Often on HN's you'll get someone asking why a company has to continually grow revenues/profits. And the person is usually convinced once someone else comes along and lays out an argument that goes along the lines of....
If you consider a market with two companies.
Company A that doesn't grow revenues or profits and company B that continually grows revenues and profits, which one would you invest in?
The answer is obviously once you realize that each company doesn't exist in a vacuum but is instead competing with other companies for the same investment dollars.
Currencies markets work in a similar manner in that you are never talking about a currency but rather you are explicitly talking about what a currency is worth with respect to another currency, or often implicitly with respect to the US dollar.
It's actually pretty amazing to think about the currency markets and how they are constantly reweighing each currency with respect to every other currency such that each currency has the correct valuation with respect to all others such that there is no available arbitrage opportunity.
So its not that the markets or wall street is being "mean" to Venezuela or punishing it, but rather they are trying to find the right balance of how many Boliviars one should get for each USD.
Unfortunately, there is a giant feedback loop that often means once a countries currency gets depressed enough they almost have no choice but to print money just to buy/import the essentials required for life. And this printing of money just has an feedback that increases inflation even more until its impossible to get out from without a bankruptcy, just google "Zimbabwe trillion dollar bill".
Venezuela is a country that is simply being looted and there isn't a lot of economic theory needed to explain simple theft.
The Bolivar isn't freely convertible except on the black market so there isn't any market (from free or otherwise) to talk about.
How it works is pretty simple. A connected businessman applies to the government to import medicine at the official exchange rate. He then takes those USD and contracts with a shell company he controls in Panama to buy antibiotics and provides all the paperwork. A small amount of those funds are then used to buy antibiotics on the open market and ship it to Venezuela. The profits are distributed around to othe shell companies controlled by various government officials to keep access to the favorable exchange rates.
Once they arrive in Venezuela the local paper writes up a story about the shortages and mentions the connected businessmen and officials as heros for importing needed medicine. Pictures are taken showing them inspecting the cargo as its offloaded.
But it there is still money to be made! Prices on antibiotics are regulated so a lot of the shipment is diverted into the black market which siphons up bolivars at the black market price.
Those are then traded back at the official favorable rates and the process repeats.
It's a brilliant scheme because the masses don't understand enough to understand how they are being robbed. Pick their pockets and then blame it on the "market" or "imperialist." Doesn't really matter as long as its a convenient.
And it gets better! Eventually things get so bad that people start sending relief supplies and cash which creates new opportunities to loot.
You only have to look at any socialist country in the last 80 years to understand what is going on. This is how Eastern Europe survived for decades. The diaspora kept everyone back home alive while those in Government became rich.
How did it work out for Russia, 80 years of communism and everyone had to line up for a loaf of bread and bar of soap. Venezuela managed to do it in a few short years...
Its not bizarre when you consider that what is called "socialism" today encompasses a range of attitudes towards economic policy.
Its not bizarre when you consider that the drive towards efficiency and concentration of wealth destroys the demand side of the equation.
The Nordic countries are doing great (better than the US in many regards) and this is what most on the left refer to when they speak of socialism.
I don't know how anyone can look at Venezuela or Eastern Europe in the 70s/80s and say "yeah, we should be like that."
Eh, socialism and communism may seem to offer better end results but the difficulty of implementation without being exploited / converting to another ideology is evidently hard, perhaps impossible.
Capitalism is really good for so many many countries... They are living the capitalist dream!
Let me give you some examples of those countries, in case you forgot:
- Honduras
- El Salvador
- Guatemala
(Almost all south america is completely dangerous)
- Moldova
- Romania
- Georgia
(Almost all ex soviet republics are lingering as third world)
- Albania
- Greece
- Kazakstan, Uzbekistan
(The middle east countries are some of the poorest)
- ALL Africa
Also I can give you a list of some countries dying with socialism and socialist society:
- Norway
- China (They are richer than the US)
- Italy
You see were am going...
I think that you should try to be not so dramatic in your arguments. There are good and evil in both sides.
> (Almost all ex soviet republics are lingering as third world)
You are exposing your ignorance. Ex soviet republics are by definition second world.
> Also I can give you a list of some countries dying with socialism and socialist society: - Norway - China
China is communist, not socialist. Norway is a redistributive democracy. There has not been a case where government or collective ownership of the means of production has led to good results.
China tried, and has been rolling that back ever since.
I suggest you learn your terms better before volunteering your opinion.
