How could we curb Venezuela’s hyperinflation?

Think of a note worth 10,000 bolívars. That seems like a lot, right? I’m a nice guy; I’ll give it to you. Go buy yourself a nice TV or something.

What’s that? They said you don’t have enough money?

Precisely.

As of July 27, 2016, this seemingly valuable note is worth just over ten dollars (it’s almost definitely worth less by the time you’ll read this). In the UK, it wouldn’t be enough to buy you a takeaway dinner. This is because of the rapid hyperinflation that’s occurring in the South American country, leaving it in a tumultuous spiral of poverty, with some not even having enough to pay for essentials such as food or heating. A recent Bloomberg report even suggested that the Venezuelan government is running out of money to print money, such is the state of the country. An analyst at Nomura even predicts that a $200 oil price is needed before the Venezuelans can balance their budgets. Estimates for the rate of decrease of prices range from 400% to 720%, meaning that Venezuelans are eager to spend their money before its worth dramatically decreases just a few weeks later. It seems that policymakers are unable to come up with a solution to the problems that Hugo Chávez’s government largely created. Is the country doomed?

Not quite.

The Venezuelan government needs to learn from the lessons of German, Zimbabwean and Brazilian hyperinflation in order to put a stop to the inflationary pressure that has roiled its economy. Fundamentally, the problem is that, due to the pegging of the bolívar against the dollar, there is an “official” exchange rate of bolívars to dollars, and then there is a black market rate, which is a cause of the hyperinflation. Officially, the bolivar trades competitively against the US currency, however on the black market, it is estimated that 10,000 bolívars are worth just over one dollar. The solution? Officially unpeg the Venezuelan currency from the dollar, and allow it to float freely, so that both the government and the people of Venezuela are on the same side: there is now only one exchange rate, and this makes the problem much easier to solve – we need only one bullet, rather than two, so to speak. In addition, this allows Nicolas Máduro and his government to significantly reduce their fiscal deficit, that came about through them getting significantly less bolívars from overseas for every unit currency than the people got through black market transactions using the unofficial exchange rate.

Now that we have a reduced fiscal deficit, the Venezuelans need to stop printing money in order to finance deficit spending. This would stabilise the aggregate money supply in the economy, reducing the potential for a further reduction in the value of money. Logic dictates that the reduced inflation will disincentivise Venezuelans from spending their money in anticipation of a coming decrease in value, which would in turn lead to an increase in savings. Aggregate demand for goods and services would therefore reduce, causing a corresponding decrease in demand-pull inflation (inflation as a result of aggregate demand outmatching aggregate supply). This leads to a continuous cycle whereby more and more people save more and more money rather than investing it, and combined with the stable money supply, inflation will continue to decrease. Years of hyperinflation have battered the Venezuelan people’s expectations, however, so it may take a long time for them to be convinced that their currency will hold its purpose as a store of value, enabling inflation to decrease substantially. While this may allow the national debt of the country to increase, it is a price worth paying for the country to return to a period of long term economic sustainability, during which tight fiscal policy (increasing taxes and cutting government spending) can help bring this debt down.

The final prong of this three-pronged attack on inflation is that when inflation decreases substantially, the likelihood is that it will still be relatively high; inflation ranging from 400% to 720% can’t simply be swatted away. Therefore, the government needs to maintain interest rates at a level such that the nominal interest rate is far higher than inflation, causing the real interest rate to be high and positive. Intuitively, this means people will see it as beneficial to further save their money rather than invest it immediately, curbing the cycle that increases demand-pull inflation. As the rate of inflation continues to decrease, the central bank should gradually decrease nominal interest rates, while keeping them high above inflation, until they have reached a level of inflation that they see as sustainable, at which point real interest rates could potentially come down.

The sad state of Venezuela is a reminder of the dangers that letting inflation go out of control can provide; Hugo Chávez has failed his country immensely. Despite this, the policies outlined above should go a long way to cut out the plague of hyperinflation, and restore peace and prosperity to the Venezuelan people.

What do you think?

Shrey Srivastava, 16

Capitalism has hit a crossroads

Photo by DAVID ILIFF. License: CC-BY-SA 3.0

This is morbidly fascinating.

Without us even knowing it, we’ve stumbled across one of the most critical moments we’ve ever reached with regards to our economic ideologies. For decades, the unbridled, free market bent of capitalist thought has dominated society, with the capitalist ethos themselves being the key to the “good life” in the words of John Maynard Keynes. But while it remains the key to ensuring economic prosperity for as great a number of people as possible, its critics have been slowly growing, and people are slowly becoming aware of the gradual damage it’s doing to our societal values. The old Keynesian notion of the good life really doesn’t stand up when we take into account that the Western world is now gradually becoming unhappier and unhappier. The pursuit for material goods and relativist, superficial wealth has resulted in the average person becoming far more preoccupied with their money than ever before, and hence unhappier. Really, though, who can blame them? When laissez-faire capitalism, which in itself rewards the accumulation of capital above all else, has changed all our lives in some way, we’ve no choice but to conform. And that, in itself, is the problem. That is why capitalism needs to change.  Continue reading “Capitalism has hit a crossroads”

Why Bernie Sanders would be bad for the U.S. economy

It is fair to say that Bernie Sanders has received a quite sensational surge in popularity over recent months. His increased popularity comes as a result of the idealism which he exhibits, which has appealed to many a disaffected American. However, while this surge in popularity could come as a newfound victory for American progressivism as a whole, it means that not enough people are taking the time and effort to properly analyse his economic policies, which are quite frankly ludicrous and absurd. While I admit that some of his progressive policies, such as to greatly decrease unnecessary government spending, would actually help the economy, most of the policies which he goes on and on about are simply not going to work. The first absurd policy of his, which I will hopefully try to debunk here, is the Robin Hood tax on Wall Street speculators. Continue reading “Why Bernie Sanders would be bad for the U.S. economy”