The Venezuelan bolivar lost 45% of its value against the US dollar so far this month, the biggest monthly decline ever.
Officially it takes 10 bolivars to buy a US dollar. On the black market it takes 2,753 bolivars to buy a US dollar.
The bolivar is all but worthless. This is the classic definition of hyperinflation.
Please consider Venezuela’s Currency Just Had the Biggest Monthly Collapse Ever.
Venezuela’s currency – the so-called “strong bolivar” – is weakening beyond levels that analysts had forecast just a few weeks ago as an expanding money supply chases a limited amount of U.S. dollars.
“The government has started injecting bolivars into the financial system in an accelerated manner again, and it’s set off repressed demand,” Asdrubal Oliveros, director of Caracas-based economic consultancy Ecoanalitica, said in a telephone interview. “There are too many bolivars in the street. People have the option of either buying goods or dollars, and they’re buying dollars.”
The currency has lost 45 percent of its value so far this month to trade at 2,753 bolivars per U.S. dollar on Thursday, according to dolartoday.com, a widely-watched website that tracks the exchange rate in Caracas. That’s the biggest monthly decline ever, according to data compiled by Bloomberg.
“Venezuela’s entire economic environment is influencing this phenomenon,” Oliveros said, adding the exchange rate could end the year between 3,500 and 4,000 bolivars per dollar on the black market. “Inflation is going to keep rising, there’s a risk of default, and the political situation is becoming more tense each day. People prefer to protect their money.”
Official Currency Rates vs Black Market
Venezuela has maintained strict currency controls since 2003 and currently has two legal exchange rates — known as the Dipro and Dicom rates — of 10 and 661 bolivars per dollar used for priority imports.
Revamped Bolivar
Flashback March 10, 2016: Venezuela Analysis reports Venezuela Revamps Currency Exchange System.
According to Vice-President for Economy Miguel Perez Abad, the government will consolidate its 6 and 13 bolivar exchange rates into a new protected rate of 10 bolivars per dollar, which will be made available for vital imports such as food, medicine, raw materials for production, as well as pensions for Venezuelans living abroad.
The new rate, known as DIPRO, will also be used for payments in the state sectors of healthcare, culture, sports, scientific investigations, and in other cases of special urgency.
Venezuelan students studying at academic institutions abroad will likewise have access to DIPRO to finance their studies.
The vice-president also unveiled a second floating exchange rate known as DICOM, which will govern all other transactions not covered by DIPRO.
DICOM will fluctuate according to market supply and demand, opening at an initial rate of 206.92 bolivars per dollar.
In a crucial modification, travellers’ dollars, which Venezuelans could previously acquire at the CENCOEX rate of 13.5 bolivars per dollar, will now only be available at the floating DICOM rate, amounting to a 1,425.9% devaluation.
In order to access the maximum annual limit of 2,500 travel dollars, Venezuelans will now have to pay 513,300 bolivars in lieu of 33,750 bolivars.
In another important change unveiled yesterday, the state oil company PDVSA will now sell dollars to the Venezuelan state at the DIPRO rate of 10 bolivars per dollar instead of the prior rate of 6.3.
The move is anticipated to generate greater revenue for the state oil giant, which is needed to cover internal operational costs, honor debts with contractors and providers, as well as continue funding social programs.
Venezuela is obligated to make a $8.1 billion payment on PDVSA bonds to international creditors by the close of 2016.
In February, Venezuela earned only $70 million in oil revenues, down from $3 billion in January 2014.
Default Averted for Now
On October 21, Venezuela Analysis noted Venezuela’s PDVSA Warns of Debt Payment “Difficulties”.
Five days later Venezuela Analysis reported PDVSA Secures $2.8 Billion Bond Swap to Avert Default.
Venezuelan state oil company PDVSA announced Monday that creditors had accepted a proposal to exchange US$2.8 billion in bonds maturing in 2017 for $3.4 billion due in 2020.
In late September, the state oil giant presented creditors with a modified offer to exchange $5.325 billion in bonds due in 2017 for securities payable at 1.22 times the principal in 2020.
With the deadline for the deal fast approaching and less than half of bondholders on board, PDVSA extended the cutoff three times and threatened to default if a majority did not accept the deal.
By the final deadline Monday, 52.57 percent of creditors agreed to the offer, amounting to a successful swap of 45.3 percent of bonds due in April and November 2017 equal to $2.8 billion.
Venezuelan Oil Minister and PDVSA President Eulogio Del Pino hailed the deal a “victory over the onslaught of internal and external elements that wagered on a negative result for the company and the country.
