
Venezuela’s Currency Has Had its Biggest Monthly Collapse - JumpCrisscross
https://www.bloomberg.com/news/articles/2016-11-24/venezuela-s-currency-just-had-the-biggest-monthly-collapse-ever
======
chollida1
Often on HN's you'll get someone asking why a company has to continually grow
revenues/profits. And the person is usually convinced once someone else comes
along and lays out an argument that goes along the lines of....

If you consider a market with two companies.

Company A that doesn't grow revenues or profits and company B that continually
grows revenues and profits, which one would you invest in?

The answer is obviously once you realize that each company doesn't exist in a
vacuum but is instead competing with other companies for the same investment
dollars.

Currencies markets work in a similar manner in that you are never talking
about a currency but rather you are explicitly talking about what a currency
is worth with respect to another currency, or often implicitly with respect to
the US dollar.

It's actually pretty amazing to think about the currency markets and how they
are constantly reweighing each currency with respect to every other currency
such that each currency has the correct valuation with respect to all others
such that there is no available arbitrage opportunity.

So its not that the markets or wall street is being "mean" to Venezuela or
punishing it, but rather they are trying to find the right balance of how many
Boliviars one should get for each USD.

Unfortunately, there is a giant feedback loop that often means once a
countries currency gets depressed enough they almost have no choice but to
print money just to buy/import the essentials required for life. And this
printing of money just has an feedback that increases inflation even more
until its impossible to get out from without a bankruptcy, just google
"Zimbabwe trillion dollar bill".

~~~
imh
You seem knowledgeable. Why can external currency changes (USD to bolivar)
cause such strong inflation internally? I would think that at some point no
one in the country can buy an iPhone, but how does that turn into no one being
able to buy milk (or other essentials)? Do countries really rely so strongly
on the international market for essentials?

 _edit:_ I could see a terrible scenario playing out where domestic goods are
now so damned cheap for anyone not in the country that the producers are
incentivised to ship their stuff overseas to rich foreigners. It could be the
domenstic buyers that are the only people who get screwed. This is all
terribly complicated.

~~~
edblarney
"Why can external currency changes (USD to bolivar) cause such strong
inflation internally?"

Simply because 'most things' that are sold in Venezuela are either imported -
or depend on imports.

The Bolivar is crashing against all currencies, not just the USD - so
anything: parts, fuel, TV's, entertainment - it all has to be imported, and it
all got expensive.

'Internal inflation' can happen when there are more Bolivars floating around
than before - even without outside currency markets to validate the price.

Ex: if there are 1 Trillion Bolivars in existence, and the government simply
prints '1 Trillion' more and dumps them on the market. Guess what happens to
prices? They will basically double every where.

So your shoes that cost 100 Bolivars, now cost 200.

~~~
imh
I think the part I missed was why the solution to a crashing currency is to
print more money. Let's say Venezuela cannot produce widgets, but they are
necessary to modern living. Venezuela's currency drops in half, so now widgets
are twice as expensive to a Venezuelan. Given a fixed exchange rate, as the
government of Venezuela I could just double the amount of money all my
people/companies have and everything would be fixed, but wouldn't that just
lower the exchange rate again? Is there some lag in the market during which
they can spend the new money at the old rate? At any rate, it's the
Venezuelans and their corporations who need money. How does printing more
money fix the issue of that poor citizen/company who is reliant on widgets?

It's becoming clearer, but I'm still confused.

~~~
Symbiote
The government has obligations in bolivars -- staff wages, pensions, payments
to private businesses, and (in countries with trustworthy currencies) loan
repayments etc.

