Will Venezuela Be Forced To Embrace The Dollar?

Tyler Durden's picture

Submitted by Daniel Fernandez Mendez via The Mises Institute,

The country of Venezuela is dangerously approaching hyperinflation. At 2015’s year-end, official figures had yearly inflation at or above 180 percent (some private sector sources estimated it at 330 percent). The technical definition of hyperinflation is when inflation is at 50 percent or more per month, meaning that Venezuela is not yet at this point, but does seem to be approaching at an accelerated pace. The South American country finds itself with inflation rates at their worst in its history (1996 saw 103 percent yearly inflation) and the highest in the world (Ukraine is second with 50 percent yearly inflation).

Venezuelen official inflation rate
Source: NSI Bolivarian Republic of Venezuela

The main effects of hyperinflation are beginning to be felt. In every case in history where there has been hyperinflation, the main cause has been fiscal imbalance, and the case in Venezuela is no different. When there is a surge in the deficit, the same applies for inflation (graph 2).

Budget deficit and inflation
Source: Central Bank of Venezuela; International Monetary Fund

Normally, moderate inflation follows the path of the deficit with a relatively large delay, because economic agents are unable to anticipate deficit values and monetization with precision. On the other hand, in times of hyperinflation, inflation anticipates the deficit (economic agents overestimate new monetization policies and there is a universal tendency to evade local currency). In Venezuela, we can see that since 2013 (graph 3) inflation has increased at a faster rate than the deficit, and for this reason we can consider the country in a state of hyperinflation as of that date.

Rates of change inflation and budget deficit
Source: Self-prepared using data from: Venezuela Central Bank; International Monetary Fund

This creates a big problem for the government of Venezuela due to the fact that real tax revenues decrease (just as in all cases of hyperinflation). During the time between receipt of tax revenues and actually putting these taxes to use, inflation eats up the real value providing the government with less real revenue.

An inverse relationship exists between inflation in Venezuela and crude oil prices (graph 4). This relationship is such that inflation increases rapidly when the main source of government revenue (revenue from oil) decreases due to the fact that the government does very little to reduce costs when decreases in revenues are experienced (thus deficits are monetized and amounts of currency rise at aggressive rates).

Oil price and inflation
Source: NSI Bolivarian Republic of Venezuela; OPEC

One of the most surprising and paradoxical aspects of hyperinflations is the shortage of money. When rises in prices grow out of control (which is starting to be the case in Venezuela), the amount of new money created is not enough to suffice for these increases in prices. In other words, the real money supply drops (nominal money supply / price levels).

Money supply growth
 

The last phase in all cases of hyperinflation is currency stabilization. This phase is inevitable whether it be because of changes introduced by the government or due to complete rejection of local currency by the population. In order for such a monetary reform to be successful, it is essential that the government first eliminate the main cause of the inflation (the budget deficit). Unfortunately, it does not seem as though the Venezuelan government has any plans to decrease spending, nor does it appear that revenue from oil will be recovering any time soon, meaning that any attempts at currency stabilization will surely fail (just as it did the last time when the bolivar fuerte was introduced in 2008).

In light of this situation, it seems that Thiers’ Law is inevitable. Thiers’ Law is the reverse of Gresham’s Law. Good money eventually takes bad money out of circulation as the latter becomes abandoned. Currently, the US dollar serves as a store of value for Venezuelans, and to a lesser extent, the unit of account. The only function that the bolivar currently serves is as a medium of payments, which is only a matter of time before this function is abandoned, as well (in fact, alternatives to using local currency have begun to spring up in the form of bartering and trade). Seeing that the US dollar is already serving various functions that replace the Venezuelan currency, it is all too possible that it becomes the undesired successor to the bolivar.

Most certainly, Venezuela finds itself in hyperinflation for which there exist only two solutions; drastically reduce spending and the deficit and execute monetary reform or lose the bolivar and adopt the dollar. Both are equally unpopular for the government of Venezuela, but the difference is that if the first option (the deficit) goes unattended, the second (dollarization) is inevitable. Then, one of the most anti-US governments in the world will have to accept the US dollar as its only remedy against hyperinflation.

