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Venezuela’s Grim Reaper: A Current Inflation Measurement – Current Annual Rate 2875%
Venezuela’s Grim Reaper: A Current Inflation Measurement – Current Annual Rate 2875%
The Grim Reaper has taken his scythe to the Venezuelan bolivar. The death of the bolivar is depicted in the following chart. A bolivar is worthless, and with its collapse, Venezuela is witnessing the world’s worst inflation.
As the bolivar collapsed and inflation accelerated, the Banco Central de Venezuela (BCV) became an unreliable source of inflation data. Indeed, from December 2014 until January 2016, the BCV did not report inflation statistics. Then, the BCV pulled a rabbit out of its hat in January 2016 and reported a phony annual inflation rate for the third quarter of 2015. So, the last official inflation data reported by the BCV is almost two years old. To remedy this problem, the Johns Hopkins – Cato Institute Troubled Currencies Project, which I direct, began to measure Venezuela’s inflation in 2013.
The most important price in an economy is the exchange rate between the local currency and the world’s reserve currency — the U.S. dollar. As long as there is an active black market (read: free market) for currency and the black market data are available, changes in the black market exchange rate can be reliably transformed into accurate estimates of countrywide inflation rates. The economic principle of Purchasing Power Parity (PPP) allows for this transformation.
I compute the implied annual inflation rate on a daily basis by using PPP to translate changes in the VEF/USD exchange rate into an annual inflation rate. The chart below shows the course of that annual rate, which last peaked at 3473% (yr/yr) in late October 2017. At present, Venezuela’s annual inflation rate is 2875%, the highest in the world (see the chart below).
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Venezuela Could Be The Future of Western Civilization
Venezuela Could Be The Future of Western Civilization
If anyone wants to see where western civilization is headed they need only to look at Venezuela today. The Bolivar has gone from 6.3 per dollar to 1,000 per dollar in the past few years. Last year farmers were ordered to turn over certain crops to the government for dispersion in government owned stores. About 100 shopping malls are now having their power cut for several hours a day as power shortages become a problem. But, as one citizen said, it doesn’t really matter because there isn’t anything to buy anyway. Last year their economy dropped 10% and this year it is expected to drop another 8%. They just had 36 747 cargo aircraft deliver newly printed cash to keep up with inflation.
This is the price of socialist programs and lack of sound economic practices. With currency inflating at this rate it is impossible for anyone to save from one year to the next. With government taking farm commodities how long will farmers continue to produce crops they will not get paid for or be paid in increasingly worthless currency. With power shortages commerce cannot continue in any serious way.
Gold has begun its move upwards in reaction to failing bank policies and the realization by the public that all is not well. If you do not get resources before they are gone you will not get them or you will pay dearly for them. Empty stores and closed banks make resource acquisition difficult if not impossible and life becomes much more difficult to survive on a daily basis. Nothing can create shortages like socialist policies and global war.
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Brain-Drained
Brain-Drained
Venezuela: Real Wages Collapse amid Continuing Crack-Up Boom
While the crack-up boom in Venezuela continues, real wages in the country have have utterly collapsed. The bolivar is still trading close to 700 to the US dollar on the black market, and the Caracas stock index keeps making new all time highs in nominal terms almost every day. Ironically, Venezuela’s currency is called the “bolivar fuerte” (VEF), i.e. “the strong bolivar” ever since it has been “reverse split” 1 for 1,000 in January 2008.
Image via designlimbo.com
As an aside, the stock market has likewise been subject to a reverse split of 1 for 1,000 about a year ago – pre-split the index would now be trading at a cool 15.5 million points.
The black market rate of the “strong” bolivar (VEF) – 1 USD now buys nearly 700 VEF – click to enlarge.
Meanwhile, Venezuela has the highest sovereign CDS spreads in the world. Below is a chart of Venezuela’s annual default probabilities based on 5 yr. CDS spreads at a 40% recovery assumption:
Venezuela: annual sovereign default probability from 5 year CDS spreads at an assumed recovery rate of 40% (which may prove to be a generous assumption) – click to enlarge.
Venezuela’s Economy Loses its Best People
The great successes of socialism in Venezuela aren’t confined to increasing shortages of basic goods, a collapsing currency and extremely high sovereign CDS spreads.
Businesses are confronted with a mixture of sharply rising input costs and price controls and as a result are unable to pay their employees wages that can even remotely balance the sharp losses in the bolivar’s purchasing power. As Reuters reports, skilled workers have been hit the worst:
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