They can print money to fulfil those obligations, effectively giving public
sector staff a pay cut, pensioners a reduction in the value of their pension,
etc.

~~~
edblarney
"They can print money to fulfil those obligations, "

Not really.

By 'printing money' they are simply 'taking value away from those already
holding Bolivars'.

Printing money is just devaluing the Bolivars already in circulation - so you
can think of it as a 'tax on cash'.

You can print paper, but you can't 'print' economic value and production.

Printing money to pay gov. employees is basically a 100% sign to everyone in
the world that 'this economy is destroyed' \- and that they should shut down
all operations, cut their loses, get all their money out and exit in every
way.

So it's a pretty bad signal.

~~~
colechristensen
You're exaggerating a little. Everybody prints money. It's what central banks
do, it's what gold mines do. It's not a bad thing, it's how economies are
managed. (completely free markets are a bad thing and anyone that tells you
they aren't either doesn't have understanding of economics or is an extremist
or both)

You can run a tightly managed economy successfully but it's hard. Very hard.
Completely free markets are cruel but corrupt tightly managed economies are
moreso. It also becomes difficult to determine the difference between a
completely free economy and a corrupt managed economy because without
regulation the former tends to concentrate power until it becomes effectively
or actually the latter.

Sometimes the only thing for a collapsing economy to do _is_ print money. It's
what a failing state will do to prevent itself from becoming a failed state.
It's not sustainable but it's like falling off a mountain, you have to do
_something_ and devaluing your currency to keep your economy somewhat
functional can be the "right" thing to do for a while.

~~~
edblarney
"Sometimes the only thing for a collapsing economy to do _is_ print money.
It's what a failing state will do to prevent itself from becoming a failed
state. "

No, this is upside down.

Printing money to pay debts, salaries - is what a 'failing state' will do to
absolutely guarantee they will fail.

Central banks don't print money - they trade bonds or other assets in exchange
for currency, and they do so at a rate to allow monetary expansion as the
economy grows.

Cynically, you could say 'government issues debt, which is bought by central
bank in exchange for $' which is very much like printing money, but it's not
quite.

And 'gold' ... the amount of gold is so small it doesn't really affect
anything.

A 'failing state' needs to restore confidence in it's institutions in order to
get out of the hole, the last thing it can do is print money willy nilly.

The anti-populist measure would be to cap/cut government salaries, 'de facto'
default on bonds - this is obviously a bad signal, but not as bad as printing
money. A 'quiet default' i.e. signalling that 'there is no way we can repay so
you'd better negotiate with us' is the pragmatic thing to do.

~~~
awongh
ah, interesting. My understanding of central bank practices was that
'government issues debt, which is bought by central bank in exchange for $' ==
printing money - but they are not synonymous?

So if you no longer have the paper trail of things being bought and sold, who
keeps track/makes public the amount of currency in circulation in this case?

If simply printing more money is a bad signal, why not just keep it secret?

~~~
colechristensen
[https://en.wikipedia.org/wiki/Fractional-
reserve_banking](https://en.wikipedia.org/wiki/Fractional-reserve_banking)

There's a paper trail. It's just that when the Fed buys something the money is
pulled from thin air. When the debt is paid back the principal returns to thin
air, the profit goes to the US Treasury.

Not all government debt is purchased by the treasury though – it only does
that in special circumstances to moderate the financial system. Most of is is
purchased domestically and much of that by other pieces of government.

And you can't keep it secret. It's like supply and demand. More money means
prices naturally raise because more people have more money to spend and will
be willing to pay a higher price.

------
powera
Here's the worst part: "Venezuela has maintained strict currency controls
since 2003 and currently has two legal exchange rates -- known as the Dipro
and Dicom rates -- of 10 and 661 bolivars per dollar used for priority
imports. On the black market, where people and businesses turn when they can’t
obtain government approval to purchase dollars at the legal rates, the bolivar
has weakened 69 percent over the past year."

Whoever is buying dollars (or dollar-denominated goods) at the "official"
exchange rate is making a killing. And will do so for about 6-9 months, before
the entire thing collapses.

~~~
fspear
>Whoever is buying dollars (or dollar-denominated goods) at the "official"
exchange rate is making a killing. And will do so for about 6-9 months, before
the entire thing collapses.

