Katelyn Rokus
3/12/19
With a predicted inflation rate of over 1,000,000% in 2018, Venezuela continues to suffer from dramatic hyperinflation that began in late 2013. For more information on the impact of the hyperinflation on the citizens, please watch this video. The rapid inflation in Venezuela resulted from a combination of increased government spending under former President Hugo Chavez and a decline in the price of oil, the chief export of Venezuela. Unfortunately, the economic actions taken by a new administration under Nicolas Maduro have done little to improve hyperinflation due to Maduro’s refusal to peg the bolivar to a more stable currency.
The Venezuelan hyperinflation crisis originated from humble administrative intentions. Seeking to reduce unemployment and poverty rates, Hugo Chavez increased government spending to provide new job opportunities. While these programs succeeded in reducing the poverty rate from 50% in 1999 to 31.9% in 2011, they also resulted in an inflationary output gap by shifting aggregate demand past potential output. Instead of increasing taxes or cutting government spending to reduce inflation, Chavez continued to lay out large sums of money to maintain popularity among voters, accumulating a foreign debt of $106 billion by 2013. This forced the government to print more money in order to repay debts, depleting the federal reserve. When oil prices dropped in 2014, the government had little ability to subsidize goods, leading to shortages of food and other essential consumer goods.In response to skyrocketing inflation, current President Nicolas Maduro enacted three measures: devaluing the bolivar by 95%, tying the value of the bolivar to the oil-backed petro (a cryptocurrency similar to bitcoin), and raising the minimum wage by 300%. While raising minimum wage theoretically could shift SRAS to the left to close the inflationary gap, prices continued to rise at a much greater speed than wages, doing little to remedy the issue. Additionally, the changes to the bolivar failed to restore customer confidence in the currency, resulting in continuously unpredictable wages.
So what can be done to curb hyperinflation? When faced with a similar problem from the late 1990s until 2009, Zimbabwe decided to abandon its currency in favor of more stable foreign currencies, particularly the US dollar. In fact, citizens of Venezuela have already shown favoritism for foreign currencies, often electing to cross the border into Colombia to withdraw money in the form of Colombian pesos.
While switching to the US dollar may seem like a relatively simple solution, Nicolas Maduro has taken an uncompromising stance against such proposals. He has gone as far as accusing the United States of initiating an “economic war” against him and his legislation, blaming capitalistic market structures for the hyperinflation and resource shortages in Venezuela. While Maduro continues to deny calls for a more stable currency, Venezuela remains trapped in a tumultuous state of hyperinflation, resource scarcity, and political unrest.
Works Cited
Coppola, Frances. “Why Venezuela's Hyperinflation Problem Is So Difficult To Solve.” Forbes, Forbes Magazine, 31 Dec. 2018, www.forbes.com/sites/francescoppola/2018/12/31/why-venezuelas-hyperinflation-problem-is-so-difficult-to-solve/#2fb7d1a1373c.“Hyperinflation Is Hard to Grasp, Harder Still to Tolerate.” The Economist, The Economist Newspaper, 13 Sept. 2018, www.economist.com/finance-and-economics/2018/09/13/hyperinflation-is-hard-to-grasp-harder-still-to-tolerate.
Osborne, Samuel. “Venezuela's President Increases Minimum Wage by 300% to Fight Inflation.” The Independent, Independent Digital News and Media, 15 Jan. 2019, www.independent.co.uk/news/world/americas/venezuela-minimum-wage-nicolas-maduro-bolivars-inflation-a8728716.html.
The Infographics Show. “Why Are People In Venezuela Starving (Hyperinflation Explained)?” YouTube, YouTube, 19 Dec. 2018, www.youtube.com/watch?v=ah9i3R9pRpg.
Young, Rob. “Can Venezuela Halt Hyperinflation?” BBC News, BBC, 21 Aug. 2018, www.bbc.com/news/business-45258262.
It seems as if Venezuela is past the point of no return in rendering its currency valuable anymore, and thus it seems as if the only option is to revert to a new currency, as was done in Belgium in 1999 when the Belgian Franc was replaced with the Euro to battle inflation, or to use a more stable form of currency, like the US dollar, as mentioned in the post, or perhaps the English Pound or the Euro. With inflation rates as high as 1,000,000%, it seems impossible that the rate will ever be able to be brought down at an effective pace purely by shifting the aggregate demand and supply curves.
