Stores in Venezuela Resort to Weighing Stacks of Bolivares on Scale Rather than Counting It

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Venezuela: a tragic reminder of the follies of political corruption, unjustified increases in money supply, and heavy handed actions by central planners to cheat basic economics.

The Venezuela hyperinflation saga continues.

The Chavez/Maduro political legacy is on life support. Most unfortunately, life in Venezuela is becoming increasingly unsafe. Protests have turned violent.

Increasing the money supply to pay the tab for unrealistic political promises is a very dangerous game that usually ends in tears. In that respect, it is never “different this time” and thousands of years of monetary history tells us no nation or empire has a free pass to utilize baseless money creation forever without facing dire consequences.

There are many people alive today who were around when Venezuela was the wealthiest nation in South America. Now the currency is approaching worthless and so is the wealth of most of its citizens.

This is how many Venezuelan Bolivares it takes to buy one US dollar on the black market (the official FX rate fixed by the government is not accepted by the market). You will notice the amount is now “off the chart” as the exchange rate rapidly moves above 19,000 BSF/USD. This, during a time when USD has fared poorly against most trading partner currencies, meaning it has nothing to do with USD strength.

This is clearly hyperinflation.

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Perhaps the most important point to convey in this post pertains to stock market performance during periods of hyperinflation.

While above-target inflation is generally bad for equity prices because it implies the central bank might react with tighter monetary policy in the near future to reign in excess liquidity, at a certain point equity prices can melt higher if investors don’t expect a meaningful tightening in financial conditions.

Take a look at the Caracas Stock Market Index below.

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Higher prices mean higher revenues for businesses. This can be falsely appealing initially, and is also part of the reason corporate managers tend to join in on the fashionable “inflation is good” bandwagon amongst elites. However, it is only an illusion of higher wealth and profits due to the diminished spending power of supposed increases in revenues and profits.

Not even the most devout Keynesian print and ease perma-doves will attempt to proclaim that investing in the Caracas stock market is making people rich in real terms, even as the market melts straight up in nominal terms.

Be careful in assuming every financial asset bubble ends in a 2008-style market crash. When debt outstanding becomes unpayable, asset bubbles become increasingly prone to inflationary outcomes rather than the more common market crash outcomes for which everyone these days seems to be on the lookout. That is one reason Alan Greenspan indicated more caution about the bond market than the stock market.

At the very least, future potential economic shocks in the US may result in a more fragmented bond market reaction than the typical risk-off correlations (gov bonds up, high yield down, USD up, EM currencies down, stocks down) witnessed in the past 15+ years.

US stock indices will most certainly fall initially during future economic shocks or downturns, but what you should really be focused on in terms of macroeconomic risk management in the current era is one or two steps ahead of a potential shock — how will activist central planners respond given the remaining options at their disposal during a period of heavily indebtedness and aging demographics?