While Venezuela’s foreign reserves have fallen to a new low of $11.8 billion, rising oil prices could yield the government an additional $2.5 billion in revenue this year, reports Financial Times.
Venezuela US Dollar Forex Reserves 2006-Present
Chart from Trading Economics
Crude Price 2006-Present
Venezuela’s US Dollar reserves fell from roughly $31 billion to roughly $21 billion from the beginning of 2010 to mid-2014 despite rise in oil from $73 to over $100 per barrel.
As social pressures mount, president Nicolás Maduro will be forced to use more reserves to buy food and other goods to stave off unrest.
I fail to see how another $2.5 billion in oil revenue each year will stave off default.
$50 or even 70 per barrel seems unlikely to stop the hemorrhaging.
Finally, I wonder how much of those reserves padded corrupt politicians pockets exchanging 10 bolivars for one US dollar at the official exchange rate.
Mike “Mish Shedlock
Perhaps Hillary can help them. I hear she has some time on her hands now. 🙂
Actually, the Clintons and their various staffs and aids have far less time on their hands than one would expect. What they are doing is providing the full support of the Clinton machine sub rosa to their shill Jill Stein in a massive lawyer-laden effort to reverse the election through state recounts and Electoral College tampering.
Expect a shocking and angry Trump response starting Monday including the withdrawal of the de facto “pardon” of the Clintons and their foundation/initiative.
The election is still underway and entering the brass knuckles phase.
“Expect a shocking and angry Trump response starting Monday including the withdrawal of the de facto “pardon” of the Clintons and their foundation/initiative.”
That, my friend, would be even sweeter than the election victory!
Maybe. IMO, the withdrawal of Trump’s threat seemed to be so Trump did not have to fight the Clinton machine again. If this above is true then once again, Trump will prevail. He has the law on his side now and the Clintons only have money and influence, now rapidly waning. It would be their last hurrah, to add to their losses.
“Finally, I wonder how much of those reserves padded corrupt politicians pockets exchanging 10 bolivars for one US dollar at the official exchange rate.” exactly what happened!!!
The import business was never about the commercial goods, the food or the medicine, was about the financial transaction made to their own overseas companies who charged an overprice to import the goods. Then these good were left to rot at the ports, once again, it was a financial transaction, not a comercial transaction. with $10000 made you a millionaire with only three or four steps on the black and official market. “la vuelta”
this is why Venezuela is in the border of default. but the country depends so much of external suppliers and new money that the government will do whatever is possible to keep the country in minimal float and the bonds payed!
They obviously need both universal dividend and retail discount policies. And the elimination of socialist re-distributive taxation as well. That way their productive investments will have the proper environment to continually increase and raise their standard of living. And their reliance upon finance will also continually decrease continually reducing those considerable costs. It just makes economic sense.
They need a free market
period
Venezuela’s problem, and much of Latin America’s historically has been the lack of strong protection of property rights, not so much free markets. Free markets have allowed wealthy owners of valuable properties to invest their wealth in US securities instead of reinvesting in local growth opportunities. That has left their countries impoverished, Miami’s real estate market booming, and every tin horn dictator trying to get control of someone else’s property.
Jon, free market principles include strong protection of property rights. The reason “wealthy owners of valuable properties to invest their wealth in US securities instead of reinvesting in local growth opportunities” cannot be blamed solely on weak property rights. Private contract enforcement (another free market principle) is also important, as well as the removal of onerous regulations. In the case of Venezuela, outright theft by government has accelerated the worsening plight of the Venezuelan people.
Markets work even absent any explicit property rights protection, as ancient Silk Road trading demonstrated. BYOG (Bring your own guns) may not always be the most efficient way of regulating market transactions. But it does resolve to a functioning free market, even if possibly one with high frictional costs.
What does not work over time, is making the guns part available to only one party. Then you’ll have Latin America (or, just in slower motion, scratch the Latin part): A burst of temporary efficiency advantage, serving to lure people down the road to complete, asymmetry determined collapse.
Venezuela needs a free market.
The failure in Venezuala is leftist and communist economic policies.
Venezuela actually previously (when situation was not this bad) used their dollar reserves to protect bolivar against lowering in value because they were obsessed that the value could not drop.
That was their first mistake, always save foreign currency reserves and let your currency float freely with its valuation decided by markets.
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Because the official currency rate is totally whack nobody in their right mind would invest in Venezuela from abroad.
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Third Chavez and his chosen successor have battled the rapid inflation with forcing companies to produce staple products like toilet paper for set prices to guarantee cheap prices to people and punish evil businesses.