It's been like that ever since the currency controls were implemented in 2003,
it is fairly well known that most if not all of the high ranked government
officials (who have unlimited access to preferencial exchange rates) are
behind the currency "black" market. The same government officials have their
fair share of cash stashed away in tax havens.

This is beyond hope, corruption is not only endemic anymore but a neccessity
for survival, unfortunately this will only end with blood, I believe
international interference is a must in this case.

~~~
aclsid
Err no, we can actually solve this issue ourselves. It was about to happen
about 3 weeks ago actually. We just need the massive street demonstrations
again and it will end.

I think international interference in this kind of issues end up causing more
trouble than solutions. It ends up becoming a contest of whose side is
supporting who. Just look at Syria.

------
SimeVidas
Last I heard, the people are waiting all day in line to get basic things like
food and medication. Can someone explain how this country hasn’t collapsed
yet? Crime must be through the roof.

~~~
ptaipale
Crime is indeed very high - murder rate per capita is 15 times higher than in
the U.S. or 70 times that of United Kingdom.

It is so high that the government has stopped publishing statistics, and also
so high that "authorities would assign judicial police to Caracas area morgues
to speak with families. At that time, they would advise families not to speak
to report the murder of their family member to the media in exchange to have
the process of recovering the victims body in an expedited manner. It was also
reported that police would intercept the families of the victims and take them
to the library of the University Institute of the Scientific Police (IUPOLC)
where authorities offered families ways to "streamline procedures and advise
them not to give information to the press in return for their aid"*

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

The government also banned private handgun ownership in 2012. The number of
murders has grown by about a third since that.

~~~
kazinator
What? UK to US is 70:15?! How savage.

~~~
lanna
UK to US is 15:70, no?

~~~
ptaipale
Yes, approximately. Homicide per year per 100 000 people:

U.K. 0.9 U.S. 3.9 Venezuela 62.0

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

~~~
vacri
To add a bit more perspective, the US is also an outlier amongst developed
nations, who are almost all under 2.0. That 3.9 is not 'normal' (though it is
something of an improvement on previous rates).

~~~
adventured
It's a lot more nuanced than that as well with the US. A very small portion of
the US population lives in a location with a murder rate at 3.9 or higher,
because murder in the US is hyper concentrated (a few areas of Chicago have
more murder annually than all of Japan). People like to pretend the US is a
wasteland of murder, when in fact the very extreme majority of people in the
US live in areas with murder rates comparable to Canada.

~~~
StavrosK
Is murder in other countries not concentrated? I can draw circles over a few
areas in Japan and say "these areas here have 100% of murders, the rest of the
country has a murder rate of zero".

~~~
adventured
If you step outside of the major US cities, the murder rate per capita
plunges. That variance in the US is far beyond what you see in other developed
nations (eg Britain, Sweden, Finland, France, Belgium, Germany, Japan, etc).
It's so bad that if you just brought the three dozen worst urban sub-areas
down to normal as compared to the rest of the city in question, you'd reduce
the total US murder rate more than a full point.

~~~
temp
>if you just brought the three dozen worst urban sub-areas down to normal as
compared to the rest of the city in question, you'd reduce the total US murder
rate more than a full point

>three-dozen

That seems like a lot of areas to say "just". If it's that easy to bring it
down, do it in actuality rather than coming up with hypothetical scenarios
where the US doesn't have such a high murder rate.

------
LordFrith
Here's a recent, long New Yorker article on Venezuela, Maduro, Chavez, Polar
industries, crime, China, oil, inflation, Cuba, America, Colombia, taxi
drivers, Halliburton, and a bunch of other things I don't remember.

