bolivar

Another Fiat Currency Bites the Dust

April 15th, 2018 by

To slightly amend a quote from the classic film Fight Club, “On a long enough timeline, the survival rate of every fiat currency is zero.”

The deteriorating economic situation in Venezuela has added the country’s currency, the bolivar, to this ever-growing list.

Socialist Policies Not Panning Out (Shocking!)

Venezuelan President Nicolas Maduro
By Hugoshi [CC BY-SA 4.0], via Wikimedia Commons

For years, the socialist government of President Nicolás Maduro has driven Venezuela deeper and deeper into economic crisis.

Maduro succeeded the notorious Hugo Chavez, who styled himself the dictator of the country from the late 1990s until his death in 2013. Maduro’s tenure has been marked by increasingly authoritarian rule and a decimation of living standards.

Along with social unrest and shortages of various necessities like food and medicine, Venezuela has been plagued by hyperinflation of its currency.

Although the socialist regime has attempted to peg the rate of the bolivar, the black market provides a glimpse at its real exchange rate: The currency has plunged 99.9% against the U.S. dollar in just the last five years! This is according to research by Reuters.

In 2017, the inflation rate for the Venezuelan currency topped 2,500% and even reached as high as 4,000% at one point in November.

President Maduro and his circle of supporters have blamed the hyperinflation on the United States.

Redenomination: Starting From Scratch

This is reminiscent—on a smaller scale—of the infamous bout of hyperinflation that rendered the Zimbabwean dollar utterly useless. Some will remember that Zimbabwe was printing 100-billion-dollar banknotes that were essentially worth nothing.

The same story has played out dozens of times in other countries throughout the 20th and 21st centuries.

bolivar

Banners showing the current bolivar banknote designs. Source: Flickr | [CC BY-SA 2.0]

Venezuela’s central bank will now carry out Maduro’s decision in March to officially demonetize the bolivar, as Coin World has reported.

The process is known as “redenomination” because it tries to bring the official denomination of coins and paper money back to a reasonable level. All denominations will simply be divided by 1,000.

Thus, the new “sovereign bolivar” should have the purchasing power of 1,000 of the old near-worthless bolivars.

Unfortunately, the redenomination will have to take place all over again in less than two years at the current rate of inflation.

President Maduro’s popularity has plummeted since he was elected to a six-year term in 2013. The much-maligned Maduro also recently attempted to create the first state-issued cryptocurrency with the Petro coin. It debuted in February and is supposedly backed by Venezuela’s oil supply, which is among the largest in the world.

However, crude oil output from the country has slowed, and future production is only backstopped by massive loans from China and Russia.

 

The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.

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