In Venezuela, despite enormous levels of money creation; money shortages are more and more common (graph 5). While the money supply has doubled since last year, real money supply has decreased 30 percent.

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Joebloinvestor's picture

BARTER with anything you have.

DownWithYogaPants's picture

They need to back their currency with hot chix. 100 Bolivars per foda.

Pladizow's picture

"But but but, the dollar is going to collapse!" - Gold Bug

Leopold B. Scotch's picture

"One of the most surprising and paradoxical aspects of hyperinflations is the shortage of money. When rises in prices grow out of control (which is starting to be the case in Venezuela), the amount of new money created is not enough to suffice for these increases in prices. In other words, the real money supply drops (nominal money supply / price levels)."

 

There is no shortage in money, only skyrocketing expectations of more of it.  Were the expectation to cease becasue the morons destroying the currency stop their lunacy, equilbirium is re-established.

 

Yeah, I get what you're saying, but really, there's absolutely no shortage.  Merely a recalibration loop stuck repeat because of expectations of more FULL RETARD.  What IS in short supply is Confidence in currency.

daveO's picture

No gold (or oil, other hard assets), no trust. The High Priests of Financial Fraud, aka modern economists, can preach until they're blue in the face about their new, improved alchemy. 

modifythephasevariance's picture

Apparently 1 fat chick reads this website and downvotes Mr. Pants

Kirk2NCC1701's picture

X Currency (Bolivars) = Y Vulvas

-Kirk's Law of Barter

EllaDara's picture

Venezuela’s President Maduro, has been nominated for the Nobel Prize in Chemistry, because he managed to turn the whole country into shit.

http://www.looneymarkets.com/enjoy/so-true/he-could-share-it-with/

 

Guru1294's picture

I Beg to differ but I would consider this hyperinflation. I mean 10-20% inflation is scary, 180% is hyperinflation territory, and theres no coming back from this. After such an inflation, even if they manage to curb the rate of increase will prove to be useless as the public has already lost faith in the currency at this point

nibiru's picture

So who is the opposition leader who will be pro-Western? Who is this handsome guy that will put Venezuela onto path to prosperity? Will he be US-backed or Chinese-backed or maybe Russians with their candidate?

tarabel's picture

 

 

Russia and China and those magnificent men in their Flying BRICS don't seem to be falling all over themselves to help a brotha out in his showdown with Uncle Samuel, do they?

It's called throwing good money after bad.

MFL8240's picture

Anything but the dollar.  That is excatly what these criminals are wanting!

FGH's picture

Maybe they can figure out a way to denominate shares in beachfront condos in Miami? 

samjam7's picture

This is another great example of the sheer stupidity of Maduro's government.

Because he does not want to aknowledge ramping inflation, his government refused to print higher denominated bills. Therefore, the higest denomination of bills currently in circulation are 100 bs. which have a value of 10 cents USD on the black market. You can still find 1-5 bs bills as well, to clean your hands with.

Instead of printing higher denominated bills the government just kept on printing more and more 100 bills to keep up with the expanding monetary base, all the while running out of hard currency to even pay for the production of these bills. Now we're at a point where the government, willing or not is not even able to print new bills meaning there will soon be a shortage of 100 bs bills. Already one needs to go to several ATMs do withdraw enough cash and more often than not ATMs are quite simply empty.

Dollarization would only happen after Maduro falls and even then it would be a very undesirable outcome. Maybe as a transition to a new monetary system it could be useful but certainly not as a permanent replacement such as ocurred in Ecuador or Panama. 

spanish inquisition's picture

Maybe Venezuela should peg or use yuan.

Kirk2NCC1701's picture

Maduro was a Manchurian plant.

Things are progressing exactly as intended, FBO Globalist Banksters.

The BRICS have enough problems of their own, and are no match. Also, Venezuelan oligarchs would naturally want to align with oligarchs in the US, than those in Russia or China, due to cultural familiarity and preference.