Have you ever visited Moldova? Amazing second world.
Well, China is communist, you say. and they are the 3rd country by GDP. Bad results?
What do you understand by socialism? Do you believe that you are not entitled private property?
> Socialism is simply a philosophy that puts people before money
That is a platitude that doesn't mean anything. Abolishing a pricing mechanism doesn't put people ahead - it destroys resources. Capitalism has done more for the people in the last 300 years than any other system in the last 30,000.
Actually, it is done by the willingness of the governed who think that through community resource sharing we can take care of each other. That is why the important stuff (medicine, education, protections) is free o almost free.
I don't think this is true, corporations do bad things, and there are bad corporations, but no corporation has anywhere near the power of a state. Corporations can't force you to give them an arbitrary amount of your income the way the revenue service can. Corporations can't kill or imprison people. Corporations can't control and set rules on currency. Corporations can't regulate industrial practices or limit others from participating in the market.
In fact, corporations are actually creations of government. Corporations would not exist were it not for laws defining certain times of companies with limited liability for owners.
Banks and investment funds control our currency, governments are at best a serious player. many governments are smaller than and often forced to do the bidding of corporations. Companies like wallmart and macdonalds control more what people eat than the us government or those people themselves. If you think companies don't have a lot of power you are deluding get yourselves - the only way to have choice for consumers is when they (through government) control and check the market. If government doesn't monopolies and other anti competitive behaviour nullify any of the free market benefits very quickly.
This used to be true. Nowadays, some corporations have more power than states and have more money in the bank than the whole GDP of multiple countries. Corporations can steal income and can indeed kill people, they are just not powerful enough to do it in the western world yet. Corporations do regulate industrial practices a lot through massive lobbyism, the examples are countless.
Were it true that you had control over your governments you would have control over the companies would you not, as it is the government that regulates and controls companies.
... Problem is that we can only do cider things based on the information we have and to the extend we understand the issues. Controlling media and limiting education are two powerful ways in which both governments and companies control people.
Don't corporations produce and survive only because they produce stuff that people choose or not to purchase? Monopoly sources exist of course but as Peter Thiel has pointed out, the capitalist world is dynamic with what he calls creative monopoly at work. You maybe stuck for choice this year but likely not in the next.
You seem knowledgeable. Why can external currency changes (USD to bolivar) cause such strong inflation internally? I would think that at some point no one in the country can buy an iPhone, but how does that turn into no one being able to buy milk (or other essentials)? Do countries really rely so strongly on the international market for essentials?
edit: I could see a terrible scenario playing out where domestic goods are now so damned cheap for anyone not in the country that the producers are incentivised to ship their stuff overseas to rich foreigners. It could be the domenstic buyers that are the only people who get screwed. This is all terribly complicated.
In this case the devaluation is almost entirely driven by Venezuela specific issues. This can be clearly seen by the fact that the US dollar exchange rate is relatively stable versus almost every other currency while the Venezuelan currency is rapidly depreciating versus every other currency.
So you have it backwards. This almost entirely due to poor economic policies by the Venezuela, not something "external".
While the fall in oil prices has exacerbated the problem the core issue is the policy of plugging a huge budget deficit by printing Bolivars. This almost directly causes the huge local inflation and rapidly falling exchange rate as measured in the black market (i.e. the "true exchange rate). Combine this with strict currency controls (i.e. "fake" government set exchange rates that are not available to most people) you get shortages since Venezuela must import many essentials. [EDIT: And, as pointed out below, price controls are a key cause of the shortages.)
This situation while somewhat complex is a textbook example of these issues.
And in addition to deficit and currency controls, also price controls which have destroyed markets. Then you have a political police enforcing silly laws about companies will have to continue to produce something even when it is economically unfeasible. In the short term you get some physical deliverables like bread next week; in the long term you get a dysfunctional economy.
This whole mess is causing us headaches at work, because some LatAm sales people requested a second exchange rate for Venezuela since the real one is so broken. But a lot of the code assumes a 1-1 country-currency mapping, so if we give in we'll end up with special cases for Venezuela everywhere... sigh.
There are also the situations where a country redenominates their currency and renames it in the process - e.g. the Mexican Peso went from MXP to MXN (the N standing for New). Zimbabwe has worked itself through ZWD, ZWN, ZWR, ZWL during various redenominations.
Lived in a country with a similar effect albeit very very much lighter.
