Venezuela Is Not Heading Toward Economic Collapse; It Has Already Arrived
An international correspondent in Caracas recently tweeted, “On Monday, Venezuela’s biggest bill bought you four pennies. Today it will only buy three. The bolivar has lost 1/4th of its value in 4 days.” (Source: “Twitter post,” @nmcrooks, November 25, 2016, 2:13 p.m.)
That was last week. So much for the “strong bolivar.” Venezuela is heading for economic collapse. This will have repercussions all over South and Central America.
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The bolivar—ironically named bolivar fuerte (strong bolivar) to distinguish it from the previous bolivar— has lost almost half its value in November alone. It was trading at 2,753 bolivars per U.S. dollar on Thursday, which marks its largest-ever drop. (Source: “Venezuela’s Currency Just Had the Biggest Monthly Collapse Ever,” Bloomberg, November 24, 2016.)
Venezuela’s economic collapse seems inevitable. The bolivar continues to produce negative records day after day.
This recent fall of the bolivar has been the fastest ever. Venezuelans are no longer bothering to count the notes; they merely weigh them: “I’ll buy that loaf of bread for a pound of bolivars.” It has come down to that. The monthly minimum wage is about 70,000 bolivar fuertes. It might sound great, but that’s barely equal to $26.00.
For a long time, socialists from around the world celebrated Venezuela as an example of wealth distribution and economic success in general. However, it did not take a Nobel-winning economist to realize that Venezuela was simply redistributing the country’s good fortune. Former President Hugo Chávez’s social welfare programs were fueled by rising oil prices in the first decade of the 2000s.
Today, the flip side of that process is in full sight. Venezuela must import food, whereas it once was a major producer. Under Chávez, so much oil wealth was simply redistributed. It was not reinvested to improve the economy across all sectors. Venezuela’s current President Nicolás Maduro inherited Chávez’s policies without his charm, charisma, and—especially—without the oil revenues to fund those policies.
Since 2013, When Maduro Took Over, Venezuela’s GDP Has Dropped Over 20%.
Economic collapse has already come and gone. The current rocketing inflation is on the brink of graduating to hyperinflation. Maduro could reverse course. He could resign, or he could follow some of the opposition’s suggestions (represented by most members of the National Assembly—the equivalent of U.S. Congress).
Soon, Venezuela will be paying workers by the pound (the lbs. kind, not the one from England). In November alone, the U.S. currency has gained 132% against the bolivar. Everything suggests that Venezuela will start December in hyperinflation mode. This is the first time it has happened in the South American oil- and resource-rich country. Hyperinflation is an indicator of economic collapse.
Rather than attempt corrective action, the government led by President Nicolás Maduro has blamed the hyperinflation problem on the black-market exchange. Maduro, who succeeded President Hugo Chávez in 2013, has repeatedly accused the currency traders of “conspiring against Venezuela from Alabama.” That’s where Gustavo Diaz, a hardware salesman at a Home Depot Inc (NYSE:HD) store in Hoover, Alabama has become Venezuela’s No. 1 enemy.
Diaz runs the web site “Dolar Today,” which reports the informal exchange rate since the official one was banned. The harsh restrictions on legal currency change—strictly controlled by the government (exchanging bolivars had become almost impossible for several years) have favored the rise of the informal or “black market.”
At present, most companies set prices based on the value of the U.S. dollar in the informal market. This has caused a sharp increase in inflation. Indeed, the bolivar and Venezuela are experiencing the kind of inflation that feeds itself, because the bolivar’s value is challenging gravity in a race to the bottom.
Such rapid losses have forced citizens to change their (scarce) savings into dollars just so they don’t lose them. Naturally, this has the effect of increasing demand for foreign exchange, accelerating the bolivar’s depreciation. Venezuela is not so much heading toward economic collapse, as it is already experiencing it.
Meanwhile, the number of bolivars in circulation has doubled according to the Banco Central De Venezuela. In the coming weeks, 500, 1,000, 5,000, 10,000, and 20,000 bolivars will be in circulation to facilitate purchases. Until now, the largest bolivar denomination was 100 bolivars. This is because the government has refused to manufacture paper money of greater value in order to “avoid causing more inflation.”
