Venezuela’s Currency Collapse Shows Danger Of Central Planning

Venezuela has an exciting new currency! And if you just look at the numbers on the bills it would seem Venezuelan’s are getting richer. But that’s not the case – not even close.

In fact, thanks to good ole’ hyper-inflation Venezuelan’s are getting poorer every day.

Take a look at this tweet to get a sense of how bad it is:

Here are some of the new bills, along with the $100 bill that was recently taken out of circulation:

Venezuela Currency

Thanks to their incompetent government, Venezuelan’s are watching their currency spiral out of control. They barely have a functioning economy, as even basic items such as toilet paper are increasingly difficult to find.

To get a sense of how out of control prices are, that red $20,000 note above is worth just over $5 US Dollars on the black market. The black market is where real prices can be found, as nobody trusts the inflation or currency numbers put forth by the Venezuelan state.

Venezeula’s printing presses are on fire

Source: Bloomberg

The chart above shows the massive increase in the printing of money in Venezuela. Since all that money is chasing the same number of actual goods, each dollar becomes worth less. As you can see, the printing presses have gone out of control.

Perhaps the geniuses running Venezuela’s economy are starting to figure out that printing more pieces of paper doesn’t magically create economic growth.

Massive oil reserves, massive incompetence

Venezuela has massive oil reserves, matched only by the massive incompetence of their socialist government. For years their economic infrastructure has eroded, as political appointees replaced skilled engineers and oil industry workers.

The government went on a massive spending spree, which was barely affordable when oil prices were high. The sharp decline in the price of oil put Venezuela’s economy into a tailspin. I’m not talking about the decline that happens when any commodity dependent economy struggles. No, Venezuela is fully collapsing.

Venezuela had no free market to let the economy readjust. Instead, the government claimed America was waging “economic war” against them, and blocked business from raising prices.

The price controls caused numerous businesses to fail, leading to the shortages that plague Venezuela’s economy today. Now, Venezuela is desperately printing money as confidence in the currency erodes – which is destined to fail.

The same thing happened in Weimer Germany, when people had to carry wheelbarrows of cash just to get a loaf of bread. Often, thieves would steal the wheelbarrow and dump the cash – giving you an idea of how much the money was worth.

Hyperinflation never ends well, and Venezuela won’t be an exception.

As hyperinflation consumes what’s left of the economy, Venezuela stands as a cautionary tale for centralizing power in the hands of politicians. Though not every country that centralizes power fails as massively as Venezuela, there is too great a risk in giving just a few people so much control over the economy.

Leaders often get too caught up in trying to “save the world,” instead of doing what they’re supposed to do – focus on creating jobs and providing effective and efficient services. When their utopian schemes lose connection with economic reality, disaster is sure to follow.

Spencer Fernando

Photo – Twitter