Kissy Ass's picture

The only man who stood up against the evil jew empire was Fidel Castro.

He kept the US jew confetti in circulation in Cuba all during the embargo and it still is today. A giant FUCK YOU! He pegged his currency to the Dollar and stood there with his middle finger raised into the air and pointing north.

Viva Fidel!
https://www.youtube.com/watch?v=cUdusoxj59k

tarabel's picture

 

 

Cuba has always been open to immigrants. Why didn't you make the exodus to your anti-Jewish Wonderland.

Uh-huh, that's what I thought.

Kissy Ass's picture

I own a residence there purchased back in the early 2000's for a very reasonable price, cash. It's on the beach and has no previous claims from sour Cuban-Americans. I will move there when my business is done in this hideous jew cuntry.

Top notch, low cost health care is important for a retiree.

tarabel's picture

 

 

Ah, I see. A pilot fish with an exit plan. Namely, to move to a country where you can be the Jew spreading around your own personal pile of confetti.

But I do stand rebuked in re my previous observation. I do prefer people who practice what they preach.

 

Kissy Ass's picture

Converted to metal over long enough timeline. No boating accidents on the way there. Practice has made perfect. Ex-NSWC boat with new power for the lulz. Will make excellent dive boat.

ATM's picture

You will love it when the government has to take control of your claim free residence to make way for an American resort.

I am sure you will love the new place they give you in Las Piedras, comrade.

daveO's picture

It'll most likely be a Chosenite resort developer/gangster just like under Batista.

Pladizow's picture

I call bullshit - only an idiot discusses private matters, online!

Kissy Ass's picture

What's private about ex-pat'ing LOTS of 'merikans do it as they become aware about the Filthy's.

Emergency Ward's picture

You will be close enough to Miami to get that top-notch care.

tarabel's picture

 

 

We need to replace Andrew Jackson on the 20 with a picture of a donkey going all Brokeback Mountain on Maduro.

Secret Weapon's picture

"The technical definition of hyperinflation is when inflation is at 50 percent or more per month".  Inflation of only 10% per month would be enough to kill most families. This "technical" definition must have been written by some ivory tower ass hole who does not shop for his own food or buy his own health insurance. 

To Hell In A Handbasket's picture

You just can't cure stupid, even on an economic forum. If and when the Venezuelans adopt the dollar in parallel to their own currency, why will prices stabilize despite the socialist government continuing with the same polices? When you fail to answer my question with anything approaching a modicum of commonsense. The penny just might drop

gcjohns1971's picture

Since VENUZUELA doest control Dollar production, they will find themselves in Greece's position...only with no bailouts available.

You can only run a deficit when:

A) You print your own currency (which is an IOU)

B) Or by writing an IOU in the currency you have.

 

Who is going to take an IOU from VENUZUELA?

Nobody, that's who...not even the Venuzuelan Army...which means Maduro's got a problem unless he changes his ways.

But he's a true believer.

He'll either end up dead or flee the country.

youngman's picture

They do embrace the dollar now..if you have dollars in Venezuela you are King right now....its funny but if you cant print more BS....can you have hyperinflation???

Mike Masr's picture

They should accept the Chinese Yuan as their currency!

Juan will love the Yuan.

RedDwarf's picture

Yes, or at least some external form of money (bitcoin, gold, euro, etc).  We saw this play out in Zimbabwe recently, this won't be all that different.

Hubbs's picture

Sounds like Venezuela is just ripe for the vulture banks to move in .

Duc888's picture

 

 

 

You'd think that maybe Venezuela would take some of their gold....and....ummmm, oh I don't know, back their own currency?

http://investingnews.com/daily/resource-investing/precious-metals-invest...

 

 

Kagemusho's picture

So, if they're in hock to the guys who printed up all the currency they  are currently using, and cannot get any more, and they have essentially defaulted on the loans with the Chinese, you can expect the IMF vultures to be visiting Caracas very soon..if they are not already there.

