Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Market Insanity

Venezuela faces Hyperinflation and Cash Shortage at the Same Time

Venezuela is now facing one of the weirdest effects of hyperinflation – a serious shortage of cash.

Riots broke out in parts of the long-suffering country because citizens were unable to redeem their worthless 100 bolivar notes, The Latin American Herald Tribune reported. President Nicholas Maduro declared the bills worthless; in emulation of Indian Prime Minister Narenda Modi’s demonetization policy, on December 14.

By December 16 riots had broken out and mobs were looting businesses because no replacement cash was available; even though the 100 bolivar notes made up 76% of the country’s money, Bloomberg reported. People were looting because they had no money to buy food.

By December 17, Maduro recanted and told his people that the 100 bolivar note was legal tender again. Instead the notes will remain good until January 2, in order to give the new money time to arrive.

The High Cost of Hyperinflation

It is not clear why the 100 bolivar note’s replacement; the 200 bolivar note, was not available. Maduro blamed “international sabotage” but a more likely reason is that the Central Bank of Venezuela cannot pay its printing bill.

The bank owed the British printing company De La Rue (LON: DLAR) $71 million, Bloomberg reported in April. At the time it was desperately trying to find another printer to make the money.

Venezuela has been ordering huge amounts of banknotes because its money is worthless. One US dollar is reportedly worth 1,000 bolivars on the black market – the official exchange rate is 20 bolivars to $1.

Last year, the Central Bank ordered 10.2 billion banknotes for a country of 30 million people, Bloomberg estimated. In contrast the US Federal Reserve had 7.6 billion banknotes printed for a population of 323 million in 2015.

The Central Bank ordered so many bolivars that De La Rue (OTC: DLUEY); the world’s largest currency printer, could not meet the demand, Bloomberg reported. It had to contract to other companies to fill an order for 3.3 billion Venezuelan bolivars. So much cash was shipped to Venezuela that a fleet of 747s had to be chartered to haul it.

The Paradoxes of Hyperinflation

The mess in Venezuela exposes one of the strangest paradoxes of hyperinflation. A government needs lots of cash to keep its zombie economy shuffling along, but it cannot afford to print the cash.

Unlike the pensioner, soldier or government employee in Caracas; a company like De La Rue will not take bolivars in payment. De La Rue demands payment in US dollars or Pound Sterling, which Venezuela can only get by selling oil. Since oil prices are falling, Maduro ends up selling more oil to buy money with less and less buying power.

Maduro cannot send his thugs to De La Rue’s offices in Basingstoke, Hampshire, and have them point guns at the CEO’s head. That means he has to sell off assets to get money to finance hyperinflation, unless Venezuela wants to start printing money on newsprint.

Basically, Venezuela ends up paying good money for worthless money. The printers make a nice profit, while the people of Venezuela get stuck with worthless paper. The bolivar is currently worth around 4¢ on the black market, which means the cost of printing it and hauling the banknotes probably exceeds the buying power. The deal is a lousy one especially for the people of Venezuela.

Is Venezuela in the Death Spiral?

One has to wonder what will happen when the Central Bank can longer pay for printing, a situation that may have occurred. Will Maduro try to print new money in Venezuela, or just leave the old bills in circulation?

Presidential guard soldiers stand at attention next to the place where the body of late Venezuela’s President Hugo Chavez lies inside the Military Museum where the walls are covered in images of independence hero Simon Bolivar in Caracas, Venezuela, Wednesday, March 20, 2013. Chavez died on March 5. (AP Photo/Ariana Cubillos)

An interesting problem here might be that Venezuela lacks the equipment, resources and technical expertise to print money. The government might be able to print some sort of script, but there’s no guarantee anybody would accept it. Such a script would present huge problems because anybody with a copying machine would be able to counterfeit it.

It looks as if the Venezuelan economy is in a death spiral from which it cannot escape. Even if Maduro were to start making economic reforms; or resign to let a new leader takeover, it might be late. Total economic collapse might be just around the corner, followed by who knows what.

Bitcoin Might Disrupt Venezuela’s Economy even Further

One group that is profiting from Venezuela’s pain is bitcoin speculators. A growing number of the country’s citizens are turning to the cryptocurrency because they no longer trust the government’s money.

Bitcoin is popular in Venezuela because it can be exchanged without a third party, The Guardian noted. Another reason why the digital tender is becoming popular is its vast buying power in Venezuela, one bitcoin was worth 7,888.74 bolivars on December 18, 2016.

Among other things Bitcoin can be used to buy items from other countries or Amazon gift cards which can be used to buy items online. This allows people to bring in essentials like food and medicine. Many Venezuelan tech workers are now paid in bitcoin for the freelance work they do.

A final reason why Bitcoin is popular is that it can be easily transmitted through encrypted messaging apps like Telegram and WhatsApp. Apps like StartChat enable people to send bitcoin via Telegram. That makes life easier in a country where Maduro has officially closed the borders with Colombia and Brazil to keep cash from leaving.

The popularity of Bitcoin might make things worse in Venezuela by giving rise to a tech-savvy elite that has the buying power to take control of the economy. This might lead to class warfare and political turmoil.

Some news stories indicate that Maduro’s secret police have been arresting and terrorizing bitcoin users. The nation’s media has also been trying to portray bitcoin as criminal, possibly presaging a crackdown or give corrupt officials a pretext to prey on bitcoin users.

It looks as if Venezuela is on the verge of economic chaos. Whether that chaos will lead to political anarchy; or a new cryptocurrency-based economy, is too early to tell. The situation in Venezuela shows us that now might be a good time to take up Bitcoin mining. Demand for the cryptocurrency is about to skyrocket in Venezuela and elsewhere.

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