Hyperinflation a monster with plenty of life left
If history has taught us anything, it’s that things can always get worse, even when that seems impossible – as it does right now in Venezuela.
Indeed, in the span of a few months, the International Monetary Fund has gone from forecasting that Venezuela’s inflation rate would hit 12,875 per cent by the end of the year, to now saying that it will get all the way up to 1 million per cent.
Now, this isn’t the type of prediction you should take literally – the IMF says it’s more a ‘‘signal that the situation in Venezuela is similar to that in Germany in 1923 or Zimbabwe in the late 2000s’’.
Instead, it’s a reminder that even a failed state such as Venezuela can still fail some more. Which it almost certainly will.
How did Venezuela get to this point though, when the debate is whether its inflation rate is about to reach either ‘‘only’’ five figures or seven?
The Chavista regime’s spending plans have been so extravagant, and its management of its stateowned oil company so inept, that it hasn’t had enough petrodollars to pay its bills, even when oil was US$100 a barrel.
So it really doesn’t now that the shale revolution has sent crude prices down so much.
Which is to say that it’s always had to print a little money, but now it has to print a lot.
The result has been a downward spiral that’s sent prices on an ever-faster upward trajectory, to the point that, going by black-market rates, Venezuela’s currency has lost 99.9997 per cent of its value in the past six years. To put that in perspective, US$333,333 (NZ$491,495) worth of bolivars in 2012 would only be worth US$1 today.
And the truth is, nobody knows how much worse this is going to get.
‘‘You cannot forecast the course and duration of hyperinflations,’’ said Johns Hopkins professor Steve Hanke, one of the world’s foremost experts on the subject.
That’s because hyperinflation is more a political phenomenon than an economic one, to the extent that it’s about governments choosing to continue to print money even after it’s started to kill their currencies, so it can last a lot longer than you’d think.
But like everything unsustainable, hyperinflation eventually comes to an end. There are two things that can force a government’s hand.
The first is what Hanke called the ‘‘physical constraint on redenomination’’, which is just another way of saying that it can’t print money fast enough.
It’s actually a pretty good description of what happened in Yugoslavia in the 1990s. Back then, Serb strongman Slobodan Milosevic had tried to pay for all his wars by setting off what is still the third-worst hyperinflation in history, until his mint simply hit full capacity.
So he had no choice but to stop.
The second way a hyperinflation stops is when people stop accepting the currency en masse.
It’s what’s known as spontaneous dollarisation, because that’s what everyone starts doing business in instead, and it’s what brought Zimbabwe’s hyperinflation, the second worst on record, to an abrupt halt nearly a decade ago.
‘‘The citizens just went on strike,’’ Hanke said, ‘‘and refused to get paid in Zimbabwean dollars’’. The government had no reason to keep printing them – and so it didn’t.
This is starting to appear in Venezuela, where consumers don’t even think in bolivars.
The good news, then, is that Venezuela’s hyperinflation might end up burning out, as those other ones did.
The bad news, though, is that’s probably a long, long way away from happening.