The Venezuelan government implemented strict anti-market policies under the late socialist president Hugo Chavez.
A decline in global oil prices severely impacted Venezuela’s oil-reliant economy, as much of their GDP relies on the ability to export oil.
Venezuela’s central bank increased the money supply and tampered with interest rate policies, which led to both surpluses and shortages in the past.
Let’s take a deeper look at the root causes of the Hyperinflation in Venezuela
Venezuela’s foreign reserves – which consist of U.S. Treasury Bonds and gold – are valued at around $12 billion, down from about $42 billion in 2008. Since current government revenues, mostly derived from its oil exports are not sufficient to meet its debt obligations, Venezuela has been forced to sell most of its reserves, including its gold reserves.
The decline in the value of the Bolivar has made it prohibitively expensive or impossible for the government to pay for products, causing shortages and consumer prices to skyrocket.
Are Nicolás Maduro’s and Hugo Chavez’s Socialist Platforms Partly To Blame?
Chavez’ handling of this situation has been far from ideal – mainly due to his socialist beliefs.
He has seized large swathes of farmlands he claimed only served “the devil’s interests”–much like Paster Mugabe. Problem is much like Mugabe, he also uprooted something he could not replicate or reproduce. Agricultural production plunged, need for imports increased, people began bidding up the price of scarce goods as a way of dealing with unfavourable terms of trade and falling domestic production, price controls were put in place to tame inflation.
Problem is, retailers began taking items off the shelf to create artificial scarcity and make under the table sales to the highest bidders. Others targeted products that weren’t subject to price controls and increased their price to make up for what they saw as losses in price-controlled goods. Retails also caught fire as merchants and grocers played off real and artificial scarcity to survive in a heavily regulated environment.
A National Guard officer standing outside a grocery store looted by neighbours the night before in Ciudad Bolívar,
Venezuela. Alejandro Cegarra/Associated Press
The Socialism era was ushered in with the election of Hugo Chavez in 1999, and later, began its reign over Venezuela with the establishment of the United Socialist Party of Venezuela in 2007.
The introduction of the Socialist platform, as well as the Bolivar Fuerte, saw a massive jump in the money supply within Venezuela (pictured in the graph below).
In a country where roughly a third of the population lacks a bank account, cash transactions are a critical part of the economy — especially for the poor.
It is illegal to publish the free-market value of the bolívar in Venezuela, so people rely on an online exchange rate, run by an ex-colonel turned hardware salesman in Alabama, that tracks black market trading in the Colombian border city of Cúcuta.
But it’s important for us to note quite what it is that they got wrong. There’s nothing wrong with the idea that perhaps the country was a bit too stratified, perhaps a bit unequal. There’s also nothing wrong with having a political goal of trying to sort that out a bit. The problem is always going to be the manner in which you attempt to do so.
Or we could do what Venezuela did which is go mess with the markets and prices. And that method ends up in the disaster we see before us. Price fixing simply doesn’t work. For, if you fix the price below the market clearing price then you will have shortages as Venezuela does, and if you fix the price above that market clearing price then you will have surpluses.
To conclude, I believe the Socialist economic reign in Venezuela is the reason for the hyperinflation of the Bolivar. If the Maduro-led government had followed market-based protocol and used oil exports as a means to fund the poor and boost economic activity, this issue would not have gotten so out of hand. Furthermore, the means in which Maduro has implemented the Bolivar discontinuation is unjust; to only give the public 72 hours notice means you are putting many lives in jeopardy, and making theft and other crimes more accessible.
The Socialist regime in Venezuela created a weak currency that was subject to corruption, which is why this issue escalated so quickly. When oil prices went down, Venezuela started to use their dollar reserve to continue paying for the price scheme. They also increased the money supply and borrowed on the financial markets. This is not sustainable and is what led them to this hyperinflation catastrophe.
On Thursday, President Maduro appeared again on state television to announce a second extension of the life of the 100-bolívar bill for an additional 18 days, until Jan. 20. With luck, the new bills, ranging in value from 500 to 20,000 bolívars, will have been made widely available before then.
But printing larger denominations doesn’t help reverse an episode of hyperinflation. And Venezuela’s on a ticking clock. Because the rapidly devaluing bolívar is not widely accepted outside the country’s borders, in order to continue to borrow the money required to keep the nationalized oil industry pumping, the government must pay its foreign debts with dollars. According to data from the Central Bank of Venezuela, the government held $43 billion in foreign reserves at the beginning of 2009. Only $11 billion is left today.
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