Crisis in Venezuela – hyperinflation has begun

Crisis in Venezuela When banknotes are only weighed

<strong>Crisis in Venezuela</strong> When banknotes are only weighed

  • Venezuela faces one of the worst hyperinflations in world history – similar to Germany in 1923.
  • This is not only an economic catastrophe, but also hurts the social cohesion massively.
  • The culprits of the situation – the socialist rulers of the country – are looking for scapegoats.

The tragedy of Venezuela has got another name: hyperinflation. The prosperous and oil-rich country, after a long economic crisis, is likely to reach a one-million percent currency depreciation rate by the end of the year, Alejandro Werner, director of the International Monetary Fund (IMF) for the Western Hemisphere, now summarizes. The already low gross domestic product (GDP) will shrink by 18 percent, after the country suffered a double-digit decline in economic output in 2016 and 2017 already. The collapse of the economy, the scarcity of food and public goods such as health services, electricity, water, public transport, leads to migration flows, which are also the neighboring countries gradually drawn into the crisis, the IMF.

Venezuela thus faces one of the worst hyperinflations in world history. It is only comparable to the great inflation in Germany in 1923 or Zimbabwe in 2009. According to the definition of the American economist Phillip Cagan, from a galloping inflation hyperinflation, when the monthly rate of depreciation exceeds 50 percent, resulting in an annual rate of 13 000 Percent. In Germany, inflation fell in November 1923 to a good 30 000 percent.

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President Nicolás Maduro has now announced a program of “economic recovery” that will start on 20 August. It also planned a “change of funds”: “Five zeros less”. Originally, Maduro had announced the cancellation of three zeros.

The perpetrators of the Venezuelan disaster make it similar to other responsible people before her – they are looking for scapegoats. Maduro, who ruled the country along with a socialist military clique, says his country is in an economic war that the United States has instigated. Protesters who took to the streets against the policies of Maduro, he described as “fascist gangs”.

This economic war does not exist. But it is clear where the causes of hyperinflation are in Venezuela. “Inflation is always and everywhere a monetary phenomenon,” postulated Nobel laureate Milton Friedman once. To say: inflation arises when central banks or governments put too much money into circulation. In Germany, the path to the destruction of the Mark began in August 1914 with the outbreak of the First World War. The imperial government initially financed the war by issuing war bonds and tax increases. However, part of it was raised by money printing, and that part grew larger and bigger over time as the government feared protests and wartime fatigue. After the lost war, the printing press had to work even faster, until in November 1923 a dollar cost 4.2 trillion marks.

Venezuela suffers from “Dutch disease”

Image result for dutch diseaseIn Venezuela, it was not a lost war, but the immense oil wealth of the country that triggered the march into disaster. It all began on December 6, 1998, when Maduro’s predecessor, the charismatic officer Hugo Chávez, won the presidential election in Venezuela. Chávez proclaimed the “Bolivarian Revolution”, which also received enthusiastic approval in the industrialized countries under the name “Socialism for the 21st Century”. The economic kernel of this socialism was to distribute the raw material rent from oil production, that is, what is left over from oil revenues, after deduction of wage and capital costs, to the people, or to be more precise, the supporters of the president.

What happens when you do that, other countries have already gone through. For example the Netherlands. There, natural gas was discovered in the 1960s. The raw material pensions that came into being were used by the Dutch to expand their welfare state. Wages rose, and with them the cost of domestic production, causing Dutch industrial goods to lose competitiveness. As gas prices plummeted, the country plunged into a severe economic crisis. To this day, this crisis is called “Dutch disease”. The disease was not cured until the bargaining parties signed the legendary “Wassenaar Agreement” in 1982, when unions agreed to a wage-with-pay agreement for new jobs.