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What is Hyperinflation? Ask Venezuelans

What is Hyperinflation? Ask Venezuelans

On October 1, Venezuelans will witness another wave of their socialist government’s magic money wand. Maduro will herald the removal of six zeroes as a bold, new day

Broadly speaking, prices in the United States are rising at their fastest pace in more than a decade. A few bold forecasters are predicting hyperinflation on the horizon. But how fast must prices gallop to reach that ominous threshold?

This is not a question that has a single answer on which everybody—or even every dictionary—agrees. But if there’s a consensus among economists about what that magic number is, it might well be a rate of 50 percent per month. That would translate into prices soaring by almost 13,000 percent on an annual basis.

Thankfully, Americans are a very long way from anything like that. In Venezuela, however, people know exactly what hyperinflation is because the socialist, money-printing tyrants in Caracas have been delivering it for years now. They stopped publishing money supply numbers but we know that in 2017, the money supply was six times higher than it was just two years before.

The bolivar is so close to absolute worthlessness that Venezuelans are refusing en masse to use it, preferring American dollars and cryptocurrencies instead. On October 1, the regime of Nicolas Maduro will “reform” the bolivar by officially lopping off six zeroes. “All monetary amounts expressed in national currency will be divided by one million,” the central bank announced last week. New paper notes will be issued in face values of from five to 100 bolivars.

Photograph showing several bolivar banknotes on August 4, 2021, in Caracas, Venezuela (EFE)

My prediction: The new money will promptly sink in value just like its predecessor. Why? Because destroying value is what socialist governments do best. Barring some unforeseen and unlikely regime change in the next six weeks or so, the socialist policies that produced this disaster will still be in place: reckless government spending and printing of money, vilification of profit and private entrepreneurs, coercive redistribution of wealth, and cronyism and corruption on a colossal scale.

In 2018, the Maduro kleptocracy “reformed” the bolivar by removing five zeroes, so the October adjustment means the currency will have shed a whopping 11 zeroes in just three years.

Venezuela is living proof of one of the few things that British economist John Maynard Keynes said that made sense:

There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction….

As the medium of exchange, money is only useful for what it gets you in exchange, which typically means real wealth in the form of goods or services.  Think of money as a kind of receipt or claim ticket. You earn it but then you turn it in for something you really want, much like you give a ticket to the clerk to claim your coat after a theater performance. If while you were watching the show, the coats were burned and the clerk issued thousands of new claim tickets, none of those tickets would be worth anything.

In other words, the value of money can be radically affected by both its own supply and the supply of what you can buy with it. Too many tickets chasing too few coats is a formula for chaos.

Socialism and hyperinflation

Neither socialism nor socialists possess a coherent theory of wealth. They have endless schemes to seize it, give it to their friends, or buy votes with it but no thoughtful perspective on how it comes into being or how to generate more of it. So, socialism ends up as the equivalent of burning the candle at both ends: It destroys wealth creation at the same time it issues more claim tickets redeemable for a diminishing supply of wealth.

Frank Holmes’ Blog reported on July 26 that a cup of coffee in Caracas costs almost 7 million bolivars and that per capita GDP in Venezuela is lower today than it was 35 years ago.

A man tries to pay a bus fare with a lot of bolivars (EFE)

Economics can explain the causes and effects but socialism is more voodoo than it is economics. Socialism is the irrational belief that politicians and power can somehow veto the laws of reality and make us all better off.

Does anybody remember Decree #3196? It was issued by the former bus driver and Chavez crony Nicolas Maduro in December 2017. It declared that the government would launch its own oil-backed cryptocurrency, which it subsequently did in February 2018. It was called the petro. Skeptics like me at the time suggested there was no reason to trust a new currency to a regime that was busy destroying another one.

Sitting in front of cameras broadcasting the news to the nation, Maduro triumphantly decreed the petro into existence. Voila!

Normal people know that creating wealth is not like waving a magic wand; it takes work, risk, investment, employment, manpower and brainpower. But the fool Maduro thought that wealth was something you just announce, and then it appears on command.

Within six months, Reuters reported the petro’s fate: “The coin is not sold on any major cryptocurrency exchange” and “No shops are known to accept it.” Three years later, the petro is as worthless and shunned as the bolivar. Here’s a short video about its failure:

It was the Austrian economist Ludwig von Mises who famously declared that “government is the only institution that can take a valuable commod­ity like paper and make it worthless by applying ink.

On October 1, Venezuelans will witness another wave of their socialist government’s magic money wand. Maduro will herald the removal of six zeroes as a bold, new day. Everybody else will see it as nothing more than a clown show that isn’t the least bit funny.

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