> but how does that turn into no one being able to buy milk (or other essentials)?
The problem is that these countries come with price controls for basic food. The food can be available on black market. The problem, it's much more expensive to produce than the current price tag on the controlled government market.
So there are two possibilities:
1. The industry goes bankrupt because of the laws. And I witnessed this first hand. I saw people and farmer throw away milk on the street. It makes no economical sense to produce at all.
2. Sell it on the Black market, or smuggle it outside of the country. This will depend on how strong is the local government on controlling borders and commerce.
"Why can external currency changes (USD to bolivar) cause such strong inflation internally?"
Simply because 'most things' that are sold in Venezuela are either imported - or depend on imports.
The Bolivar is crashing against all currencies, not just the USD - so anything: parts, fuel, TV's, entertainment - it all has to be imported, and it all got expensive.
'Internal inflation' can happen when there are more Bolivars floating around than before - even without outside currency markets to validate the price.
Ex: if there are 1 Trillion Bolivars in existence, and the government simply prints '1 Trillion' more and dumps them on the market. Guess what happens to prices? They will basically double every where.
So your shoes that cost 100 Bolivars, now cost 200.
I think the part I missed was why the solution to a crashing currency is to print more money. Let's say Venezuela cannot produce widgets, but they are necessary to modern living. Venezuela's currency drops in half, so now widgets are twice as expensive to a Venezuelan. Given a fixed exchange rate, as the government of Venezuela I could just double the amount of money all my people/companies have and everything would be fixed, but wouldn't that just lower the exchange rate again? Is there some lag in the market during which they can spend the new money at the old rate? At any rate, it's the Venezuelans and their corporations who need money. How does printing more money fix the issue of that poor citizen/company who is reliant on widgets?
The government has obligations in bolivars -- staff wages, pensions, payments to private businesses, and (in countries with trustworthy currencies) loan repayments etc.
They can print money to fulfil those obligations, effectively giving public sector staff a pay cut, pensioners a reduction in the value of their pension, etc.
"They can print money to fulfil those obligations, "
Not really.
By 'printing money' they are simply 'taking value away from those already holding Bolivars'.
Printing money is just devaluing the Bolivars already in circulation - so you can think of it as a 'tax on cash'.
You can print paper, but you can't 'print' economic value and production.
Printing money to pay gov. employees is basically a 100% sign to everyone in the world that 'this economy is destroyed' - and that they should shut down all operations, cut their loses, get all their money out and exit in every way.
You're exaggerating a little. Everybody prints money. It's what central banks do, it's what gold mines do. It's not a bad thing, it's how economies are managed. (completely free markets are a bad thing and anyone that tells you they aren't either doesn't have understanding of economics or is an extremist or both)
You can run a tightly managed economy successfully but it's hard. Very hard. Completely free markets are cruel but corrupt tightly managed economies are moreso. It also becomes difficult to determine the difference between a completely free economy and a corrupt managed economy because without regulation the former tends to concentrate power until it becomes effectively or actually the latter.
Sometimes the only thing for a collapsing economy to do _is_ print money. It's what a failing state will do to prevent itself from becoming a failed state. It's not sustainable but it's like falling off a mountain, you have to do _something_ and devaluing your currency to keep your economy somewhat functional can be the "right" thing to do for a while.
"Sometimes the only thing for a collapsing economy to do _is_ print money. It's what a failing state will do to prevent itself from becoming a failed state. "
No, this is upside down.
Printing money to pay debts, salaries - is what a 'failing state' will do to absolutely guarantee they will fail.
Central banks don't print money - they trade bonds or other assets in exchange for currency, and they do so at a rate to allow monetary expansion as the economy grows.
Cynically, you could say 'government issues debt, which is bought by central bank in exchange for $' which is very much like printing money, but it's not quite.
And 'gold' ... the amount of gold is so small it doesn't really affect anything.
A 'failing state' needs to restore confidence in it's institutions in order to get out of the hole, the last thing it can do is print money willy nilly.
The anti-populist measure would be to cap/cut government salaries, 'de facto' default on bonds - this is obviously a bad signal, but not as bad as printing money. A 'quiet default' i.e. signalling that 'there is no way we can repay so you'd better negotiate with us' is the pragmatic thing to do.
ah, interesting. My understanding of central bank practices was that 'government issues debt, which is bought by central bank in exchange for $' == printing money - but they are not synonymous?
