
Venezuela devalues the bolivar by 95% and pegs it to ‘oil-linked’ cryptocurrency - sonnyblarney
https://www.businessinsider.com/venezuela-devalues-bolivar-and-pegs-it-to-cryptocurrency-2018-8
======
sonnyblarney
Consider the implications of a 95% devaluation. That means any foreign debt,
which was already problematic, just went up by 20x. It means your iPhone,
which was already too expensive, just went up by 20x. WTF.

'Pegging' currencies is a problem, because the country loses monetary policy
controls, but maybe they're smart enough to realize that's the problem in the
first place ... it's smart to peg it to something petroleum based as the
economy is effectively based on that. Perhaps it's a desperate attempt to
restore faith in the currency, i.e. it's 'crypto' and can't be tampered with,
and attached to something rational.

This might actually be the first hard case use for a good crypto: to basically
provide 'integrity' wherein the underlying political system has none ... of
course, the only way it can work is if the regime has enough self awareness to
recognize this and accepts the limitations of the crypto, and the fact it's an
admission that they are so incompetent that they screwed up the entire economy
and currency.

Of course, any smaller nation may still very well simply opt to use USD as
it's considerably more liquid and just makes more sense for so many reasons,
political populism aside.

~~~
wonthegame
How did Maduro's govt mess up their economy? It was my impression that the US
placing sanctions on Venezuela was the tipping point.

~~~
stupidcar
Chavez/Maduro style democratic populism was based on expensive social welfare
programmes targeted at the poor, funded by oil revenues.

Some would call this well-intentioned socialism, others clientist bribery. But
it doesn't really matter. What matters is that these programmes were
affordable only when the price of oil was sky-high. When the price of oil
collapsed a few years ago, they became unaffordable.

At this point, the government needed to make substantial cuts to the size of
the state and its welfare programmes to stabilise its finances. However, such
cuts are just not really possible for this kind of government: The entire
basis of its power is a huge web of political patronage and self-enrichment,
sitting on top of a mass of impoverished supporters. Money is the only thing
that makes the system work.

Thus, the government attempted to maintain its spending through borrowing and
enlargement of the money supply. Their hope was that, eventually, oil prices
would rebound enough to restore the lost revenue and stabilise the economy. As
they waited, their domestic and foreign opponents saw an opportunity to make
the situation worse for them through measures like sanctions. However, the
debt and printing of money would have lead to financial crisis sooner or
later.

~~~
tim333
>expensive social welfare programmes targeted at the poor, funded by oil
revenues.

If they'd stuck with that things could have gone ok. There was way more
disfunction and crackpot economics.

------
tim333
If they just changed the law so you could exchange bolivars at whatever rate
you wanted and dropped import restrictions so you could import/export what you
wanted and dropped price controls and subsidies a fair chunk of their problems
would go overnight. Instead more weird disfunction seems to be continuing.

~~~
cryptonector
They would also have to return expropriated companies (at least in the food
sector) and farms to their rightful owners.

None of that would make up for all the lost equipment (to theft, to disuse, to
misuse, to lack of maintenance). Nor would any of that encourage new
investment (how can you trust that the government won't go back to its old bad
ways?). Nor would it bring back all the population that has left for Colombia,
Ecuador, and Brazil.

But all of what you said and all of what I listed, together, would be a good
start. It would also help a great deal to abandon all the violent rhetoric,
allow truly free and fair elections, allow the opposition to win when they do,
and so on and so forth.

Argentina did all of what you said (well, they still have some subsidies), and
it wasn't quite enough by itself. The primary budget deficit is still very
large and the immediate driver of inflation there.

Large welfare state + underdeveloped economy + expropriation == no
trust/confidence. Or, how to destroy your country in just a few steps and a
just few years.

~~~
conanbatt
Argentina has unfortunately not changed is monetary emision rates even though
they claim to have chanced monetary policy. Argentina is headed for disaster
because precisely, it admires Venezuela.

~~~
cryptonector
Well, no, the _current_ Argentine government decidedly does not admire
Venezuela's model (the preceding government did admire Chavez/Maduro). Their
problem is that to rein in inflation they must cut the welfare state way down,
including a variety of subsidies (electric, ...). Removing those subsidies is
known there as a "tarifazo", which means "massive rate increase", and has
caused previous governments to fall, which is why the current government is so
scared to do it.

Macri's government hopes that they can slowly adjust things rather than go the
shock therapy route -- if all goes well, it could work, but both approaches
are risky, and it could all end badly again either way.

~~~
conanbatt
That’s the narrative but the results show still rampant inflation, still high
government spending, and same monetary base expansion. The current government
is economically very similar to the previous, and substituted hiperinflation
with external debt

~~~
cryptonector
I mean, the Macri government is clearly not at all like the Fernandez
government. The problems you list are real, and they are making mistakes as
they always do, but the Fernandez govt really did want to go the way of
Venezuela. The Macri government just doesn't have the oomph to push through
the reforms they want -- whether for lack of seats in the congress or lack of
conviction or fear of a repeat of 2001, I don't know.