[https://www.newyorker.com/magazine/2016/11/14/venezuela-a-
fa...](https://www.newyorker.com/magazine/2016/11/14/venezuela-a-failing-
state/)

~~~
ctrl_freak
That was an interesting read; thanks for sharing. I'm always fascinated
reading the latest exposes on the Venezuela saga.

------
dredmorbius
Venezuela's problems stem from several issues, and there's sufficient
political invective about them that a clear discussion is difficult.

An earlier HN post addressed the question of Venezuela's refusal to simply
default on its loans, as another South American state, Argentina, did:
[https://news.ycombinator.com/item?id=12057616](https://news.ycombinator.com/item?id=12057616)

In another earlier thread, I suggest strongly that the problems Venezuela is
facing are far more characteristic of a failing end-stage oil state than of
the inevitable failure of Communism, for which China and Vietnam offer
possibly interesting counterexamples.

[https://news.ycombinator.com/item?id=12541955#12545819](https://news.ycombinator.com/item?id=12541955#12545819)

~~~
nickik
Im not sure what it means that Venezuela is failing because of 'end stage oil'
rather then socialism. Does Venezuela not have tons of oil reserves? If they
fail to develop these and all the other resources then that clearly because of
bad policy stemming from at least a nominal socialist agenda.

~~~
dredmorbius
That's partially addressed in the comment I'd linked to above from an earlier
post.

Not all oil is equal. The single-strike wells of the Persian Gulf which poured
fourth 70,000 barrels of oil _per day_ of light sweet crude, _and are still
producing nearly a century later_ (see the First Oil Well of Bahrain for
example) are quite different from the lower-grade, hard-to-pump crude
Venezuela has, or the production profile of a hydrofracked well.

Put simply, you want to consider the _net costs of production_ , including the
_energy costs of production_ (EROEI -- energy returned on energy input) which
are considerable for Venzuela. Also, incidentally, for the "largest ever"
onshore US discovery of Texas shale oil announced a week or so back.

For Texas, the average per-well extraction is 20 barrels/day. These low-
production wells are known as "stripper wells", and operators will literally
turn on and off the pumps in response to the price of oil if it exceeds their
ongoing production costs -- fuel or electricity for the pump jack, plus
depreciation.

[http://oilpro.com/q/1775/many-barrels-oil-does-well-
produce-...](http://oilpro.com/q/1775/many-barrels-oil-does-well-produce-
daily-texas)

I don't have a per-well production statistic for Venezuela, though national
production has held steady at about 2.5 mbpd since 2004.

[http://www.indexmundi.com/energy/?country=ve&product=oil&gra...](http://www.indexmundi.com/energy/?country=ve&product=oil&graph=production)

There are a few end-run oil exporter scenarios. One, the "export land model"
by Jeffrey Brown looks at the total _domestic_ consumption of exporting
countries, and sees a tipping point where domestic demand accounts for all
production.

There's another scenario, in which the total financial accounts of an exporter
are taken into account. Here, the problem is that when the global oil price
falls below the costs of production in a country, it literally cannot afford
to pump oil from the ground, and finds itself deprived of foreign cash flows.
The classic case of this is the Soviet Union in the 1980s. Having based its
national budget on the high price of oil in the 1970s, it was caught in the
double bind of large flows of new fields (North Sea and Alaskan North Slope),
as well as a plummeting global oil price with the 1980s supply glut. As much
as anything, Saudi Arabia defeated the Soviet Union.

That story's been played out in several Arabian states, including Egypt and
Syria (both minor oil producers), Yemen, Lybia, Tunisia, and, yes, Venezuela.
Texas, North Dakota, and Alberta, Canada are all running into the problem of
development predicated on $100/bbl oil in a world of $45/bbl WTI.

I don't care _what_ your governmental or economic system is. If you're basing
your economy on massive sales of extractive resources and the price falls out
from under you, you're sunk.

Saudi Arabia has been making very interesting noises about its finances for
the past few years. Keep in mind that KSA are essentially a family-run state /
business. The House of Saud runs the country and owns the country's largest
company, Saudi Aramco, accounting for over half the country's GDP. I'm not
sure exactly what you'd call a state in which a single unitary power bloc
controls the major economic unit, but it doesn't strike me as terribly
democratic-market-capitalist.

I've also poked around the Heritage Foundation's Index of Economic Freedom and
measures of per-capita wealth, to find some interesting bits. Dig around
[https://dredmorbius.reddit.com](https://dredmorbius.reddit.com) for more on
that.

Again: the heated rhetoric tends to cloud more than clarify understanding of
what's going on here. I say that without either defending _or_ denegrating
Venezuela. I'm simply interested in understanding it.

[http://www.ibtimes.com/saudi-arabias-2016-budget-creates-
new...](http://www.ibtimes.com/saudi-arabias-2016-budget-creates-new-normal-
only-part-solution-economic-crisis-2246638)