So if you no longer have the paper trail of things being bought and sold, who keeps track/makes public the amount of currency in circulation in this case?
If simply printing more money is a bad signal, why not just keep it secret?
There's a paper trail. It's just that when the Fed buys something the money is pulled from thin air. When the debt is paid back the principal returns to thin air, the profit goes to the US Treasury.
Not all government debt is purchased by the treasury though – it only does that in special circumstances to moderate the financial system. Most of is is purchased domestically and much of that by other pieces of government.
And you can't keep it secret. It's like supply and demand. More money means prices naturally raise because more people have more money to spend and will be willing to pay a higher price.
You are arguing that they shouldn't print money to pay their obligations. You are right, but Venezuela still can print money to do that if they want to and that is precisely what they are doing now.
It will allow country to pay its bills (i.e. wages).
Never mind that by paying their bills with freshly printed money they make all existing money cheaper.
Average Venezuelan can now buy less for their wage, but at least they've got some wage and it is stable or even grows number-wise. That's what makes this trap so dangerous.
It actually allows everyone to pay off their debts very quickly. People who bought a large apartment with mortgage in bolivars around 2012 might even get from all this situation with large profit, I presume.
Nobody benefits in the long run. Nobody. Everyone loses when money printing happens.
What you pointed out - i.e. 'those holding property' - they don't 'benefit' - so much as their assets are in something that can't depreciate so quickly as currency.
If government prints massive bolivars - well - their houses go up by that amount proportionally. So they are somewhat 'insulated' from the inflation problems.
Now - because 'money printing' is a 100% signal of economic collapse, no 'asset' is going to save you at the end of the day, because as everything falls apart ... nobody has any money for anything, or rather, they have wads of worthless paper that nobody else wants ...
I currently live in Venezuela and I'm lucky enough to work both with my own local business and with income in foreign currency. People like me are having a field day here, mostly because inflation does not affect you directly when you just keep rising the price of your goods/services. And as for the foreign currency you earn, it means that very quickly I was able to purchase a car and a house and pay off debt in a way that not even in my wildest dreams I would have done it.
The govt is definitely destroying the economy, but just like in war economies, some people would benefit while a lot more will suffer. In here, the people suffering are people that depend on a wage.
I have stopped complaining about it because there is no real political leadership anywhere willing to do what is necessary to fix it, so the party will keep going on until they cannot pay their international obligations and the whole thing will start falling under its own weight.
The problem is that there won't be any collapse per se. Maybe a default on government paying its international debt or something.
What is slowly happening here is that this is morphing into another Cuba, where you will see the vast majority of the population earning these miserable wages, but they survive because of government subsidized food and services.
The worst part is that here the supply of such food is highly irregular so you see massive lines when people find out corn flour or whatever other product arrives at a store. But of course, if you have the means, you just buy whatever you want at market prices in certain stores and just avoid the whole thing. Prices that people living with a wage cannot afford.
So the real tragedy is this boiling frog effect. In 1989, there were massive riots because fuel prices increased, but now people are losing the will to fight for their rights, helped by lack of clear planning and leadership on the opposition. So I would say most people are just thinking of migrating somewhere else, Argentina and Chile especially, and frankly, I cannot blame them.
Hard assets are always worth money. Real estate, durable machinery, etc. The inflation lets you erase the mortgages on them.
Many of the early backers of the Nazi regime were people who were able to get control of valuable industrial property and manufacturing equipment during the Weimar hyperinflation. Iirc, it's detailed in Albert Speer's book.
You become 'more wealthy than your peers'. But in reality, it's crap for everyone. You become 'much less wealthy relative to everyone outside the country'.
> Inflation reduces the value of things priced in the currency, so the 'mortgage' is a financial product and so is worthless
Not true, the price will go up to track currency devaluation unless the price was pegged via contract or legislation. Even bread will see its price go up many times in day
It doesn't fix the problem. It just enriches the people who are printing the money.
The solution to Venezuela's problem is to produce more goods, either for internal use or to trade/export those goods, so that other goods can be imported.
Consider that each dollar they print physically goes to someone, who can then spend it. The money trickles through the economy in this way, so for a while the people that receive it can use it to buy more good than they otherwise would have been able to.
* You can print money, but you can't print value. *
The value of the goods in Venezueala are priced in Bolivars. Bolivars have a fixed quantity.
If you 2x the number of Bolivars by 'printing money', then all those goods go up 'as measured by Bolivars' by 2x.