ReplyDeleteOne method that could be used instead of printing more money, which causes hyperinflation and decreases the purchasing power of said money as prices rise, is open-market operations. The Federal Reserve could buy bonds/treasury bills from the government in order to help pay off the nation's debt. I agree that Chavez should have used a contractionary fiscal policy such as raising taxes or decreasing government spending as this would have limited inflation. Instead, his approach was more expansionary by increasing government transfers which only would make inflation worse. Yes, a plus side to inflation is that unemployment decreases but with that, real wages decrease as price levels rise. It is smart then to turn to the US or another stable form of currency as it is more stable and will be able to withstand the rising prices in Venezuela.
ReplyDeleteThat's true, one of the problems with inflation is that real wages decrease. In the long run, wages should adjust to the higher price level, but since wages are sticky and the price level only continues to increase, there is no time to adjust nominal wages for inflation. If Venezuela could slow inflation back to a small, consistent rate, it could be feasible to increase nominal wages without switching currency.
DeleteThe hyperinflation in venezuela has seemed to have skyrocketed out of control and many solutions aren’t able to work as well anymore. The fact that venezuela doesn’t want to adapt a foreign currency is understandable, yet it is costing them in more ways than just a grudge. Their hyperinflation is only getting worse. I agree that raising the minimum wage in the country would be impactful in a minimal way and I think that at this point, venezuela’s best option would be to step down and adapt another currency and allow for aid in how to get their economy back on track.
ReplyDeleteI thought the post was well organized, and did a good job of explaining how inflation becomes rampant in
ReplyDeletea country and how it's made worse. Additionally, I really like that you included comparisons to countries that were in similar financial states, and how they were able to resolve the situation. However, I think that those comparisons could have been expanded upon to include countries that prevented inflation from getting out of control in the first place so that we better see where Chavez went wrong. Additionally, as a side note, the visuals included in the post seemed interesting, but were described or explained.
Venezuela, in general, has never exceeded economically or even hit basic standards. With over 70% of their exports being oil, this leaves little room for other exports and an unattractive look for global trade. As oil prices dropped in 2014, this provides a large hit on not only global trade but their economy as a whole. As stated in the post, Venezuela's projected inflation rate is 1,000,000%. Moving to a foreign currency would be the smart way to go as it would provide stability within the economy and give a set price on goods. The problem is the government has a different idea which makes it very difficult for the people in Venezuela to transition to a foreign currency.
ReplyDeleteAnother complication is the political instability in Venezuela. So long as the opposition and government aren't working together there is no fiscal policy the government can take to alleviate the inflationary gap. The automatically balancing of the economy through welfare and other government programs have been completely overwhelmed by the magnitude of this crisis. I don't know the best way to end the hyperinflation but that does not include a US invasion destroying the economic base of the country.
ReplyDeleteThis is a lot like the situation with Germany after WWII. Since they were forced to pay other countries they figured they could just make more money. With the drastic increase in the money supply, money means literally nothing and they're sent into a hyperinflation. Because of the hyperinflation they're almost forced back into bartering rather than trading currency for goods and services because material goods were worth more than money.
ReplyDeleteThe current situation in Venezuela keeps getting worse and worse. Venezuela has never precisely been economically amazing, but this situation has gotten to the level of post world war one Germany in terms of inflation. There is not much Venezuela can do; they are a mostly export based company which is awful because of the oil price dropping. I agree that there is not much Venezuela can do besides adopt a new currency, the inflation is too critical and will continue to get worse.
ReplyDeleteAfter just reading and creating my own post about the federal reserve, it is slightly shocking to see how much influence the government has/had on the fed. It makes sense that in the U.S. the federal reserve is made up of economist as the decisions that they are making can be life-changing. I wonder how the Venezuelan federal reserve worked before this hyperinflation occurred and I also wonder how they got so far off track. Furthermore, how was this outcome not predicted. Or was it, but the chance of it happening just didn't seem concerning? Interesting how different other countries choose to control their economies.
ReplyDelete