Best of the Week
Most Popular
1. Market Decline Will Lead To Pension Collapse, USD Devaluation, And NWO - Raymond_Matison
2.Uber’s Nightmare Has Just Started - Stephen_McBride
3.Stock Market Crash Black Swan Event Set Up Sept 12th? - Brad_Gudgeon
4.GDow Stock Market Trend Forecast Update - Nadeem_Walayat
5.Gold Significant Correction Has Started - Clive_Maund
6.British Pound GBP vs Brexit Chaos Timeline - Nadeem_Walayat
7.Cameco Crash, Uranium Sector Won’t Catch a break - Richard_Mills
8.Recession 2020 Forecast : The New Risks & New Profits Of A Grand Experiment - Dan_Amerman
9.Gold When Global Insanity Prevails - Michael Ballanger
10.UK General Election Forecast 2019 - Betting Market Odds - Nadeem_Walayat
Last 7 days
The Gold Stocks Correction and What Lays Ahead - 19th Oct 19
Gold during Global Monetary Ease - 19th Oct 19
US Treasury Bonds Pause Near Resistance Before The Next Rally - 18th Oct 19
The Biggest Housing Boom in US History Has Just Begun - 18th Oct 19
British Pound Brexit Chaos GBP Trend Forecast - 18th Oct 19
Stocks Don’t Care About Trump Impeachment - 17th Oct 19
Currencies Show A Shift to Safety And Maturity – What Does It Mean? - 17th Oct 19
Stock Market Future Projected Cycles - 17th Oct 19
Weekly SPX & Gold Price Cycle Report - 17th Oct 19
What Makes United Markets Capital Different From Other Online Brokers? - 17th Oct 19
Stock Market Dow Long-term Trend Analysis - 16th Oct 19
This Is Not a Money Printing Press - 16th Oct 19
Online Casino Operator LeoVegas is Optimistic about the Future - 16th Oct 19
Stock Market Dow Elliott Wave Analysis Forecast - Video - 16th Oct 19
$100 Silver Has Come And Gone - 16th Oct 19
Stock Market Roll Over Risk to New highs in S&P 500 - 16th Oct 19
10 Best Trading Schools and Courses for Students - 16th Oct 19
Dow Stock Market Short-term Trend Analysis - 15th Oct 19
The Many Aligning Signals in Gold - 15th Oct 19
Market Action Suggests Downside in Precious Metals - 15th Oct 19
US Major Stock Market Indexes Retest Critical Price Channel Resistance - 15th Oct 19
“Baghad Jerome” Powell Denies the Fed Is Using Financial Crisis Tools - 15th Oct 19
British Pound GBP Trend Analysis - 14th Oct 19
A Guide to Financing Your Next Car - 14th Oct 19
America's Ruling Class - Underestimating Them & Overestimating Us - 14th Oct 19
Stock Market Range Bound - 14th Oct 19
Gold, Silver Bonds - Inflation in the Offing? - 14th Oct 19
East-West Trade War: Never Take a Knife to a Gunfight - 14th Oct 19
Consider Precious Metals for Insurance First, Profit Second... - 14th Oct 19
Stock Market Dow Elliott Wave Analysis Forecast - 13th Oct 19
The Most Successful IPOs Have This One Thing in Common - 13th Oct 19
Precious Metals & Stock Market VIX Are Set To Launch Dramatically Higher - 13th Oct 19
Discovery Sport EGR Valve Gasket Problems - Land Rover Dealer Fix - 13th Oct 19
Stock Market US Presidential Cycle - Video - 12th Oct 19
Social Security Is Screwing Millennials - 12th Oct 19
Gold Gifts Traders With Another Rotation Below $1500 - 12th Oct 19
US Dollar Index Trend Analysis - 11th Oct 19
China Golden Week Sales Exceed Expectations - 11th Oct 19
Stock Market Short-term Consolidation Does Not change Secular Bullish Trend - 11th Oct 19
The Allure of Upswings in Silver Mining Stocks - 11th Oct 19
US Housing Market 2018-2019 and 2006-2007: Similarities & Differences - 11th Oct 19
Now Is the Time to Load Up on 5G Stocks - 11th Oct 19
Why the Law Can’t Protect Your Money - 11th Oct 19
Will Miami be the First U.S. Real Estate Bubble to Burst? - 11th Oct 19
How Online Casinos Maximise Profits - 11th Oct 19
3 Tips for Picking Junior Gold Stocks - 10th Oct 19
How Does Inflation Affect Exchange Rates? - 10th Oct 19
This Is the Best Time to Load Up on These 3 Value Stocks - 10th Oct 19
What Makes this Gold Market Rally Different From All Others - 10th Oct 19
Stock Market US Presidential Cycle - 9th Oct 19

