I wonder at what point these bills stop being literally worth the paper they're printed on. The last thing a country with hyperinflation problems needs, is spiralling costs to buy worthless money.
I wonder how much longer the Bolivar can actually exist. I have not seen anyone getting out of hyperinflation without temporarily ditching the currency altogether. If Venezuela eventually ditch the Bolivar and don't want to adopt the hated Yankee dollar, it would be an interesting opportunity for the Euro.
> it would be an interesting opportunity for the Euro.
I think Venezuela is much closer politically to China at this point. I could see them moving to the yuan, and that would be a political coup also for Beijing.
jimmywanger wrote a good comment, but I kinda wanted to expand on it.
In a certain way, it is illogical. There are drawbacks to adopting a foreign currency. You have to have enough trade with the other country to bring in the (in this case) dollars. You lose the ability to cover short-term debts by printing some money that you can take out of circulation a little latter (no harm, no foul). You also lose the ability for benefitting from seigniorage (by printing small amounts of money, you can prevent deflation as the economy expands and increase government purchasing power). By adopting the foreign currency, the foreign government keeps the seigniorage benefits.
But when your government is so corrupt that it can't be trusted to manage a stable currency, it can make a lot of sense. Right now, Venezuelans have no reasonable way to conduct commerce. Bolivars lose value so quickly that you never want to invest in enterprises or hold cash. If I have $100 on Jan 1, it's likely worth at least $95 in purchasing power on Dec 31. People expect inflation in Venezuela to be 1,600% next year meaning that $100 on Jan 1 would become $6.25 in purchasing power on Dec 31. People would rather hoard goods than cash - even goods that Americans would see as losing value quite quickly. Cars lose so much value when you drive them off the lot (the adage goes), but that's way better than the amount of value lost in Venezuelan currency over the course of a year. Currency should lose value slower than quickly depreciating goods.
When you don't have a stable currency, it's hard to operate economically. In many ways, if you have a good to sell, you don't really want to exchange it for cash until there's something else you want to buy. If there's a week delay between you selling what you own and then you buying the new thing you want, you've lost a lot.
By adopting a stable currency like the USD, it would allow them to have a functional economy where people could buy and sell goods and invest in things and make logical choices knowing that the currency has a stable value - rather than running around hoping not to be stuck with notes that are going down in value faster than any good.
When your country is so corrupt and incompetent that no one will trust your leaders for many decades to come, it then starts to make sense to adopt a foreign currency. The people then see that they can rely on the currency because the competent US government is in charge of it - and for all we might complain about the US government, it is competent by global and historical standards. It gives people a stable currency that the Venezuelan government can't offer them.
Venezuela wouldn't answer to the Fed or get to print notes. They'd just be exporting things like oil to the US, getting USD in return, and then using that USD locally as a stable currency.
Someone else mentioned Brazil. Brazil is one of the few places to really combat hyperinflation. The thing is that it's hard. You can't just say, "we're going to be good starting now. . .trust us". People don't trust you yet. It takes years for people to trust that you won't fuck up a currency after years of having the reputation of fucking up currencies. Let's say that Venezuela stops printing money today and acts like a good government. Hyperinflation continues because people don't truly know they have stopped printing money and don't believe the government when it says it has. So when the government needs to pay for goods and services, it suddenly faces very high prices without the printed money to pay for it. Most likely, the inflation will break the government's plan of not printing money since they would have to shut down the government due to lack of funds faster than people would trust that the government had stopped printing money.
Brazil overcame the issue by running two simultaneous currencies - one real paper currency that kept inflating and another non-paper currency called the "real" with stable prices. Stores had to denominate their goods in terms of the new "reals" and each day an exchange rate between the paper currency and the "reals" would be published. So, bread would always be, say, 5 reals, but on monday that might be 10 of the paper currency and on friday 11 of the paper currency. Eventually, people trusted that the "real" was stable, the government took the old paper currency out of circulation in exchange for new paper "reals" and people continued to trust it.
But it's hard to fight hyperinflation because when you can't measure and guarantee government actions, it's about trust. Trust is something hard to regain after decades of reasons not to trust.
I see - so basically, this is a way for reducing the existing state apparatus into a symbol, and become a sort of client state.
I'm assuming this means that Banks basically need to operate with 100% reserve ratio, which makes it really difficult to provide loans esp. when dealing with a commoditized external currency. Worse yet, unlike Gold, the foreign nation can issue currency at will (well, essentially), to actors in your state, and basically run it as they like. It's the perfect state of limbo.
Ecuador's case is interesting to say the least; the current US educated president, basically made the country's reserve bank answerable to the state, printed loads of money, had the currency replaced by USD, sold away the country's gold to Goldman Sachs, and granted Assange asylum. After the strange events surrounding last months event, it'd appear that Wikileaks itself is compromised.
> Worse yet, unlike Gold, the foreign nation can issue currency at will (well, essentially), to actors in your state, and basically run it as they like.
I'm having trouble parsing this statement. What do you mean actors in your state, and what do you mean run it as they like?
There are two sort of orders of magnitude of money that I can sort of make out what you're talking about.
One is bribe money, where you can give people money to do stuff that you want them to do. That's usually on the order of hundreds of thousands to millions, and it doesn't matter what currency that is. That should be a rounding error to sovereign government.
