How destructive is hyperinflation? To quote economist Thomas Sowell, “Hyperinflation can take virtually your entire life’s savings, without the government having to bother raising the official tax rate at all.”
A number of countries are currently experiencing the destructive effects of hyperinflation.
With the Venezuelan Bolivar at above 2,000,000 percent inflation, buying anything, even if something should be available, is virtually impossible. At towns along the Colombian border, food and medicine are bought with dollars or pesos. The Bolivar has simply lost any kind of value.
Foreign currency has become a critical means of survival in Venezuela. More than 40,000 Venezuelans, desperate for work and food, cross the border to Columbia each day. If they find work, they are paid in pesos. Should food be available, that, too, is purchased with pesos. Bolivars have become almost irrelevant to many Venezuelans. Most other currencies are eagerly accepted.
During the recent blackout that left Venezuela in the dark, food and medicine could only be bought with cash, as the electronic payment systems were non-functional. In Venezuela, cash means any foreign currency. In Maracaibo, the country’s second largest city, only U.S. currency greater than the dollar bill was accepted.
Foreign currency becomes available through friends and family who have permanently escaped the country and can send back cash. Those without such connections suffer. Some stores won’t accept the bolivar, and those that do charge a price Venezuelans cannot afford. Anyone lucky enough to have a job finds that the minimum wage of 18,000 bolivars, or $6.00, does not buy much.
With Venezuela in a state of turmoil as Maduro is fighting for his life, even the scarce goods that used to occupy the shelves are becoming rarer. This, of course, makes them more expensive, even when paid for with U.S. dollars. Even the dollar is becoming a victim of Venezuelan inflation.
According to the Venezuelan firm Ecoanalitica, a basket of necessities that was priced at $100.00 in 2018 now costs 675.00. The recent blackout, which left the country without electricity or air conditioning, saw the price of a bag of ice triple within a few days.
An elderly woman living in Caracas indicated that she was able to survive a year ago on the cash she received from family abroad. With hyperinflation continuing to soar, bare survival is a daily struggle. Her monthly pension, which is paid in bolivars, covers a bag of laundry detergent. Nothing more.
Venezuelans living in border cities have easier access to foreign currency, and many shops in those regions set their prices in foreign money. Cities near the Brazilian border conduct business trading the Brazilian real. The Bolivar is no longer accepted.
If life in Venezuela is looking bleak, it is almost certain that it will get worse. Inflation is anticipated to rise to 10 million percent by the end of the year. Venezuela, once one of South America’s wealthiest countries thanks to its massive oil reserves, has seen the destruction of its oil industry as the price of oil plummeted.
In 2018, a desperate President Maduro tried to rejuvenate the Venezuelan bolivar by removing seven of its zeroes. This was widely considered to be a joke. Economist Steve Hanke called it a “scam.” The continued downward spiral of the bolivar has lent gravitas to those words. Professor Hanke continued, “Redenomination will be like going under the knife of one of Caracas’s famed plastic surgeons. Appearances change, but, in reality, nothing changes.”
The actual misery which Venezuelans are experiencing is difficult for an outsider to grasp. Alvaro, a computer engineering professor, related his story on social media. He is in one of the highest paying professions. Alvaro makes approximately $13 a month, or 37,255 bolivars. A liter of milk costs 4,200 bolivars. That is 11 percent of his monthly income or a quarter of the minimum wage. His life’s savings, thanks of hyperinflation, are worth a mere 2 percent of what it was close to 20 years ago. Inflation indeed is an invisible tax, that can wipe out your lifes savings.
As Alvaro points out, 20 years have been stolen from the citizens of Venezuela. From what was a country that enjoyed abundance, the quality of life has receded to hunger, sickness, and nothingness. All due to hyperinflation of the bolivar.
When Venezuelans withdraw money from the bank, it is immediately spent, because it might be worthless the next day. Prices can double on a daily basis. This is a disturbing image reminiscent of the Weimar Republic. Regardless of where it happens, hyperinflation invariably equals economic destruction.
At this time, Venezuela is in a state of flux. Thousands of protestors have called for Maduro’s resignation, and some countries (including the U.S.) have recognized Juan Guaido as his successor. Whoever comes out on top faces a tremendous uphill battle.
Although Venezuela is facing the worse type of hyperinflation, it is not the only country experiencing monetary devaluation at a rapid rate. Zimbabwe’s annual inflation is around 59 percent annually and growing. Fortunately, price increases have been kept manageable at 10 to 15 percent due to government efforts. Zimbabwe has experience with hyperinflation.
In 2008, Zimbabwe saw inflation spiral out-of-control at 500 billion percent. It was forced to abandon its currency altogether and replace it with the dollar. At the moment, Zimbabwe is facing its worse economic uproar since 2008, with food shortages and a shortage of useable foreign currency. It remains to be seen if history will repeat itself.
The main problem is that Zimbabwe is operating almost without cash or actual currency. The major currencies used are the dollar, bond notes, or EcoCash. Trades, even the purchase of a piece of gum, are done electronically. The value of the electronic currency was supposed to equal the value of paper currency. However, merchants are known to set three separate prices for their wares. The cheapest is payments made in dollars. Payments made in bond notes are somewhat higher. Payments in EcoCash are inflated by around 40 percent. The critical lack of dollars is making this three-tiered monetary system considerably worse.
Iran, in the meantime, is experiencing an annual inflation rate of 42.3 percent. In 2016, the country saw a growth of 12.5 percent. Last year, the growth was only 3.7 percent. Iran’s current economic woes are largely the result of oil sanctions initiated by President Trump. Rising oil prices have helped Iran, but this has also created inflationary conditions. As Professor Hanke points out, during the first six months of 2018, the Iranian rial was devalued by 51 percent while unemployment rose to 11.9 percent.
Despite the U.S. sanctions, some countries are still purchasing Iranian oil, but they are doing so at significantly reduced prices.
Hyperinflation is the inevitable result of a government printing fiat money until it loses all value. Both Venezuela and Zimbabwe in 2008 have done this. For Venezuela, there is little relief in sight. Zimbabwe simply stopped printing any currency, which helped alleviate the worst of the problems. How Iran will deal will with its rising prices and decreased income is yet to be seen.