This led to Venezuela not having any toilet paper at all because normal business does not work for losses and motivation dies with centrally planned and mandated losses for companies.
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To combat rising prices when many stores didn’t follow Chavez and his moustached successors insanity because they had no money to buy inventory they would sell for a huge loss Venezuela nationalized parts of the shops so government forced the production of certain things at gunpoint and government trucked the products from the practically nationalized factories to nationalized shops with nationalized trucks to sell for cheap prices so people had to stand in line for 8 hours to get to buy some products for cheap prices and this lead to professional waiters who stood in line for people who had actual jobs to do instead of waiting in line.
Venezuala practically became Soviet Union with either huge lines or no product in shops.
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The venezuelan goverment keeps making the situation worse and has un-motivated every business and useful person so that they do not produce because there is no point because the politicians force people to either work for a loss, confiscate things or call the productive people capitalist enemies of glorious socialism.
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Final nail in thecoffin was the crash of oils value so now venezuala has no reserves and because the oil company has been filled with socialists and political cronies instead of productive workers the production is falling in an environment where currency reserves have been wasted and price of oil is too low to even recoup operational costs in the venezuelan government oil company because its full of chavebista workers.
When the lights go out in Caracas will it become a place to go galt? It has the climate, natural resources and the succeeding government is likely to be polar opposite of what is there now and the people will be emotionally conditioned to reject poor choices for several generations.
Communism and free markets can never coexist. Thanks to the fantasies of socialism, and massive vote fraud by the Regime, Venezuela is going down in a massive wave of violence, and possibly Maduro is going down with it. In 15 years or so, this could easily be the US we are talking about.
Solution: bitcoin or other crypto-currency
I’m sure everyone in Venezuela is going to start transacting business in silver and gold any second now. Any second now…
Probably $US, not silver & gold just yet.
That’s not going to be an option in the US if options are ever needed.
Not gold. Bitcoin. All one needs is a mobile phone and one is free of fiat currencies, except for the minor detail of paying taxes. Not super urgent to transition to a bitcoin-like currency here in the U.S., but this post shows that many have emergency need to escape their national currency.
Has increased in use there, not too common, also outlawed it seems :
https://www.quora.com/How-common-are-bitcoin-in-Venezuela
Bit coins are very insecure (see the recent bit coin thefts,and government seizures). They also only work if Internet is available and you are allowed to use the sites that can deal in them
Right and when Venezuela bans access to all bitcoin control nodes? Gold and silver aren’t bound by such restrictions.
You scoff, but if Venezuelans had nothing more than silver dimes, quarters and half dollars, and price controls were abandoned, the economy would stabilize. A partial relaxation of price controls already cut lines in half. It is ironic that between the madcap activity of Maduro and now Modi, people are starting to wake up to the destructive nature of fiat currency. Hugo Salinas Price writes that in some parts of Mexico, which is the home to many silver mines, locals willing to pay in specie are eagerly welcomed, legal tender law be damned.
Mish
Happy Thanksgiving
Cap. controls at 5 $/VEF 10 000 too it seems
https://panampost.com/sabrina-martin/2016/11/17/venezuela-caps-daily-bank-withdraws-at-us-5-a-day-to-avoid-bankruptcy/
My undrstanding is that anyone with a useful skill has left or are packing their bags, medical people especially. Chinese naval base Maracaibo in 3,2,1
Venezuela has many cuban doctors working there because of a deal with Castro brothers with cuba getting oil and venezuela getting doctors.
Cuba has failed also in many ways but at least the doctors are better than in most of latin america.
“The bolivar is all but worthless.”
Income equality. Everyone is getting rich in bolivars. In Zimbabwe, everyone became a billionaire in Zim dollars.
I don’t understand why hyperinflation is such a confusing topic? Some think that printing a lot of money causes it. Thus, all evolved economies should be facing it now.
Currency needs to be backed by national wealth. Without it, the value is no different than if you or I printed some on the copier.
National wealth is what the nation produces. In Venezuela, it was/is oil at a high price. Take that away and print a lot of currency and you have inflation and/or hyperinflation. Note: a gold standard wouldn’t have mattered diddly squat. Gold is nothing more than a denominator and the ‘exchange rate’ is nothing more than a committee decision. Thus, phony.
Japan, the Eurozone, the US, and others can print because 1) all are competitively devaluing their currencies so no change is mathematically relevant. 2) The national wealth is intrinsic to the nation and not just a function of the quantity of paper involved. Gold is, as always, irrelevant, and, if involved, just a reason for committees to decide on fixed rates among nations. (I know, if I read some pamphlets from gold merchants and several hundred pages from other purveyors of intellectual flotsam, I would know better.)
