NS4540 Winter Term 2018 Hyper-Inflation in Venezuela Federal Reserve Bank of Chicago, Strong Dollar Weak Dollar

Overview I Robert Looney, “Hyperinflation is Crippling Venezuela, but Maduro Has no Interest in Fixing it” World Policy Review, January 22, 2018 Until recently hyperinflations that inflicted staggering costs in South America in the 1980s and 1990s seemed like a thing of the past However in 2017 inflation hit 652% in Venezuela with the IMF forecasting rates of 2,349% in 2018 and 3,474% in 2019 Even these forecasts may be conservative with the price of selected items already increasing by 80% in the first week of January 2018

Overview II While normal hyperinflations take place through excessive increases in the money supply, Venezuela’s also reflects a sharp fall in the supply of goods The economy has been shrinking sharply each year since the oil price collapse in 2014 In 2016 alone output fell by 16.5% At the end of 2017 the contraction of Venezuela’s economy was the region’s largest ever recorded Today per capita incomes in Venezuela have fallen back to levels not seen since the 1950s.

Hyperinflationary Process I The calamity is mainly self-inflicted After assuming office in April 2015 President Nicolas Maduro continued the lavish spending of his predecessor Hugo Chavez Did not have the oil profits to pay for it Excessive expenditures combined with inept management led to increased fiscal deficits financed by printing money So far (January 2018) under Maduro the money supply has increased by 12,000% Minimum wage increases have further fueled the hyperinflation

Hyperinflationary Process II In 2017 alone the country’s currency the bolivar lost 97% of its value against the dollar The exchange rate for U.S. dollars on the black market is almost 900 times the official rate The devaluations have set off a vicious circle Dollar priced imports are prohibitively expensive Many private Venezuelan firms either can’t afford foreign parts or materials Production cutbacks occur with many firms going out of business The reduced supply of goods adds to hyperinflationary pressures and subsequent devaluations

Hyperinflationary Process III The costs of the hyperinflation are staggering Food shortages are everywhere leading to widespread hunger Poverty is increasing rapidly with many incomes incapable of keeping pace with the cost of living Massive brain-drain occurring with educated middle class families leaving in droves rather than working with others to force Maduro out of office Not only does Venezuela have the highest inflation rate in the world – also has Highest crime rate Food riots Protests and Mass lootings of stores

Hyperinflationary Process IV The resale of price controlled goods at black market prices is one of the fastest growing sources of income Another new activity is bitcoin “mining” to gain access to a currency capable of holding its value

Hyperinflation Strategy I The puzzling thing about the hyperinflation is not how it started and keeps accelerating, but why the government has shown little interest in stopping it Venezuela’s neighbors showed in the 1980s and 1990s it is possible to bring hyperinflations under control in a relatively short period The trick is to replace discredited national currency with one that people have trust in holding. Dollarization in Ecuador in January 2000 Bolivia’s 60,000% inflation in 1985 by stabilizing the black market exchange rate

Hyperinflation Strategy II Point is governments today have the tools to stop hyperinflations in their tracks if they are willing to use them Only conclusion can come to is that combatting hyperinflation is not in Maduro’s interest While Maduro may have accidentally stumbled into hyperinflation he is now using it as part of his strategy to stay in power Lenin who believed that excessive inflation would usher in the demise of capitalism would certainly approve

Hyperinflation Strategy III Maduro’s ability to stay in power despite the collapse of the economy depends on the support of his key backers: The security forces and the military The roughly 25% of the population – mainly low income families whose livelihoods improved under Chavez and who depend on government handouts and Chavista gangs that are a cross between community organizers and party paramilitaries. The government has remained in power through its ability to direct resources such as remaining oil revenues and loans from China and Russia to these groups.

Hyperinflation Strategy IV More importantly, hyperinflation combined with an elaborate set of price controls enables the transfer of additional resources to these groups while simultaneously impoverishing the mostly middle class opposition Vast sums are transferred to ranking military officers by providing them access to U.S. dollar at the official exchange rate The military also benefits from its position overseeing the country’s food distribution system much of which it sells at a high profit in the black market. The food distribution system also creates a patronage network where loyalists receive food and opponents are deprived.

Assessment Tragedy of Venezuela is what is good for the country’s leadership is a disaster for at least 75% of the population Reason why despite readymade solutions – hard to see hyperinflation ending anytime soon.