Market Oracle FREE Newsletter

Stock Market Trend Forecast Oct - Dec 2019 by Nadeem Walayat

Venezuela's Hyperinflation Hits 80,000% Per Year in 2018

Economics / HyperInflation Jan 20, 2019 - 07:22 PM GMT

By: Steve_H_Hanke

Economics

Venezuela's economy has collapsed. This is the result of years of socialism, incompetence, and corruption, among other things. An important element that mirrors the economy's collapse is Venezuela's currency, the bolivar. It is not trustworthy. Venezuela's exchange rate regime provides no discipline. It only produces instability, poverty, and the world’s highest inflation rate for 2018.  Indeed, Venezuela’s annual inflation rate at the end of 2018 was 80,000%.

I observed much of Venezuela’s economic dysfunction first-hand during the 1995-96 period, when I acted as President Rafael Caldera’s adviser. But it wasn’t until 1999, when Hugo Chavez was installed as president, that the socialist seeds of Venezuela’s current meltdown started to be planted. This is not to say that Venezuela had not suffered from an unstable currency and elevated inflation rates before the arrival of President Chavez, but with his ascendancy, fiscal and monetary discipline further deteriorated and inflation ratcheted up. By the time President Nicolas Maduro arrived in early 2013, annual inflation was in triple digits and rising. Venezuela entered what has become a death spiral.


With the acceleration of inflation, the Banco Central de Venezuela (BCV) became an unreliable source of inflation data. Indeed, in December 2014, the BCV stopped reporting inflation statistics on a regular basis. To remedy this problem, the Johns Hopkins-Cato Institute Troubled Currencies Project, which I  direct, began to measure Venezuela’s inflation back to 2013.

So, how do we accurately measure Venezuela’s inflation? There is only one reliable way. The most important price in an economy is the exchange rate between the local currency - in this case, the bolivar - 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 data are available, changes in the black-market exchange rate can be reliably transformed into accurate measurements of countrywide inflation rates. The economic principle of purchasing power parity (PPP) allows for this transformation. And the application of PPP to measure elevated inflation rates is rather simple.

Beyond the theory of PPP, the intuition of why PPP represents the ‘gold standard’ for measuring inflation during hyperinflation episodes is clear. All items in an economy that is hyperinflating are either priced in a stable foreign currency (the U.S. dollar) or a local currency (the bolivar). If goods are priced in terms of bolivars, those prices are determined by referring to the dollar prices of goods, and then converting them to local bolivar prices after checking with the spot black-market exchange rate. Indeed, when the price level is increasing rapidly and erratically on a day-by-day, hour-by-hour, or even minute by-minute basis, exchange rate quotations are the only source of information on how fast inflation is actually proceeding. That is why PPP holds, and why we can use high-frequency (daily) data to calculate Venezuela’s inflation rate, even during episodes of hyperinflation.