I would say that history would disagree with your statement. Take the Weimar Republic (Germany) for example around 1921, they experienced a hyperinflation event even with lots of “intrinsic wealth” as you mentioned above. I don’t see how the intrinsic wealth of a nation factors into the value people associate with it’s currency. Unfortunately you can’t take intrinsic value to the bank but you can take worthless Bolivars. Just my view.
ALL successful countries have their own currency with a floating exhange rate decided by markets.
The failure of Venezuela started with communist and socialist policies but it was made worse by artificial decisions about bolivars value by committee full of socialists.
There has actually been some spanish leftist professors “advising” in Venezuela and I am amazed they have not been executed by Venezuela as enemies of socialism despite said leftist professors being leftist and socialist through and through.
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Venezuela should get more publicity in media to show dangers of socialism so that some of the crazier Bernie supporters would realize its not a good idea in practice.
Socialism is only good in theory if you believe in unicorns of socialism.
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Euro has created so much misery because euro has the same exchange rate for Germany and Greece/Italy so Germany benefits with customers who buy with debt that in theory cant depreciate in value since its all euros and guaranteed by ECB in Frankfurt but all other countries except Germany get just increased debt and loss of competitiveness.
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Euro can not and will not continue because it is unsustainable and every country would be better off in their own currency with floating exchange rate decided by markets.
If you implemented the policies that would create adequate demand and falling prices in perpetuity….the exchange rate would accurately reflect their superior economic stability….and those that didn’t implement such would have the crappy exchange rates. Begin by throwing general equilibrium out of your mind…and the rest becomes obvious.
Adequate Demand is Demand that would occur in a free market – at free market prices – Not government sponsored BS that you seem to like
How do you do that ‘adequate demand’ thing? How can you make me buy something? Perhaps if you gave me $1000 I might blow it on something or some poor family might buy groceries and shoes with it. But, when do I get another $1000? I expect you to keep it coming if you want me to create adequate demand. Otherwise, I’ll just go back to my old habits of drinking and watching tv.
PS General Equilibrium is like quantum theory. If you can measure it, then you are measuring where it was, not where it is at this moment. Is it a wave or a particle? In other words, it’s valuable as a teaching tool to say ‘this is what happens if you do this stuff, possibly.’ It’s a joke if you apply it to anything useful.
I admire your belief that experts can create superior economic stability. Where can we find some and when can they start?
PS: Quantum Theory is not a joke. Economic Theory that gets mathy is, however. Poor phrasing above.
Katsaus and you are the two individuals that get A’s in class today 🙂
I would have added in: Last month during protests Maduro “da bus driver man”, in order to appease the protests, gave everyone in the country a 40% raise. So 40% makes complete sense.
And, being a hyper anal retentive f*ck, something about using the term ‘intrinsic’ bothers me. It’s more of a ‘relative’ ratio. And even then that’s not completely correct. As nations maintaining the ratio must have a similar economic system. I’m trying to think of a term to call it for that book you want written. Wait til ya see da chapter titled “The great reverse engineering” – a.k.a. – why the Fed doesn’t do what you think they do. So far – 24 chapters outlined.
Now I must get back to doing something for Mish. France is building military on my borders and allied with my neighboring Civ states- made themselves f’n Suzerain… My scientific advantage is too big, and I have ballistics while they are stuck in the Renaissance. Warmonger penalty or not, I must annihilate them!!! Paris will soon be mine! Mish may enter freely, although gifts of luxury items are always appreciated.
After that I start drafting the book… 🙂 Arghh!! I hate writing.
Back to a serious note – y’all should be looking at Brazil. Most interesting place in the world right now. Old school is spinning at their loss of control here. Who would have thought when they moved the government to Brasilia, in order to hide their activities, that the internet was coming. To paraphrase Monty Python “no one expects the internet”
My terrible mistake. You are correct.
Hyperinflation is caused by an excess of money printing and the curse of the pixies. The pixies must be involved since Japan and the Eurozone can’t seem to catch a cold, let alone a rising price for almost anything unless it rose in price worldwide for everyone else. The ghosts of the samurai must be protecting Japan, or possibly the Divine Wind has resurrected and is somehow magically blowing the hyperinflation into the sea.
And, of course, somehow being on a gold standard prevents hyperinflation, unless you have ghosts of samurai or the Divine Wind looking out for you. But that doesn’t explain the Eurozone. Perhaps it’s the lord looking out for drunken sailors and Utopians who think printed money is the cure for all social ills that cost money to fix.
You nailed it!!!