This normalization happens very - very rapidly.
Why? Because everyone is watching what happens.
The moment the Government prints X Bolivars, banks, currency traders, exporters, businesses basically 'mark down' the value of the currency, or 'mark up' the value of their products by that amount.
Many small businesses won't have the sophistication to do this, but the effects of the 'big banks and companies' doing this will make it pretty fast.
The only time you can safely print money is if there is more economic activity - and the expansion of the economy requires more currency. If you 'print money' at the same rate the economy expands, you can actually hold prices roughly stable.
As for widgets:
Anything produced internally - services, some agriculture - Venezuelans do this by simply 'doing it' - like all other nations on planet earth. Organize themselves intelligently.
As far as 'needed imports' - yes - once a currency crashes this is really bad. It's like losing your drivers license when you need it to get to work. No driving = no income = everything else gets bad.
In the short run, it will be hard, they have to basically live at a lower standard of living and restructure.
Once they are stable, and outside entities 'trust them' then they can get good credit, they people will accept Bolivars as payment etc. etc..
Also - they have to produce something of value.
Think: what is a Bolivar worth to someone outside Venezueala? Absolutely nothing. Really - it's only worth something if ultimately they can buy something from Venezueal.
So - a currency held by someone outside the market is really like an IOU to that country. An American holding Bolivars basically has an IOU from the Venezuealan economy - that can be exchanged for 'something' later, but Venezuealans have to be able to produce something that the American would want. Like Oil, berries, coffee, or some service or manufactured good.
The problem in Venezueala is not economic - it's political. They have old-style populist 'crony socialism', in which the government takes over everything, they don't know how to run anything, everything is run into the ground, and to boot - it's super corrupt: government officials are looting the treasury by all sorts of means.
The underlying populism of South American brand of socialism is much different that Eastern Europe or Asia. The issue is that there is a small minority of 'white people' descended from Europeans who are educated, wordly, somewhat competent - who own and run everything - and then large numbers of indigenous people who are illiterate aboriginals - at least in Europe the peasants had skills and formed an economic base. In South America, they are barely out of the Amazon jungle in many cases.
Now this is a very, very crude generalization - there is a lot of 'in between' and obviously tons of aboriginals who are totally up to modern standards.
But by enlarge, it's kind of ethnic war. The metzo Aboriginals have the voting power - they put blow-hard army goons and bus drivers in charge, their elite peers are just as corrupt as the 'capitalist class' and this is what you get.
The only 'alternative' is basically the 'white ruling class crony capitalism' which really wasn't super good for social progress. They under-invested in education and services etc. and so they lose power.
It's a really, really difficult situation in so many ways.
Civilization takes a long time to build, and can be destroyed quickly.
I think maybe you get that in Bolivia or Peru. Venezuela is vastly different in the "metzo aborigin" stuff you are talking about, whatever that is. The vast majority of the population is mestizo, that is brown if you want a better description, and since college education here is free, you do not have those clear racial divides you see somewhere else. Here we always say we don't have racism but classism, which based on your social standing, things will go very different for you.
In fact, one of the major leaders of the opposition is a mestizo who graduated from Harvard. Totally agree the current govt is a bunch of assholes, in fact, make Chavez look like a terrific ruler, but as far as the race stuff, no, this is not Africa.
Agreed. I heard there is a bunch of actual racism going on in Chile precisely for those reasons, but I guess it mostly happens at the upper echelons and with certain people with poor educational backgrounds.
If the government prints 1 trillion bolivars, then it has effectively stolen half of everybody else's money in the country. The value of the bolivar is half of before, but it's now evenly split between the government and the people. So you can see why printing money is attractive to governments. It's like imposing a one time country-wide flat 50% tax on everybody, with no legislation required to do it.
However, it misses the other side-effect of imported inflation, namely the effect of substitution. If good or service A is imported but priced in a relatively appreciating currency, and service B is non-imported and priced in the local currency, the price of B drops, driving demand upwards. If B is also exported, the export markets seeing a relative drop in the value of the currency B is priced in will also buy more of B, further driving demand upwards.
Consequently, imports become more expensive even without a drop in demand. Exportable items (or even just substitutes for imports) become more expensive in response to increased demand.
