skip to Main Content
Venezuelan President Tackles Inflation By Deleting Zeros From Currency

Venezuelan President Tackles Inflation By Deleting Zeros From Currency

By Luis Pablo de la Horra

It seems that Venezuela’s dictator Nicolás Maduro has finally found the way to bring the country out of the unprecedented economic crisis Venezuela is immersed in since 2012. The ineffable leader of the Bolivarian Revolution has recently announced the launching of a new currency, the so-called Sovereign Bolivar, which will replace the bolivar as the official medium of exchange starting in June.

The announcement was made via Twitter, where Maduro said that the current bolivar will be demonetized (cease to be legal tender) in favor of the new currency. The truth is that the bolivar was de facto demonetized a long time ago by the market due to the irresponsible monetary policy (basically, printing money to fund budget deficits year after year) undertaken by the Central Bank of Venezuela, fully controlled by the Bolivarian government.

But what’s so special about this new currency that is expected to solve the worst economic crisis that Venezuela has experienced in the last decades? Simple: it removes three zeros from the current bolivar. In other words, 1,000 current bolivars will become 1 sovereign bolivar. According to the Venezuelan authorities, this will help fight inflation, a first step towards fixing the deteriorated economic situation of the country. But will it?

The Economics of the Situation

Let’s take a look at economic theory. Like the demand for other goods, the demand for money depends on the utility economic agents derive from it. When an independent central bank promises to deliver a common-sense monetary policy aimed at, for instance, stabilizing the price level, people will demand that currency because of its usefulness as a medium of exchange and store of value. However, when a central bank irresponsibly inflates its currency due to political pressures, prices end up skyrocketing and consumers and investors cease to use it, shifting to other currencies or commodities that better meet their necessities.

If we apply this line of reasoning to the Venezuelan case, the corollary is simple: when it comes to fiat money, trust is key. Expectations about the future purchasing power of a currency affect its demand today, which in turn determines its relative price with respect to other currencies as well as goods and services. Therefore, changing the nominal value of money by removing three zeros is useless as long as confidence in monetary authorities (which, in this case, is the same as saying the Venezuelan government) is not restored.

Yet, taking into account the track record of Maduro’s government, this seems to be a chimera. Maduro has led the country to the abyss in a very short period of time. Venezuela has seen real GDP decline by 16.5 percent in 2016 and 14 percent in 2017, and it is expected to decline by another 15 percent in 2018. The humanitarian crisis has pushed 1.1 million people to flee the country in pursuit of a better life. In addition, the NGO Caritas Venezuela estimates that 280,000 children could die of malnutrition in 2018.

The sinking of oil prices has played a role in the current crisis by depriving the Venezuelan government of a large fraction of its revenue. This oil dependency is long-running, but it has grown bigger since Hugo Chávez came to power in 1999. From day one, Chávez used oil revenues to create a subsidized and dependent population which served as support for remaining in power and transforming Venezuela into a socialist country à la Cuba.

Ongoing Bad Monetary Policy

However, the causes of Venezuela’s economic and humanitarian crisis cannot be exclusively attributed to oil. When oil prices sank, the Venezuelan government could have trimmed the budget and helped restructure its economy to make it more diversified and less oil-dependent.

Instead, it decided to print money in order to fund public spending. When prices began to soar due to excessive money printing, the government imposed price ceilings on many products, which led to shortages of food and other essentials across the country. In addition, Maduro has continued with Chavez’s nationalization policy, undermining the private sector’s capacity to produce goods and services.

In light of the above, gimmicks like removing three zeros from the bolivar or the creation of a State-sponsored cryptocurrency are only cosmetic changes that will have little (if any) positive effect on the economy.

As suggested by the economist Steve Hanke, the only viable solution involves dollarizing the economy and getting rid of government-imposed economic restrictions like price ceilings so that markets can do what they do best: allocate resources efficiently and achieve economic growth.

But to do this, it is necessary that a new government brings stability to the country and puts an end to the Bolivarian Revolution once and for all.

Reprinted from Intellectual Takeout.

Luis Pablo de la Horra
Luis Pablo De La Horra holds a Bachelor’s in English and a Master’s in Finance. He writes for FEE, the Institute of Economic Affairs and Speakfreely.today.
This article was originally published on FEE.org. Read the original article.

This Post Has 14 Comments
  1. I not to mention my friends have been digesting the great information located on your site and then suddenly developed a horrible suspicion I never expressed respect to the web blog owner for those strategies. All the men ended up consequently passionate to read them and have now definitely been tapping into those things. Thanks for actually being really kind as well as for figuring out certain perfect guides millions of individuals are really needing to understand about. Our own sincere apologies for not saying thanks to earlier.

  2. I visited several web pages however the audio feature for audio songs present at this site is in fact fabulous.
    Woah! I’m really loving the template/theme of this blog.
    It’s simple, yet effective. A lot of times it’s very difficult to get that “perfect balance” between usability and appearance.

    I must say you have done a very good job with this.
    Also, the blog loads extremely quick for me on Chrome.

    Outstanding Blog! I have been surfing on-line greater than three hours
    lately, but I never found any fascinating article like yours.

    It’s beautiful worth enough for me. Personally, if all website owners and bloggers
    made just right content material as you probably did, the web
    might be a lot more helpful than ever before.
    http://Cspan.org/

  3. Nice post. I learn something new and challenging on blogs I stumbleupon oon a daily
    basis. It will always be useful to read through articles from other writers and use
    something from other web sites.

  4. I believe this is one of the so much important info for me.

    Annd i am glad studying your article. But want to observation on few common things,
    The web site style is perfect, the articles is really excellent :
    D. Good task, cheers

  5. In real life you’ll fold at the table in case you felt that your particular
    hand was no good, it does not take same rules if you play online.
    Most of these top online casino bonuses are for the people individuals who have
    played their way into the games for many time.
    It uses Skill – On – Net software, is belonging to Skill On Net Ltd, is licensed in Malta, and is
    also promoted from the Win7 Affiliate Group. https://www.onlinecasino-kor.com/%EC%B9%B4%EC%A7%80%EB%85%B8%EC%82%AC%EC%9D%B4%ED%8A%B8/%EC%98%A4%EB%B0%94%EB%A7%88%EC%B9%B4%EC%A7%80%EB%85%B8

  6. In real life you’ll fold at the table in case you felt that
    your particular hand was no good, it does not take same rules if you play
    online. Most of these top online casino bonuses are for the people individuals who have played their way into
    the games for many time. It uses Skill – On –
    Net software, is belonging to Skill On Net Ltd, is licensed in Malta, and is also promoted from the Win7 Affiliate Group. https://www.onlinecasino-kor.com/%EC%B9%B4%EC%A7%80%EB%85%B8%EC%82%AC%EC%9D%B4%ED%8A%B8/%EC%98%A4%EB%B0%94%EB%A7%88%EC%B9%B4%EC%A7%80%EB%85%B8

Leave a Reply

Your email address will not be published. Required fields are marked *