And, of course, a gold standard is needed to force discipline on the central banks. Pray tell, how exactly does that work? Will a committee constantly change currency values via the price of gold and fixed exchange rate with gold in order to keep the world in proper order? If you say, ‘No the market will do this’, then, again pray tell, how is that different from using currency pairs today? This causes gold to be overhead in the world economy, and a profit center for gold merchants.
Again, you nailed it!!! We need this!!!
If you can provide a better explanation, feel free but please omit the weird magical associations that state or imply a mystical association with gold and prices. Also, when can we expect to see hyperinflation in Japan and the Eurozone and why did it appear in Venezuela? I assume Venezuela has criminals who used harsh language and do horrible things as government officials, and thus anger the pixies who decide they should be the ones who get hyperinflation? In other words, it’s a celestial popularity contest among invisible entities and Venezuela is on the outs.
Again, you are correct. In the final analysis, there is little difference between Venezuela and Japan in most respects. One is just more popular than the other and their intrinsic national wealth difference is irrelevant with respect to their currency values. Except for the currency values and language, you almost can’t tell the two countries apart. Therefore, it must be Venezuela is populated by bad people who think bad thoughts and commit bad acts while printing too much money.
1- I was being complimentary. You completely misunderstood me. Or please be specific what you think I said that led to your response. I was being complimentary of your comment on currency value being relative to national wealth. It’s just more of a ratio than an intrinsic value.
2- I hate gold. Can’t even stand the color of the stuff. You are converting to a product to convert back out of a product. Lots of unnecessary math. Sillier fools like bitcoin.
3- Not magical anything. Therein lies the riddle that preoccupied me for 2 months. Your example of numerator/denominator was 100% correct, but only as to why currencies stayed stable to one another, but it still should have resulted in all countries having sizable inflation. That did not happen. So as we both agree, money is not magical, nor does it defy basic laws of physics, so there had to be some parameter working as a suppressor to keep inflation from occurring.
More importantly, I took France out in 6 turns. Rome is next. Tomyris really is the embodiment of hell hath no fury like a woman scorned.
Sorry. I blew it. I overemphasized a couple of sentences, obviously in error. Must be too much drinking and TV. Get me those $1000 checks asap so I can be a better person, at least until they stop. My current aggregate demand must be flawed.
Thank you for the complimentary post. But, also, thanks for the provocation (my error) so I could elaborate in general to all the spooks (not you) who think a gold standard is good and hyperinflation is a complicated concept.
Also, mt poor eyesight lined your reply up with the aggregate demand guy. Sorry, again.
Also, point 3: Intrinsic wealth of a nation explains it. Feel free to replace intrinsic with another word. Basically, Venezuela has lots less than Japan, hence hyperinflation. Currency and other money printing forms are backed by it, or the lack of it in the case of Venezuela.
it’s the school of deflation in everything but your earnings… not sure why that side of the equation doesn’t register with people as well. Prices drop>revenues drop>salaries drop>hot chicks pants drop… well – maybe not the last part, but i liked how it sounded.
Venezuela is basket case: the oil wealth cannot compensate for the “quality” of the leadership.
However, history teaches me never to laugh at someone else’s misfortune. It has a habit of boomeranging.
Marxism is not “misfortune”. It’s an immoral, humanity crushing lie.
Are we going to have currency crisis elsewhere (e.g. emerging economies)?
Some more snafus involving dollar pegged commodity producers seem all but inevitable, if the Fed wants to “dampen the irrational mood” following a Trump victory. Unless Trump trumps them, by going full Reagan on the Fiscal side, at least.
Better not let Steve H Hanke hear about this piece, Mish. He’s already refuted Zero Hedge’s claim that Venezuela was heading for hyperinflation. In his refutation he insisted that studies he’d conducted with some other clown (apologies, respected economist), had emphatically proven that inflation had to be running at 12,875% to qualify as hyperinflation!
One assumes if inflation is running at 12,874%, all is well.
Academics … you gotta love ’em.
Hanke’s definition is ridiculously tight – requires 50% in a month or so – we are nearly there.
By any reasonable measure the country is in hyperinflation.
Printing zapped Ven’s economy. Its a classic case of printing producing a banana republic. A gold standard is the first step toward a lasting recovery. Market forces require honest money to work efficiently.
Mish, thinks for the update on Venezuela. It again gives us a glance at the ruins a socialistic government would ultimately take us to. I would appreciate seeing more as you get more.
Your story does give us reason to give “Thanks” for Trump’s win.
http://www.newyorker.com/magazine/2016/11/14/venezuela-a-failing-state?utm_source=pocket&utm_medium=email&utm_campaign=pockethits