YOU MAY ALSO LIKE

And what criteria are used to categorize an inflation as an episode of hyperinflation? The following criteria should be met before any episode of elevated inflation be termed “hyperinflation”:

  • An episode of hyperinflation occurs when the monthly inflation rate exceeds 50%/mo. for 30 consecutive days
  • The hyperinflation episode ends when the monthly inflation rate falls below 50%/mo. mark, unless the monthly inflation should exceed 50% per month for another 30-day period within a year after the first episode is terminated. In this case, the second episode is not counted as a new hyperinflation episode, and but is instead considered a continuation of the original episode.

In Venezuela, the monthly inflation rate exceeded 50%/mo back on November 13, 2016 and remained above 50%/mo until December 14, 2016 (32 consecutive days). On December 15, 2016, the monthly inflation rate fell below 50%/mo mark. Then, on November 3, 2017, the monthly inflation rate again exceeded 50%/mo threshold, before falling below the threshold on December 17, 2017 (for 44 consecutive days). So, Venezuela has been engulfed in a hyperinflation episode ever since November 13, 2016, with another flare up of the same episode occurring during the November-December 2017 period.

Venezuela is the only country in the world that is currently experiencing the ravages of hyperinflation. As 2018 came to a close, Venezuela’s hyperinflation, which I am able to accurately measure by applying Purchasing Power Parity (PPP) to high frequency, reached 80,000%/yr, and has lasted 25 months. Devastating as it is, 80,000% is a far cry from the International Monetary Fund’s unbelievable end-of-the-year inflation forecast for Venezuela of 2,500,000%/yr. One should never forget that one can measure episodes of hyperinflation with great precision, but no one can reliability forecast their durations or magnitudes—a fact that has failed to penetrate the walls of the IMF’s insular bureaucracy.

As 2018 came to a close, Venezuela’s hyperinflation, which I am able to accurately measure by. applying Purchasing Power Parity (PPP) to high frequency, reached 80,000%/yr, and has lasted 25 months.Prof. Steve H. Hanke

How can Venezuela pull itself out of its economic death spiral? Venezuela must officially dump the bolivar and adopt the greenback. Official “dollarization” is a proven elixir. I know because I operated as a State Counselor in Montenegro when it dumped the worthless Yugoslav dinar in 1999 and replaced it with the Deutsche mark. I also took part in the successful dollarization of Ecuador in 2001, when I was operating as an adviser to the Minister of Economy and Finance.

Countries that are officially dollarized produce lower, less variable inflation rates and higher, more stable economic growth rates than comparable countries with central banks that issue domestic currencies. There is a tried and true way to stabilize the economy, which is a necessary condition required before the massive task of life-giving reforms can begin. It is dollarization. Stability might not be everything, but everything is nothing without stability.

Just what does the Venezuelan public think of the dollarization idea? To answer that question, a professional survey of public opinion on the topic was conducted in March 2017 by Datincorp in Caracas. The results are encouraging: Sixty-two (62%) of the public favored dollarization. Since things have considerably deteriorated since that survey, my conjecture is that the proportion of Venezuelans favoring dollarization has substantially increased. It’s time for enlightened, practical politicians in Venezuela to embrace the dollarization idea. The fact of the matter is that the public has already spontaneously dollarized the economy.

By Steve H. Hanke

www.cato.org/people/hanke.html

Twitter: @Steve_Hanke

Steve H. Hanke is a Professor of Applied Economics and Co-Director of the Institute for Applied Economics, Global Health, and the Study of Business Enterprise at The Johns Hopkins University in Baltimore. Prof. Hanke is also a Senior Fellow at the Cato Institute in Washington, D.C.; a Distinguished Professor at the Universitas Pelita Harapan in Jakarta, Indonesia; a Senior Advisor at the Renmin University of China’s International Monetary Research Institute in Beijing; a Special Counselor to the Center for Financial Stability in New York; a member of the National Bank of Kuwait’s International Advisory Board (chaired by Sir John Major); a member of the Financial Advisory Council of the United Arab Emirates; and a contributing editor at Globe Asia Magazine.

Copyright © 2019 Steve H. Hanke - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Steve H. Hanke Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules