Original art by Mario Dávila

The price of a dollar hit 31,109 VEF/$ today, up from three thousand VEF/$ this January. That’s another zero on the exchange rate in 10 months. The growth since 2013 has been so explosive you have to graph it in logarithmic scale to even see anything:

Look at the graph’s vertical axis. The numbers don’t increase by some fixed amount each step, they double. The line gets steeper in 2017 because the exchange rate is now doubling every three months on average, about twice as often as during the four years from 2013 to 2016. This is genuine exponential growth, and if the 2017 trend sticks, the exchange rate could climb to 60,000 VEF/$ by year-end and 120,000 by April 2018. 

It’s depressing but hardly surprising. In this late stage of voodoo populism, Venezuela’s central bank (BCV) creates trillions of bolívares from thin air every month to cover the government’s fiscal deficit. So every month, the economy is flooded by a tsunami of new bolívares that chases the same supply of goods and dollars, causing soaring inflation and washing away some large fraction of everyone’s bolivar holdings. That’s why Venezuelans rush to buy canned tuna, car batteries or anything else with durable value if they have leftover money.

As it happens, this is a dangerous and unstable monetary equilibrium. On one hand, the bolivar’s value is falling closer and closer to zero as government dilutes the currency and collapses demand for local money. On the other, to get the same spending power from BCV’s printing press, the government is having to mint more and more currency every month to compensate for the lower and lower value of the bolivar.

It’s a terrible feedback loop. Maduro is growing the money supply by 750% a year because the value of the local currency has cratered 83% in real terms and 97% in dollars since 2012. And as long as it keeps falling, he’ll have to print more. 

This is genuine exponential growth, and if the 2017 trend sticks, the exchange rate could climb to 60,000 VEF/$ by year-end and 120,000 by April 2018. 

The regime backed itself into this corner by refusing to rationalize policy. Instead of entering an IMF program to get the house in order, Maduro gutted imports 80% to keep paying external debt and caused the deepest recession in Latin American history. Imports fell so severely that the private sector was wiped out and the economy hung out to dry. It’s no surprise real tax collections have fallen 70% since 2014 and that Maduro’s now scrambling to plug the resulting deficit with BCV’s printing press. 

But here’s the thing about the printing press: after a certain point, governments actually get less real money by printing more nominal money. There’s a limit to how much the regime can siphon from the economy, and after that limit, the printing press backfires and only causes explosive inflation. Tragically, most governments react to this by printing yet more money, which only makes the overshooting worse.

If the regime hasn’t crossed that line already, it will soon. BCV printed over 5 trillion bolívares in September (29% of base money or ~300% of tax collections) to finance Sunday’s regional elections and Christmas spending is right around the corner.

This textbook disequilibrium tends not just to high inflation but to high and accelerating inflation. And at some point, higher and higher inflation can spin out of control into bona fide Zimbabwean hyperinflation. Prices rose 36% in September and are up something like 900% against last year, so Venezuela is right on track to hit 1000% inflation this month or next and 50% a month sometime next year. Those are two common thresholds for hyperinflation, i.e., the danger zone.

BCV printed over 5 trillion bolívares in September (29% of base money or ~300% of tax collections) to finance Sunday’s regional elections.

This is serious. Straight hyperinflation is to the economy what “Little Boy” was to Hiroshima – a nuke. Hyperinflation razes banks and the financial system to the ground, reducing the real value of all deposits and loans to zero. It forces some or all of the economy to dollarize with dollars it doesn’t have, or worse, it makes people barter. Hyperinflation rips supply chains apart and disrupts business in the extreme. It’s a nightmare for everyone, but especially for people without bank accounts and the poor. Whatever Venezuela’s got now, hyperinflation is worse. Believe me.

It’s not too late to do something. Maduro could always resign, appoint ministers that aren’t criminally incompetent, or stop selling 80% of PDVSA’s dollars for 0.03% of their market value (10 VEF/$) to ghost companies and sell them for 100% of their value to real companies instead.

If PDVSA sold its dollar surplus (however small) at market value, it would raise a boatload of bolívares for the government and replace some significant fraction of the currency BCV mints from thin air. That’s why a devaluation could paradoxically slow inflation and the exchange rate’s explosive growth, even though many “controlled” prices would adjust upwards at first. A single dollar fetches 31,000 bolívares right now, so it might not take that much FX to stabilize things.

Or maybe it is too late to do anything. Maybe confidence in the currency has been flushed too far down the toilet. I don’t know.

In any case, Venezuela is edging closer and closer to hyperinflation and the regime hasn’t even acknowledged the problem, much less come up with a plan to address it. They’re either asleep at the wheel or happy with the status quo where Venezuelans are too poor and too tired to protest. This is a catastrophe waiting to happen, as if Venezuela needed another.

29 COMMENTS

  1. “It’s not too late to do something.”

    It was already too late when they let a communist in the big house in 1998. Way over the limit of lateness when they brought him back in 2002 after he resigned.

    Now is just history taking it´s natural course. The Caribbean Gulag Archipielago is about to make a “great leap forward”

  2. “They’re either asleep at the wheel …”

    They stand in an ideological Mexican standoff, hardened and unable to change.

    Reasonable economic measures have been known for years now, but in the most postmodern way, they have rejected well established art and science to deal with their condition because of their Stalinist dogmas of faith.

    I can only imagine them dismissing reason among them with cliches such as “hay que ser un verdadero revolucionario, co~no!”. I dare speculate in this way by reading the tone and tenor of Aporrea writers.

    At this point, speaking truth is probably interpreted as the early stages of treason, so they all stand around in fear of being purged and treated as a scapegoat. The next Ortega will rot in jail, or even worse. Look at the ex-boyfriend of one of Chavez’s daughters being fed to the dogs (probably well deserved), or Ramirez writing self exculpatory pieces with mild criticism from his perch in NY.

    But, I also speculate that they know that the last chavista standing will take all the most blame, so there is a sweet spot between sticking it out and defecting to the US and to sell out a bigger criminal than you.

    What I don’t get is why hold elections on Sunday? If they lose, they embarrass themselves, if they win, the are called cheats and embarrass themselves. So what do they gain? They have made it deadly clear that they will stay in power over the bones of their people, so why stir the pot and risk ‘candelita que se prenda’?

    • Renacuajo: “They stand in an ideological Mexican standoff, hardened and unable to change”

      I would eliminate ideological and it would be an accurate description. We are talking about a drug cartel that controls an army and a country and will kill everyone if they have to because surrendering means death for them.

      We are not talking of dislodging an authoritarian government, we are talking about toppling a criminal organization.

      • Hi Moraima,

        I agree with you. Venezuela is governed by a criminal organization (Orwell’s Animal Farm, the pigs always devolve into it)

        However their use of strident communist rhetoric and intolerance to opposed views detracts from their ability to communicate and think clearly. It reduces their vocabulary and the conversations that can be done in what they consider polite company. Can you say IMF? World Bank? Successes of the Venezuelan democracy? with Chavistas? Might as well choose to read Lolita in a nunnery’s book club!

        If you ever talked to true-to-the-bone intersectionalist also known as the politically correct crowd, you know what I mean.

  3. No hay problema, camara’! Vamos a usar un digital carnet de la patria pa’ pagar todo! Asi es como debe ser, pa’ que todos compren igual [en las colas sabrosas], y derrotamos al Imperio y su mariquita guerra economica.

  4. Venezuela is already on the cusp of hyperinflation. When people have lost confidence in the currency and spends it as soon as they get their hands on it this leads to hyperinflation. At this point the prudent thing for the govt to do is to stop printing money but to stop means it can’t pay its bills so it has no choice but to keep printing in ever increasing amounts which leads to even more inflation in a self-feeding cycle.

    If you think the exchange rate is high now it will look cheap in a few month’s time. Hyperinflation will stop when the economy dollarize or the govt collapses.

    Much suffering is in store for Venezuelans but if hyperinflation manages to do what street protests couldn’t it may be all be worth it in the end.

    • Your observation speaks to the historical ignorance of Chavistas:

      1)-By 1999 EVERYONE knew that communism did not work, just ask the Chinese or the Vietnamese.

      2)-Hyperinflation is the biggest tax to the people and wipes out governments (except Zimbabwe), just ask Argentina, Brazil, Peru, Bolivia, Chile, Ecuador about how great were the 80s for them.

  5. +5 million percent devaluation in the Bolivar since Chavismo?

    576 to the dollar “Old Bolivars” in February 1999 equals .576 New Bolivars?

    Is my math right?

    • You ignore the Bs. I spent in the 1970’s, dude. Demasiado joven, me imagino – no es culpa tuya. I did the math once, and very roughly it works out that the BF was circulated at Bs.1,000 to BF1 to $1.00. If Frank Muci has data on the date of issuance and the conversion rate to the “bolivar fuerte”, I’d appreciate it.

      The bolivar used to trade Bs.4.30 = $1 – in the 1970’s. It had been relatively stable there since the 1930’s, IIRC.

    • El Guapo – My mistake. Here’s an article on the history of the bolivar dating back to 1787, coming forwards. https://en.wikipedia.org/wiki/Currency_of_Venezuela

      from the article, here are the bolivares to the dollar:
      1964 Bs.4.45
      1974 Bs.4.45
      1990 Bs.47.00
      1995 Bs.177.00
      [your numbers: 1999 Bs.576]
      2000 Bs.680
      2003 Bs.1600
      2005 Bs. 2090

      And the bolivar fuerte was introduced at a conversion Bs.1000 to one BF (or VEF) in 2008.
      Then it gets a little foggy because Venezuela sought to impose a fixed exchange rate
      2011 Bs. 4300

      2017 (approximately) VEF 31,000 to one dollar.

      The devaluation from Bs.4.45 in 1974 (oil was officially nationalized in 1976), to Bs.1600 in 2003, is a factor of 360.
      From 2003 to the present the devaluation from 1974 total is a factor of
      VEF 31,000 = Bs. 31,000,000
      Bs.31,000,000 / 4.45 = oh heck, call it 7,000,000.

      (Did I get it right? It seems unbelievable.)

      • You’re dead-on re the VEF! It was January 2nd, 2008. You can still find the exact week on this BCV worksheet: http://www.bcv.org.ve/excel/2_2_1_s1.xls?id=464 (check rows 427 to 428).

        And as you and others implied …Like proper communists, they did it to erase our once grand purchasing power from our memories, as I insist below. BTW, the doc I’m referring to there is an audiovisual take on the 1999-2017 devaluation scam: https://youtu.be/pDtPsyo_ab8

        Most importantly …Kudos to Frank and rest of the team at caracaschronicles!

        “La importancia del “4.30” es tan inmensa como referencia histórico-emocional en la mente de nuestros contemporáneos (casi un símbolo patrio), que todo mi artículo está basado en usar esa referencia como ‘lente,“ a través del cual todos podamos ver, como éstos delincuentes diluyeron la riqueza acumulada por el país hasta1999, más la que entró desde ese momento hasta hoy.

        Sin embargo, la dilución es tantas magnitudes superior al parámetro histórico, que no existe forma de visualizarla, sin la ayuda de la escala logarítmica. Por otra parte, de no hacerlo de esa forma, no lograría comunicar mi objetivo de desnudar la estafa con sus propios números (los del Banco Central) y no con mi interpretación de ellos (porcentuales, indexadas, etc.)”

  6. Wait…isnt the plan to make the Bolivar worthless?….no monetary exchage without gov. Control…….turning the whole country into Cuban welfare state…renoving purchasing ability …..complete reliance on goverment for all.
    How far down can they reach before the place explodes?
    I dont think there is any thought of hyper inflation by the regime……for them….is all to plan….thank their Cuban Masters.

  7. I think we should also refer to Venezuelan currency as Bolivar Fuerte, to remind everybody of the great invention of Hugo the magnificent.

  8. Right on the Money! It was 3.2 million % last time I did the math on August 31st (VEB25 million vs VEB577 in Feb. 99). I’ll do the numbers again at month-end, but I’m sure they’ll be at or above your +5MM est.

  9. We’ve been bartering here for months. I purchased a six row pnuematic grain drill the other day by plowing ten hectars. The “mata burro” installed on my JD tractor was paid for by plowing two hectars. I could site many other examples.

    My woman just returned from shopping for supplies in Punta de Mata. Everything was shut down because there is no internet but she managed to trick her way into one market and spent Bs 1,140,000. The result? Four plastic bags of merchandise which she carried in one hand from the car.

    We live in Bizzaroworld folks.

  10. I can only do a sad laugh when my mom says “no te gastes todos los reales” or “hay que tener ahorros” every 15 and 30 I can only empty my pockets on the near supermarket before they become worthless, tuna cans? Don’t joke with me who can even afford that ?

  11. The saddest part is, that every time I think I am not doing the right thing and I should be listening to what my mom says and save some bsf for the future, I can only feel despair to be proof right one more time at the end of the month, when everything in the supermarket doubles all prices

    Maybe the gob refuses too see the true ? No, they know the true but they can or choose not to do anything about, only smoke and mirrors, like a fun house, but I am not laughing, at least I think I am not, maybe it sounds like a soft laugh but is more like a despairing cry that can only be hear by me and only me.

    I know I am not alone in this, even if I see my fellow country man, and woman’s laughing at the buss stop waiting for the always late “rojitos” to come, they are too crying at the miserable conditions this has become.

    Best things to come in a bottomless pit, is only red and black mix together while a faint trace hope still shines, never able to see outside.

    The world is a beautiful but there are ugly parts in it.

  12. Even with hyperinflation and social decay I can’t help but never give up hope. Albania was a mess for decades and it’s on a path of progress now. Argentina was imploding in 2001, look at where it is now. Times change. I will not surrender and migrate. I will either be first in line to take advantage of a country in fresh recovery or go down with the ship that gave me the opportunity to go to college for free and travel to 20 countries in the span of three decades.

    • If Argentina is your idea of a success story, you have very low expectations.

      By the way:

      Congratulations on your perfect example on the Venezuelan mentality of me, me, me.

  13. “This is genuine exponential growth, and if the 2017 trend sticks, the exchange rate could climb to 60,000 VEF/$ by year-end and 120,000 by April 2018.”

    Seven weeks have passed and the exchange rate has already hit 97,000 VEF/$. It looks more than likely that it will hit the April 2018 target before the end of the current year.

    Remember that huuuge spike right after the July 30th constitutional fraud? Now it looks like a pretty small thing here: https://web.venezuelaecon.com/

    Also, that huuuge spike moved the exchange rate up to 19,000 VEF/$. Now, four months later, the exchange rate is FIVE times that.

    I’m genuinely sorry for Venezuelans. And there’s no end in sight for this disaster, which should (but won’t) serve as more than a cautionary tale for other countries all around the world.

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