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

January 1, 2019 in Economics

By Steve H. Hanke

Steve H. Hanke

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.

How can Venezuela pull
itself out of its economic death spiral?

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, …read more

Source: OP-EDS