It doesn't - the currency markets are just adjusting the relative price for supply and demand. The inflation itself is being caused by money printing. Their Government prints cash, M0 (expand out to Max to see it):
From the ratio of M0 to M3, most of the expansion is from M0, so the Basel capital controls are actually slowing down a runway hyperinflation - to some extent at least. Seems to start in 2012, so I would guess that they started money printing to cover civil service salaries when the oil price dropped, and haven't looked back.
It's not just iPhones that get imported. Raw materials for plenty of goods need to be imported in modern economies. In Venezuela's case, an example might be cotton for making clothing. Or rubber for maintaining cars and other vehicles, (think brakes and tires). There are thousands of such examples.
I recently read a HN comment that used their once booming oil industry to illustrate this fact.
They have vast amounts of accessible light crude oil but due to their currency they're struggling to purchase/maintain the machinery in order to efficiently extract/refine and monetise it.
The less reliable your country, the less likely foreign businesses are to extend credit. If European and American companies, who probably manufacture the machinery, see the risk is too high, they will demand full payment upfront.
It doesn't cause it, it is an artifact of the imploding value of the currency and future outloook.
If I'm a guy with a cow and a gallon of milk is worth 1 boliviar today, but $0.80 tomorrow, I don't want your boliviar. I want a dollar, silver, 10 boliviars, or some bacon.
The problem is that Venezuela imports everything, the policies are very hostile to national production and there is a mafia with access to government sponsored dollars that profits from the whole situation without moving a finger, in other words, corruption that actually pyramids to all society: people enters the game by reselling scarce goods and believing in a cardboard opposition - that never delivers any concrete result - obviously linked to the government and its corruption mafia.
It is driven by fear. If you have bolivars and you know it they will be worth half in a month what do you do ? You buy USDs, and you will pay any price for them. So people are desperate just trying to save their savings.
Sure. There are many fundamental economic problems. But it is fear that drives hyperinflation. And this is why it is hard to fix. Because even if you fix the fundamentals the fear will still create hyper-inflation.
I see a lot of answers on here that are misleading or confusing. One problem with economics is it's really a bunch of made-up mind games related to social sciences, which in turn has led to all kinds of conspiracy theorists and cults even within more mainstream economics and some really crazy stuff at the fringes.
The topic of inflation seems to be particularly of interest to conspiracy theorists who all claim to know exactly why it happens, who is to blame and how to fix it (it often sounds like "Government blah blah blah gold standard"...). The truth is there are some strong, well-researched but ultimately incomplete explanations regarding inflation, but really nobody knows.
So here is my understanding of the best current guesses about the topic:
Ignoring the specific example of Venezuela for a second. At a basic theory level: Inflation in country A does not depend on external currencies nor does it matter how much country A imports or exports or if they trade at all.
Imagine a closed off country with no international currency exchange and no external trade. For some reason, it doesn't matter why really, citizens there expect prices for things to go up (maybe it's an island running out of space so landlords raise rents or maybe the government is increasing taxes or maybe everyone on the island is just really lazy wanting to sit on the island's beaches all day thus it is taking increasingly more $ to get anyone to get up and do anything one might need help with)...
The citizens expectation of future higher prices leads those in the economy who sell a product or service and who can charge more for it to do so immediately (as they prepare for future higher expenses they will soon face). Specifically, the producers of inelastic goods like farmers who grow food or oil companies will do better in this scenario than regular employees who suffer more as they can't get an increase in salary so easily. But really everyone starts to struggle.
Depending on how high prices are increasing, citizens may start soon switching to bartering and looking to store value in other ways other than their currency (like gold coins or magic the gathering card collecting, etc). Barter is not always possible and most landlords won't accept rent payment in the form of your magic card collection, not directly anyway. Where money is still used and accepted, people will try to get rid of any money they receive as soon as possible (as it's increasingly less valuable putting it in a savings account is bad). So people try to get their money into anything but a savings account and buy as quickly as possible something they need immediately or something that is a store of value. This is inflation and potentially hyperinflation without any international currency exchange or trade.
Now, where a country is able to engage in trade with other countries (for good and services or sell each other debt), this will influence the economy and inflation there. And depending too much on imports one can't be sure they can afford is very bad. But external currencies doesn't cause inflation, rather currency exchanges become a mirror to reflect a country's relative credit-worthiness and growth prospects, as well as any inconveniences connected to the fact people don't want or need another country's currency so where someone does accept foreign currency they must be compensated for the process, time and risk of getting payment in a form they do want.