~~~
nickik
I am pretty sure well run oil company could still operate profitable in
Venezuela. It is no Saudi Arabia that is for sure, but I still think you can
not blame all the problems on just oil export prices.

I would agree that Saudi Arabia is not democratic or all that capitalist.
Socialist don't have a monopoly on bad government.

How well a country is set up you can see what happens when their main export
tanks, Venezuela was clearly terrible and instead of reacting and adjusting,
they started looting the big companies, enforce exchange controls, escalated
inflation and did many other idiot things that hurt the country badly.

We don't know yet how the Saudis will deal with this if it ever comes to that.

------
logronoide
Can't believe there are populist parties in Spain defending this model and
trying to import it.

~~~
wooter
Sanders praised it. As a Venezuelan in SF, I've had my fair share of arguments
where I've had to defend the perspective that Venezuela isn't a socialist
paradise.

"These days, the American dream is more apt to be realized in South America,
in places such as Ecuador, Venezuela and Argentina, where incomes are actually
more equal today than they are in the land of Horatio Alger. Who's the banana
republic now?" \- [http://www.sanders.senate.gov/newsroom/must-read/close-
the-g...](http://www.sanders.senate.gov/newsroom/must-read/close-the-gaps-
disparities-that-threaten-america)

~~~
macspoofing
GOP would have had a field day with Bernie had he been nominated instead of
Clinton.

~~~
tormeh
Just like the Democrats had a field day with Trump: Great entertainment, but
the outcome wasn't all that fun. Bush would have been less fun, but he would
have lost.

------
drinchev
This is madness. I can't believe people can live in such a nightmare. Isn't
there any opposition or can't just people there revolt? Or maybe army makes a
coup?

~~~
xienze
Might be easier for people to rise up against the government if guns weren't
banned in Venezuela!

~~~
rafaelm
Guns are only banned for normal citizens. The para-military forces that
support the government are very well armed.

This is one of the reasons you don't see people in the poorer areas
protesting. They are scared of these groups.

~~~
aclsid
You mean the armed thugs. Calling them paramilitary forces gives them too much
dignity. They are thugs on bikes that will probably end up dead by the time
they reach their 30s.

------
boterock
It is sad that some year ago 1 usd would be like 2000 bolivares (I don't know
the exact amount, but bolivares were almost the same value as colombian
pesos). They decided to create the "bolivar fuerte" which was 1000 bolivares,
so 1 usd would be 2 bolivar fuerte. With the bolivar fuerte price drop, the
usd is now above 2000 bolivar fuerte, so in a matter of years, Venezuelan
money is worth less than a thousandth it was worth less than 10 years ago.

------
guelo
The weird thing is that Maduro has so far refused to default out of some sense
of pride. The bond market has already priced in the inevitable default.

~~~
pavlov
There was speculation that a substantial amount of the national debt is
actually held by regime insiders, who benefit enormously from the high
interest rates. A default would stop that racket.

I can't remember where I read that, so take it for idle speculation.

------
known
Sounds like problems in USSR

