuate down a bit although I think every one is clear that its not going to stop plummeting right away. People HAVE lost all confidence and respect for the Bolivar. Comments like the Bolivar isn’t worth shit, may as well wipe your ass with them are common. People spend money as quickly as they get their hands on it. You’re stupid if you save money from one week to the next as it will buy less. Everyone knows that, confidence is gone. Not a good thing.
        The high end prices are for one time buyers who don’t know anyone and have to go through the public channels to buy dollars. Risky because since it is a black market, if someone decides to rip you off, you have no resort. Also its a bit of a buyers market right now because not everyone has the cash to buy dollars and as I have mentioned before, cash deals are preferable so you don’t get your Venezuelan bank account frozen. So much insecurity, dollar sellers prefer to sell 15% lower to trusted long time customers (some are dollar resellers that take the risk of dealing with strangers) then to get the extra Bs taking a risk with a stranger. Nobody wants to hand over the money first.
        Also something else I noticed this morning as I took a cruise through town is that all the big construction projects started up again. If you are thinking in dollars, now is a really good time to buy cement (even if it costs 4000 Bs per bag), it’s cheap to build again. Good for all the masons that get to go to work again because they were getting pretty skinny!

        • Cement is at Bs.4M/half 45kilo bag, all the masons I know are unemployed/skinny, one is selling coffee by cup in Catia, construction materials of all types are scarce/prohibitively expensive, some money-laundering projects are under construction, $ are scarce vis a vis demand, most are not staying in the Country….

  10. Oh and all those big construction projects are owned by high ranking military, It’s like that here in my town at least and thats a matter of public record. Where do there guys get the money to build these awesome buildings on their government wages? Let’s be real, who else would be stupid enough to invest in heavy infrastructure here in Venezuela right now?

  11. If confidence in the currency as gone down the drain and people quickly spend whatever money they get their hands on this is the recipe for hyperinflation.

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