The closed off simple economy thought experiment is quite useful and established, here is wiki link to the most basic version, one dude on island aka the Robinson Crusoe economy https://en.wikipedia.org/wiki/Robinson_Crusoe_economy
The decisions leading up to this by the Venezuelan government where known to cause things like this. They where made either out of ignorance or political pandering.
I worked for the government years ago and can totally tell you these idiots are convinced they are doing a good thing. Main reasons for these problems are currency exchange controls and price controls, especially for a country with a lot of imports because we have tons of oil and the countryside morphed from agrarian to industrial overnight for a single product and its derivatives.
But what really bothers me is that whenever anybody points out the real reasons, the govt internally says that if they take out the exchange control they will face a coup d'etat, that it is supposed to control capital flight (right...). As for price controls, it is the child of always having these paternal govt since the 70s, that was always thinking what was best for the population instead of letting the market decide.
Or just plain malice. Do not be mistaken, the final objective of the "socialist" agenda of the Venezuelan regime has always been to enslave an entire nation in order to lock themselves into power forever.
To be honest, Venezuela was doing great during Chavez because the guy as much as he was Trump like in his rethoric, was no fool. As soon as Maduro took power, he created massive chaos in the foreign currency exchange system, and he kept tampering with the economy with one failed policy after another, until we have arrived here.
The problem with socialism the way I see it is that at some point there will always be a guy who wants to concentrate all the power to himself, like Chavez, Fidel, Mao, Stalin, etc. and then leave a big mess behind after they leave or after they have been in power for several years.
Do you honestly believe Chavez would not be in this position? Seriously? (de pana?) Venezuela was doing 'great' because oil prices were soaring, which in turn made dubious economic policy affordable. Chavez did enjoy massive political support, mainly because venezuelans do enjoy their free rides (just look up how many pensions and public jobs Venezuela has, which, by the way, are now the ones being affected the most by this crisis).
I am absolutely sure that Maduro, while incompetent, is in the same kind of problems Chavez would be, and is pushing the same agenda Chavez would have. Let's not get confused by personality cult here.
Sorry, I'm not biased politically, which is kind of a rare thing these days here I guess. I am able to see good things both in a guy like Leopoldo Lopez and Chavez as well. Just ask yourself if you can do the same. But on to the point.
If you lived in Venezuela right around the time when Chavez died, you would remember vividly how you were able to access those Cadivi dollars, no matter how bad and annoying the system was with the three/four stupid folders they made you fill. Importers could buy stuff with their black market dollars and then replenish their stash when Cadivi finally payed them. As soon as Maduro took power he dismantled Cadivi and it has been next to impossible to get dollars at the official exchange rate. In my opinion that is the root of all problems, and yes, I do believe that under Chavez that would not have happened even if he was foolish enough to establish that exchange control for so long in the first place.
Hell, think about it, if tomorrow they really start offering dollars at whatever conversion rate, let's say 2000 but coming from the Central Bank, I can bet you everything I have this whole problem goes away immediately. There is an inherent quality at just being able to go to your bank to exchange currency instead of exchanging on a pool of people you know.
I'm very sorry to sound harsh, but you have a fundamental misunderstanding on how economy works. It's not the government who choses an exchange rate (or for that matter, the value of anything), it's the market. If you choose to believe that Cadivi was a 'great' thing, you are simply living in a fantasy fueled by high oil prices and cheap dollars that make you think that this was 'great'.
The thing with free rides is that, no matter how high or 'great' they sound on paper, they eventually end, and you see the real problems.
> "Importers could buy stuff with their black market dollars and then replenish their stash when Cadivi finally payed them."
Sounds just great. A 'great' working economy, working around arbitrage and fantasies. I don't need to have 'political biases' to see that Chavez, whose agenda crippled the entire private sector and killed every other possibility of economic growth that didn't depend on oil, would be in exactly the same position as Maduro.
Don't get me wrong, I too believe the exchange control is really bad. I certainly did not enjoy assembling the stupid folders and God knows how many trips to the bank. My main point was that what Maduro is doing almost makes the other system seem like a good thing.
But yes, we both agree that the person that started this whole craziness was Chavez. But I still disagree with you regarding what Chavez, or any other politician for that matter would have done in his shoes. I believe Maduro's main flaw is this attitude of not doing anything while the whole structure is crumbling. In my life, I have never seen any other politician like him unless we are talking about some of these government secretaries that end up being governors or mayors when the actual elected person starts slacking for whatever reason.