------
aatharuv
One important thing to note is that the _official_ rate that has been
devalued, from 250,000 Bolivares/USD to 6 million Bolivares/USD.

The black market rate is already reportedly (as of the past couple of days), 6
million - 9 million Bolivares/USD.

~~~
MBCook
There was a great episode of Planet Money a few weeks ago about the unofficial
exchange market and how the government came after them and threaten their
lives.

[https://www.npr.org/sections/money/2018/08/03/635521893/epis...](https://www.npr.org/sections/money/2018/08/03/635521893/episode-858-venezuelas-
fugitive-money-traders)

------
Flimm
According to the article, the new Venezuelan sovereign bolívar is pegged to a
cryptocurrency petro, which itself is linked to movements in oil prices. I
know the basics of crytocurrency, but I don't understand how this works. Could
somebody explain?

~~~
jerf
I say this with no sarcasm: I'm pretty sure it doesn't. I'm pretty sure this
very much is just razzle-dazzle, hoping to fool people for just a little while
longer.

Contrary to popular belief, even trotted out here on HN in about half our
discussions on BitCoin, currencies are _not_ just something that some
government said somewhere is worth whatever. They need to back to something.
US currency backs to the fact that the US law enforcement and potentially
military (if you're big enough) will come after you if you fail to pay taxes,
which, while perhaps a bit brutalist and in violation of some of our more
delicate follow-citizen's tastes, turns out to be enough to keep an economy
humming along.

If the Venezuelan government is incompetent enough to have that same
delusional view of how currency valuation works... well... behold its results.

~~~
badloginagain
> They need to back to something

Like, say, backed by international oil market?

~~~
jerf
Agreeing with others, I don't particularly trust Venezuela's own
cryptocurrency to be an adequate backing for Venezuela's currency. There's
still circularity there.

But I'd also add that there's more to backing that just saying "And this
currency is backed by that." Go ahead; try it. Scribble some badlogninagain
bucks down on some paper and try to get people to accept them for goods and
services instead of dollars. When they complain, tell them that your
badloginagain-bucks are backed by US dollars and see if that satisfies them.
It shouldn't. For badloginagain-bucks to be backed by dollars, you need to be
able to _produce_ dollars in exchange for them. That's what a backing is;
something you can always exchange the currency for.

Exchanging dollars for people not busting down your door and taking your stuff
is certainly more abstract that exchanging it for silver, but it seems to be
functional. Exchanging Venezuelan currency for Venezuelan cryptocurrency
doesn't seem to be making progress. At this point my faith and credence in
that government is quite rationally zero that they won't screw with something
under their control, which is, you may note, concretely backed by the rest of
the world by the fact that the only assets in the world worth anything are
also all the assets not under their control. I'll believe it's pegged to
international oil markets when it's actually stabilized the currency and
people have demonstrated the ability to convert the newest bolivars into oil
concretely at will.

~~~
nostrademons
It worked for Tether. /s

------
excalibur
So this buys the economy somewhere between 1-3 months while everyone figures
out how to game the new system effectively. Then they'll change it all up
again!

------
Nokinside
So the government just begged bolivar to the government's own cryptocurrency,
the petro.

We already know that this does nothing.

Venezuelan government refuses to reduce the government spending to match the
government income. In fact they just announced 3,000% wage increase at the
same time. No matter what the name of currency, as long as it's Venezuelan
government issued currency, it's going to lose value.

There is no way this peg will hold. They just alter the way pedro is
calculated or do other shenanigans.

Is there betting market for this? I want to bet several thousands against
pedro/bolivar.

