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What A Mess: Lessons From Socialist Venezuela's Currency Chaos

Capitalism.com
|
November 29, 2016
socialist, venezuela

Socialist Venezuela is facing currency chaos.

The value of the socialist country’s currency is so low that instead of counting bills, business owners are weighing stacks of cash instead. That’s right – Venezuelans are shelling out stacks so large that standard sized wallets are becoming a thing of the past. They’re using backpacks full of cash to buy goods and services.

The bolívar bill is worth five U.S. cents on the black market as inflation reaches 720 percent. Banks have been printing more cash since 2014 to help fix the currency exchange rate, a decision by President Nicolas Maduro that backfired. Big time. The currency devalued, price of goods soared, and now the country faces runaway inflation.

From the Independent:

Oil makes up a staggering 95 per cent of Venezuela's exports, and accounts for a quarter of the country's economy, with oil-related revenues having historically supplied roughly half the government budget. This kind of over-reliance on a single export notoriously depresses all other industries in a country, in a phenomenon known by economists as "Dutch Disease".

When the price of oil on the global market collapsed by two-thirds in 2014, Venezuela had little else to fall back on, so a natural reaction would have been for the bolívar to collapse. But Mr Maduro, who succeeded Hugo Chávez following the revolutionary leader's death in 2013, instead tried to control the exchange rate, creating a massive black market for currency.

Figuring out scams to get dollars and then sell them for bolívars became hugely lucrative business for Venezuelans, setting off a feedback loop that drove the inflation rate higher and higher.

Over reliance on a single export – oil – has put Venezuela’s economy in bad shape. And now, citizens are walking around with huge sacks of cash in a country with a notoriously high crime rate.

Mr Maduro, who has largely continued the socialist policies of his predecessor, blamed the situation on an “economic war” waged by his opponents in the business community and in the United States. But, in a sign his government recognises the severity of the problem, he recently announced the issue of larger-denomination bills, expected in January.

The notes are reportedly set to start at 500 bolivars and reach 20,000 bolivars, or just over £8.

Until the notes are issued, however, the Venezuelan people are poorer than ever, while the country is awash with cash.

Bremmer Rodrigues, who runs a bakery on the outskirts of Caracas, said his family are at a loss over what to do with their bags of bills. Every day his business takes in hundreds of thousands of bolívar, he said, which he hides around his office until packing them up in boxes to deposit at the bank. He said if someone looked in on him, he might be mistaken for a drug dealer.

“I feel like Pablo Escobar,” the 25-year-old told Bloomberg. “It’s a mountain of cash, every day more and more.”

Government overreach in economies and reliance of a single export is a recipe for failure. In the U.S., we cannot allow this to happen. We must encourage free market capitalism, healthy competition and the safety of our citizens.

Read more here. Watch Victoria Smith's commentary about her family's move to the U.S. and surviving socialist Venezuela:

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