Venezuela faces hyper-inflation

Trading Discussion News and Economy
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The following was copied-and-pasted from Agora Financial’s 5 Minute Forecast.

September 1, 2018

Dear 5 Min. Forecast Reader,

Just when we thought things couldn’t get any worse in Venezuela…

This morning we read authorities in the hard-pressed South American country have arrested 131 people for — get this — attempting to “destabilize the economy.”

Which begs the question: How does one go about destabilizing what might arguably be one of the most precarious economies on earth?

Venezuela’s attorney general Tarek William Saab says the arrest of “several managers of large chains” were made for "speculating and hoarding basic products” that have prices fixed by the government.

According to an article at London’s The Telegraph, the socialist government has “[fixed] prices on 25 basic products, including beef, chicken and eggs, all of which have since disappeared from supermarket shelves.”

That’s if you can find a supermarket. Well, one that’s open.

Since the beginning of the year, 40% of stores have closed up shop.

Meanwhile, President Maduro’s ham-fisted efforts to keep Venezuela’s economy afloat have been a fiasco.

“Maduro’s reforms [have] included hiking the minimum wage by 3,400% and removing five zeros from the currency, which was also devalued to the tune of 96% and fixed to the value of Venezuela’s largely discredited cryptocurrency, the petro,” The Telegraph says.

And one of the few things Venezuela had going for it — oil production — has dropped to a 30-year low.

Long story short: The IMF forecasts inflation will reach 1 million percent this year.

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Numbers like ONE MILLION PERCENT make our eyes glaze over.

On a theoretical level, we know that this is hyper-inflation of some degree, but how bad is it, really? Is it a world record? Will Venezuela survive as a country into next year?

Putting the projected Venezuelan hyper-inflation into historical perspective

Compared to the worst episodes of hyper-inflation in modern history, the one million percent per year inflation rate predicted for Venezuela doesn’t even make the Top Twenty Highest Rates.

Here is a carefully-researched tabulation of historical hyper-inflation events, produced at the Cato Institute by Steve Hanke and Nicholas Krus.

Hanke-Krus Hyperinflation Table.pdf (946.8 KB)

The highest inflation rates tabulated here are more than breath-taking – they are incomprehensible. Who can grasp a billion percent, or a quadrillion percent, or some number with a name that the average person has never heard of?

On a practical level, in order to comprehend an inflation rate of one million percent per year, ordinary people need to know how that translates into the cost of a loaf of bread, or a liter of gasoline, or a pair of shoes.

A metric we can relate to normal life is the rate at which prices double.

In the U.S., the Federal Reserve aims for a “target” inflation rate of 2% per year. At that rate, inflation-sensitive prices will have doubled after about 35 years. As the rate of inflation increases, the time required for prices to double decreases. So, in order to gauge the impact of hyper-inflation rates, including Venezuela’s projected one million percent hyper-inflation rate, we need to calculate the corresponding time periods in which prices will double. In the case of Venezuela, we can break down the projected annual hyper-inflation rate as follows:

Equating the projected Venezuelan hyper-inflation to shorter time-frames

1,000,000% per year = 216.23% per month = 30.43% per week = 3.86% per day

Prices double every 18 days, 7½ hours.

If Venezuela’s hyper-inflation reaches one million percent per year, everything that factors into the cost of living – rent, food, gasoline, etc. – will double in price in less than 3 weeks. And then double again. And again. No economy, and no society, can withstand for very long the instability such hyper-inflation will cause.

So, one of two things will happen: Either (1) the hyper-inflation rate will explode upward, challenging the worst rates in the Hanke-Krus tabulation, and driving Venezuelan society into total collapse, or (2) the failed communist system in Venezuela will be replaced suddenly (either peacefully, or violently) with a viable, capitalist system and a new (stable) currency.

Sadly, history suggests that (1) will likely happen before (2) can happen.

Back in July, when I started researching this hyper-inflation story, I came across this article:

https://www.msn.com/en-us/money/markets/venezuelas-inflation-barrels-toward-1-million-percent/ar-AAAlYbN?li=BBnb7Kz

Your comments are welcome.

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Every time I read about such a crisis my first thought is for the ordinary people subjected to it. Their lives will get harder before they get marginally better.

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And in spite of the fact that, quoting from Wikipedia:

“The proven oil reserves in Venezuela are recognized as the largest in the world, totaling 297 billion barrels as of 1 January 2014. In early 2011, then-president Hugo Chávez and the Venezuelan government announced that the nation’s oil reserves had surpassed that of the previous long-term world leader, Saudi Arabia”

What does that tell us about the potential power of politics…

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One has to wonder about the management of that resource if their current situation is that bad.

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That’s an interesting article. The IMF growth projections for Venezuela are -18% this year (-16% and -14%, 2016 and 2017), and -5% next year. That’s a huge drop for the 2019 projection, which seems overly optimistic given the country’s current state. Does the IMF have a crystal ball about what could happen this or next year, like a chaotic revolt against the government, to get to that -5%. Doesn’t seem doable.

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Have they given any particular reason for this projection?

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None in that article.

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It would be interesting to know what their reasoning was. I am not questioning their judgement, I am just curious.

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Update:

Last evening, as part of a report on the current political crisis in Venezuela, the NBC Nightly News reported that the hyper-inflation ravaging that country has now reached 1.7 million percent / year.

1,700,000% per year = 230.52% per month = 31.77% per week = 4.01% per day

Prices double every 17 days, 15¼ hours.

Between last fall and today, the annual rate of inflation in Venezuela has increased by 70%
(from 1 million percent to 1.7 million percent). But, the time required for prices to double has decreased by only 3.7% (from 18 days 7½ hours, to 17 days 15¼ hours).

We might have expected a much larger decrease in the time for prices to double. In fact, intuition might have suggested that the time for prices to double would decrease by 70%, as the rate of inflation increased by 70%.

The explanation for this extreme non-linearity is that as the time required for prices to double approaches zero, the rate of inflation approaches infinity. So, for example, if prices were doubling every 10 days, the annual rate of inflation would be a little more than 97 billion percent.

Viewed another way, the destruction of the Venezuelan economy has already occurred.

At this point, it will make very little difference if the annual rate of inflation hits 10 million percent,
or 100 million percent, or 1 billion percent.

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One thing is clear - Venezuela’s financial system is dysfunctional. No money to be made by foreigners for holding Venezuela’s currency. Not much incentive to trade with them now days either because their government is apparently a severe hassle. Venezuela could be turning into a barter-agriculture economy.

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I find story of Venezuela almost incredible. Based on only oil reserves it could be one of the richest countries in the world, and they are currently, economically, worst country in the world. What is wrong with these people running the state?

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I have the same the question. This is so great market with strong potential and this is really sad to watch how some politicians stupid enough to destroy everything. Now we need to forget about trading over this jurisdiction, I don’t think it will be even possible in a few years.