In order to revitalize the infrastructure and get food into the cities, again, the IMF will make Venezuelans become debt peons until the 3rd generation or longer.  They can kiss any future oil revenues good-bye, as those will be first natural resources to be offered up as sacrifices to placate the IMF Moloch. Probably around the time that oil revenues globally begin to climb again.  They'll be forced to trade theirs and their children's futures for a bowl of IMF menudo.

DaNuts's picture

These poor people, watching their savings vanish into thin air as the gold bugs gloat.

daveO's picture

Well, most didn't have any savings. That's why they voted for freebies (Socialists). Now, they have to give the devil his due. The same thing's happening here in the US. The FSA marches on until it stomach goes empty. Feel the Bern muchacos.

Vin's picture

HAHAHAHAHAHAHAHA!! First they kill their country with socialism, and then they switch to the dollar which is currently in its death throws thanks to socialism and the fed? What could go wrong?

Smerf's picture

Too bad they couldnn't use gold. Demand oil payments in gold.

ThrownOffZHTwice's picture

I would guess on the black market, the only real market left in Venezuela, dollars are pretty much the only currency.  So, in effect, Venezuela has already adopted the dollar.

WassamattaU's picture

Just planted another Chestnut tree in my yard. The garden and the orchard are looking good. Goats are fat. 

gallistic's picture

That is mighty nice of ZH to showcase an up and coming young star in the Mises galaxy.

It is really gratifying to see yet another Mises ideologue torturing the stats and making a dogmatic argument in dismal science gobbledygook by cherry-picking his facts, citing economic "Laws", salting it with a little chart-porn, and honoring his economic theology.

His masters must be very proud.

I know it is simply too much trouble for the average sheep, but I strongly encourage anyone who truly gives a shit about truth to consider the source, check his formation, his political views, his current enterprise and paymasters, and his think-tank entanglements before you go full retard and swallow his fallacious argument hook, line, and sinker.

Just saying...

MEFOBILLS's picture

More Mises Monk nonsense.

I'll let Hudson speak on hyperinflation, and he mentions authors perhaps the "new Austrian" Tyler should read.  

____________________

 

Every hyperinflation in history has come as a result of the collapse of the balance of payments. The Germans are most familiar with 1921, but they tend to forget that the Weimar inflation was a result of Germany trying to pay reparations abroad. They were ordered by the Allied powers to print Deutsche Marks not for domestic spending, not to run a domestic deficit, not to rebuild Germany, not to employ labor, but to throw reichsmarks onto the foreign exchange market to obtain the foreign currency to pay the Allies, so that the Allies could turn around and pay the arms debts for what they bought from the United States before entry into World War One. It was the collapse of the foreign exchange that caused the hyperinflation, not domestic spending. And Germany’s hyperinflation was not cured by the central bank creating less money. It was cured by setting up a triangular flow of international payments. American bondholders would lend money to German municipalities that would issue bonds. The municipalities would receive dollars, and turn them over to the Reichsbank. It then would issue German currency against this for local spending – using the dollars to pay the Allies. The Allies would pay America, and that would keep the circular flow going. But to do this, interest rates had to be held down in the United States, to make German and other European borrowing more profitable for international lenders.

The same thing happened in Chile, which is another textbook hyperinflation. Rogers wrote a book on the process of hyperinflation in France that also occurred in the 1920s. The classic study of German inflation is by Salomon Flink, The Reichsbank and Economic Germany. The book actually was printed in Germany at that time. The same thing happened in Russia in the 1990s. The Russia hyperinflation occurred as a result of the depreciation of the ruble. This was already determined in advance at the meeting in Huston, Texas, between the World Bank and the IMF and the other Russian authorities. All this was published at the time, even before break-up of the Soviet Union. So to talk about hyperinflation as if it is a domestic phenomenon is to ignore the fact that never in history has it been domestic. It always is a balance-of-payments phenomenon, associated either with war or a class war, as in Chile’s case.

dogismycopilot's picture

yes. USD, EUR, OMG, WTF, LOL....they are going to need to embrace something.