I believe the problem here, more than oil prices, is mismanagement of an epic proportion. In Venezuela way too many things are either free or subsidized. You get free college for kids arriving on fancy SUVs, public hospital infrastucture rotting away and the never ending public servant attitude of not showing to work, arriving late, stealing stuff, etc. Extremely cheap gasoline, and the list goes on and on.
At the current prices, countries like Saudi Arabia and Venezuela can still turn a profit on their production, as opposed to the UK with their deposits on the North Sea or the US/Canada with shale oil.
But of course, there is always the question of who created Maduro, and Chavez is fully responsible for that disaster.
I don't know, Venezuela is inches away from going into war.
Maduro and all his friends could be really incompetent running the country, but they are experts in controlling all the structure of power there.
I have Venezuelan engineer friends that were ousted of PDVSA, the national oil company, because they were great technical people but not politically sided with Chavez. They went to work for companies like BP, Repsol or Shell outside Venzuela but the people that replaced them were total Chavez supporters.
All those supporters could not expect to get anywhere near their current status if Maduro falls in disgrace. They would do anything to remain in power including taking weapons and killing people.
Venezuela has become one of the most dangerous place on earth.
PS: The people that aspire to replace Maduro are also socialist.
Nobody is going to kill anybody unless they are paid for thugs. The National Assembly has the opposition in control by a vast majority after the latest election. Maduro and friends are in deep crap and they know it, which is why they have been delaying by any means possible anything related to elections.
I can bet you even those new engineers at PDVSA will be voting to oust Maduro as well when the time comes. People are fed up with the lines for everything, and low wages caused by the massive inflation. What is needed right now is a proper vehicle to channel all that, which will need to be different from the opposition since they are closely resembling eunuchs of old times.
I disagree with your assertion about 'depressed' countries having to inflate. The only reason that they got so depressed is because of bad government and way to much printing. You can't then turn around and say 'we already fucked it up' so destroying the monetary system now is good.
Stabilizing the monetary system, reduce government spending and deregulation is the only solution.
Its never impossible to get out of Inflation, there are only bad greedy governments that can't get there shit together. Its never a economic problem, just a political one.
This post really comes off like you're excusing Venezuela of their economic mismanagement, and I hope that's not what you meant.
There's no requirement that a failing economy print money to pay for things. Currency markets aren't stupid; they know it's being printed and price accordingly. And even if they didn't, money is just an instrument of trade anyway, and the market will find its balance.
Anyway, the change in price is at least equivalent to taking money out of the hands of money-holders and putting it in the pockets of the government. So in a sane economic theory, it's always better to tax. The advantage of money printing is that, in a system where the dictatorial elites subscribe to alternative theories of economics, money-printing allows you to blame other forces (in particular, imperialists) for what's happening.
> once a countries currency gets depressed enough they almost have no choice but to print money just to buy/import the essentials required for life
I'm sorry, but this is nonsense. Nobody outside the country is fooled by the newly printed money, and it doesn't buy any more imports.
It does help those controlling the money printing to have more money than others, thus effectively stealing from the rest of the country.
> just google "Zimbabwe trillion dollar bill".
I have some of those on my wall.
If you do google it, you'll learn that the economy and life of Zimbabwe improved considerably when they finally gave up having a currency, and trade converted to Dollars and Rands.
According to legend, the government only gave up this form of plundering because they couldn't afford the ink to print new bills anymore.
If you consider a market with two companies.
Company A that doesn't grow revenues or profits and company B that continually grows revenues and profits, which one would you invest in?
The answer is obviously once you realize that each company doesn't exist in a vacuum but is instead competing with other companies for the same investment dollars.
Currencies markets work in a similar manner in that you are never talking about a currency but rather you are explicitly talking about what a currency is worth with respect to another currency, or often implicitly with respect to the US dollar.
It's actually pretty amazing to think about the currency markets and how they are constantly reweighing each currency with respect to every other currency such that each currency has the correct valuation with respect to all others such that there is no available arbitrage opportunity.
So its not that the markets or wall street is being "mean" to Venezuela or punishing it, but rather they are trying to find the right balance of how many Boliviars one should get for each USD.
Unfortunately, there is a giant feedback loop that often means once a countries currency gets depressed enough they almost have no choice but to print money just to buy/import the essentials required for life. And this printing of money just has an feedback that increases inflation even more until its impossible to get out from without a bankruptcy, just google "Zimbabwe trillion dollar bill".