Venezuela inflation makes wallets too small to hold shopping cash
The crashing Venezuelan economy has put consumers between a rock and a hard place. Shortages have caused prices to increase dramatically while, at the same time, the value of the Venezuelan currency has plummeted. The result of the Venezuela inflation is that wallets are no longer large enough to contain the wad of banknotes that are necessary to buy even small, everyday items.
According to the Washington Post, the exchange rate is so bad that the largest Venezuelan banknote, a 100 bolivar bill, is worth only about 5 US cents on the black market, far less than the official exchange rate of 10 bolivars to the dollar. That means that common items are increasingly out of reach for Venezuelans. A pack of cigarettes currently sells for about 2,000 bolivars, the current equivalent of $1 US. This transaction alone would require the exchange of 20 of the 100 bolivar bills.
The large number of banknotes required for a typical shopping trip makes it difficult to carry enough money in a wallet or purse. Many Venezuelans are increasingly turning to electronic transactions to avoid carrying large amounts of cash. For others, the large quantity of paper money means using larger plastic bags or backpacks to transport their bankroll.
Shortages have caused the price of food to skyrocket even as the money lost its value. As food riots rocked the country in August, CNN reported that staples such as flour, milk and pasta can cost a month’s pay… if you can find them at all.
In Venezuela, there are three ways to buy products. First, there are official government stores where the price is subsidized and kept low. Economic law dictates that artificially low prices cause abnormally high demand. The result is that people flock to the government stores and rapidly clear their shelves. Products disappear quickly even with rationing. Customers at government stores can only shop on certain days of the week. There are long lines and, when you get to the front, there are no guarantees that there will be anything left to buy.
Venezuela also has private stores. Since these stores are not subsidized by the government, prices are higher. Private stores still have to contend with the shortages as well.
“I’ve been waiting in line since 3 a.m. and have only managed to get two tubes of toothpaste, so, I guess I’m going to have to eat toothpaste tonight,” Monica Savaleta, a 19-year-old dancer, told CNN.
There is a third option, the black market. Buying and selling on the black market is illegal and can be dangerous. It is also very expensive compared to the legal stores.
“I make between 12,000 and 15,000 bolivars a month,” Savaleta said. “If I buy from the [black market] bachaqueros, my whole salary is blown on three kilos [6.6 pounds] of rice.”
Business Insider listed several black market prices for common grocery items. Fresh milk is impossible to find, so many used powdered milk which costs $700 US for a 2.2-pound box. A dozen eggs fetch $150 US. A box of pasta costs more than $300 US. Watermelons are $40 US each. A one-pound bag of coffee is $200 US. To put this in perspective, the Venezuelan minimum wage is about 15,000 bolivars per month, about $1,500 US. More than three-quarters of Venezuelans live in poverty according to the Wall Street Journal.
Venezuela’s situation is known as “hyperinflation,” a condition typically defined by economists as monthly inflation of greater than 50 percent. At that level, an item that costs $1 on January 1 would cost $130 a year later. The Venezuelan inflation rate has been estimated at between 720 percent and 2,200 percent.
There have been 55 other cases of hyperinflation, all of them since the onset of the 20th century. The most famous was in the German Weimar Republic in the 1920s that eventually led to the rise of Adolf Hitler. As with many cases of hyperinflation, war and financial mismanagement led to the onset of the Weimar crisis. Germany had financed its war effort with debt, which was compounded after the war with reparations payments to the Allies. The Reichsbank began monetizing the debt, a process by which the central bank issued bonds to cover its debt which were then purchased by the same central bank. Using this process, the government could borrow money without having to repay it. The German government also began printing more marks to finance domestic spending.
In Venezuela, the economic crisis is primarily due to government policy and the oil slump. Former president, Hugo Chavez, a protégé of Fidel Castro, nationalized large swaths of Venezuela’s economy and funded much of the country’s consumption with foreign debt according to The Guardian. When the price of oil crashed, so did Venezuela’s revenues. As a result, Nicolas Maduro, Chavez’s successor, was forced to use the country’s gold reserves to service the national debt.
The Maduro government also printed more money, which contributed to the devaluation of the currency. Another basic economic law says that when there is more of something, it is valued less. More bolivars on the market made each individual bolivar less valuable.
Also contributing to the problem is corruption. Transparency International rates Venezuela as the ninth most corrupt country in the world. While ordinary Venezuelans suffer, Maduro and his cronies are doing well. The NY Post noted last spring that an estimated $2 billion has been exported from the country to private banks. The Maduro government is accused of bribery, money laundering, siphoning funds from the state-owned oil company and even drug smuggling.
In 1923, the Weimar hyperinflation ended when the German Reichsbank stopped monetizing the national debt and stopped printing new money. The Reichsbank pegged the value of the Papermark at 4.2 trillion to $1 US according to the Mises Institute. A new currency, the Rentenmark, was introduced with a value of 1 trillion Papermarks to 1 Rentenmark.
At this point, there is no end in sight to the Venezuelan crisis. A resolution will require a change in government policy and may require a change in the government itself. Dissatisfaction and food riots may eventually turn into a revolution or coup against the country’s ruling class. Until reforms are made, the best the government can do to deal with the crisis is to print money in ever larger denominations.
Originally published on The Resurgent
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