The second is trade war money. The sort of thing where you spend lots and lots of money trying to destabilize an industry or mess with a country's economic stability. That sort of intervention is measured in the billions to tens of billions, and that also doesn't matter what currency it's denominated in. If a foreign country decides to enter into a trade/commodities war with you, for instance dumping steel to ruin your domestic steel business, that also doesn't matter what currency they do it in.
> the current US educated president, basically made the country's reserve bank answerable to the state, printed loads of money, had the currency replaced by USD, sold away the country's gold to Goldman Sachs, and granted Assange asylum.
Dollarization happened in 2016. The gold exchange sucre last existed in 1932. Ecuador seemed to have given up wikileaks in 2016. And what does the fact that the current president is educated in the US have to do with anything?
You're conflating a bunch of events that happened over a long period of time and trying to draw a causal relationship out of them. Why?
> I'm assuming this means that Banks basically need to operate with 100% reserve ratio
No, not the case at all. You can do fractional reserve banking with a foreign currency as legal tender. Heck, you can even do it with gold as legal tender, which I always find ironic given how gold backing and the perceived evils of fractional reserve banking seem to go hand-in-hand, ideologically.
> Stores had to denominate their goods in terms of the new "reals" and each day an exchange rate between the paper currency and the "reals" would be published.
Actually, that was the URV, not the Real. One of the problems we had (and still have, though much reduced) is inertial inflation: a lot of things were adjusted by the inflation, and many of these were also components of the inflation index itself, leading to a positive feedback loop.
The trick was that, instead of being directly indexed to the inflation, prices and other things were fixed in URV, which itself was indexed to the inflation. This still kept the same indexing problem, but after a few months of this, the currency was converted to the Real, and the URV was fixed forever as exactly R$ 1. This removed a huge amount of indexation from the economy.
But that was only part of the solution. There were also reductions in government costs and tax increases, so the government wouldn't have to print money; increase in imports, so the demand for goods wouldn't become greater than their offer; increase in interest rates to cool down the economy; and interventions in the exchange rate (IIRC, not forcing a fixed exchange rate, but the government buying/selling dollars in the market to move the exchange rate). Without these, after the change from Cruzeiro Real to Real, the inflation would grow quickly again.
I think the above comment nails it: trust is important.
Countries have a lot of possibilities to play with their monetary policy. However, many of these possibilities carry a price in terms of losing trust in the international market. If you let down you investors, don't be surprised if the next round of investors is cautious. It's not a capitalist conspiracy; it's just how markets work.
Note BTW that Venezuela doesn't have to export oil to United States to get dollars. USD is the global currency of oil trade, and if you sell oil to anyone, you can get USD. The trade wouldn't have to be in U.S. currency either, as the country could sell in some other freely convertible currency and then change those to USDs if that's what they need.
USD is not without its trust problems, either. The U.S. federal reserve says that 1 out of 4000 notes or 0.01 % of value is counterfeit, but I expect that in world-wide USD circulation, the percentage is much higher.
> Adopting another country's seems completely illogical IMO; I mean, do banks in such countries answer to the Fed. Reserve ?
Do you know how this works? When you adopt another country's currency, that just means that their money is legal tender in your country. It raises confidence (if you've selected the right currency) that your country's officials in charge of the economy won't do silly things like print more money or devalue your currency.
It basically takes away a lot of potential economic tools you have to fix your economy in exchange for instant credibility in that most other foreign businesses will do business with you.
Many countries have used the U.S. dollar as currency, and there is not much of a problem - except that they don't have any control of monetary politics of course. Some also use the euro by agreement (e.g. Andorra and San Marino) and others without an agreement (Kosovo and Montenegro).
However, using the renminbi as currency would pose much more problems because it is not freely convertible.
Most of post-Soviet states had hyperinflation. Rouble became ten thousand times less valuable over three years, smaller republics' currencies suffered even more.
But they all stabilized without ditching the currency (they slashed a few zeroes off bills later, tho).
No, they didn't. The "peg" was maintained by the Central Bank buying and selling dollars, trying to keep the exchange rate at its target. This graph (http://www.mises.org.br/images/articles/2012/Maio/7.png) from http://www.mises.org.br/Article.aspx?id=1294 shows the exchange rate. As can be seen in that graph, the exchange rate was never actually fixed during the transition. There was no moment where the currency was the USD.
Your graph starts at July 1994, when the Brazilian currency changed into the Real. The central government did try to keep a stable exchange rate with the US dollar as you said, and that lasted until the late 90s, when they were forced to let the exchange rate float due to the asian financial crisis.
But I was talking about the Unidade Real de Valor (URV), which as a temporary meta currency introduced during the Plano Real. In 1993 the currency used everyday on the streets was still the old Cruzeiro Real but all prices and contracts were valued in URV, which was pegged to the US dollar. Every day the government released a table with the conversion rate from Cruzeiro Real to URV.
In 1994 they finally converted the URV into an actual currency, which is why that graph you posted starts at 1.
I wonder how much longer the Bolivar can actually exist. I have not seen anyone getting out of hyperinflation without temporarily ditching the currency altogether. If Venezuela eventually ditch the Bolivar and don't want to adopt the hated Yankee dollar, it would be an interesting opportunity for the Euro.