~~~
theseatoms
Presumably there's some way to take out bolivar-denominated loans?

~~~
Nokinside
Incidentally that would have prevented Venezuelan currency and debt crisis in
the first place.

I seriously doubt that any bank would give out bolivar-denominated loans with
fixed interest rate that is below 100%. I could take a two year debt with 10%
interest easily.

Venezuelans are already earning more gold farming RuneScape than actually
farming.

------
DeepYogurt
However this turns out it's going to provide an interesting and multifaceted
case study for economists in the future. As far as I'm aware pegging
currencies tends not to work well unless there's consensus among countries
(see bretton woods system). Further, pegging to an "oil-linked" currency
sounds dubious at best. Even ignoring the CC aspect of this; I'm deeply
curious to see what falls out.

------
alangibson
Does anyone have a cogent explanation of why they chose to go this way instead
of a somewhat orderly default on debts denominated in foreign currencies? It
seems to have worked for Argentina, so I'm always surprised when countries
don't go that way. (Looking at you, Greece)

------
nhaehnle
This article is terrible.

 _> Devalue Venezuela’s currency, the bolivar, by a whopping 95%. The new
currency will be renamed the "sovereign bolivar."_

 _> Instead of an exchange rate of 250,000 bolivars per US dollar, it will
increase to around 6 million._

This is not a devaluation by 95%. The math doesn't add up.

 _> The petro is valued by the Venezuelan government at around $60, or 3,600
sovereign bolivars._

So 60 sovereign bolivars are one USD? Previously it said _6 million_ sovereign
bolivars are one USD.

 _> To make things more complicated, the new sovereign dollar will also be re-
denominated, which will remove about five zeros from its unit measurement._

Oh, okay. I assume they mean sovereign bolivar, not dollar (did nobody
proofread this?). That makes the above point make more sense.

 _> At the same time, President Maduro also announced a huge 3,000% increase
to the minimum wage._

 _> So in the new re-denominated currency, a person on the minimum wage will
receive around 1,800 sovereign bolivars a month, instead of 1.8 million._

Is that 3000% increase in bolivars? In real terms? And again, I can't see the
math adding up, even taking the supposed 95% devaluation.

And I haven't gone into any of the cryptocurrency stuff...

There's probably a lot of stupidity going on in this new Venezuelan policy,
but that article makes a total mess of it on top of it. It's context-free
reporting, by somebody who doesn't seem to care to understand what they're
reporting, and the numbers just don't fit together.

The best I can make of it is:

1\. The Venezuelan government still refuses to let the Bolivar float freely,
which means that black market currency exchanges will continue to operate.

2\. The Venezuelan government is changing the official exchange rate of
Bolivar to USD.

3\. The Venezuelan government is _replacing_ the bolivar by the sovereign
bolivar, where 1 sovereign bolivar = 100,000 bolivar.

4\. They're increasing the minimum wage by an effective factor 100 in domestic
currency. (The value of the minimum wage internationally will change by a
different amount -- and not 3000% -- because of point 2, but any numbers
you're getting out of the article are likely moot anyway because of black
market exchanges.)

5\. They're introducing some weird cryptocurrency gimmick that isn't explained
properly.

Edit: And here's a Reuters article with different numbers for the minimum wage
(stating a 3 mio baseline as opposed to 1.8 mio.):
[https://www.reuters.com/article/us-venezuela-
economy/venezue...](https://www.reuters.com/article/us-venezuela-
economy/venezuelan-shopkeepers-alarmed-by-maduros-latest-economic-moves-
idUSKBN1L30N4)

------
ionwake
Does anyone have the current Black market value of a 1 USD in Bolivares? Or a
link to where I can find out?

~~~
phonon
[https://dolartoday.com/](https://dolartoday.com/)

[https://en.wikipedia.org/wiki/DolarToday](https://en.wikipedia.org/wiki/DolarToday)

~~~
ionwake
Thank you

For anyone interested, after the devaluation we still have:

Official rate: 10V to 1$ Black market: 60V to 1$

------
curtisblaine
> According to Bloomberg, the latest measures are unlikely to provide a quick
> fix for the economy, and there are risks that inflation will climb even
> faster

The only thing that would help Venezuela is Maduro's government falling, the
socialist experiment being called off and a lot of international help.

It's not just the corruption, you can't really cap the prices for the sake of
socialism and pretend that business won't fail.

------
pastor_elm
Anyone know where you can buy Petro? News sounds incredibly bullish to me.

~~~
s3xham
POTUS made that illegal for US citizens

~~~
c0nducktr
Not everyone on HN is from the USA..

------
asmithmd1
The conspiracy theory version of why the Venezuela economy is a mess, is that
they started selling oil priced in something other than dollars:

[https://www.businessinsider.com/venezuela-publishes-oil-
pric...](https://www.businessinsider.com/venezuela-publishes-oil-prices-in-
yuan-2017-9)

The other leaders to risk doing that were Saddam Hussein and Muammar Gaddafi.

Selling oil for anything besides dollars is the real line in the sand the US
will not let any country cross.

~~~
nostrademons
The timing seems off on that. That article dates from Sep 2017, at which point
the Venezuelan economic crisis had been going for 7 years, and been serious
for 4. Inflation was 69% by 2014, well before this announcement.

I think a more likely explanation is that Chavez instituted a number of
policies that were extremely friendly to consumers and hostile to producers,
with the result that the producers all _left_ , which meant there were no
goods for consumers to buy, which sent prices through the roof and instituted
a (un)healthy black market.

