The Washington PostDemocracy Dies in Darkness

Venezuela could eventually have 1 million percent inflation. How is that possible?

Venezuelan voters register with the ruling United Socialist Party next to a mural of former president Hugo Chávez. (Ariana Cubillos/AP)

If history has taught us anything, it’s that things can always get worse, even when that seems impossible — as it does right now in Venezuela.

Indeed, in the span of a few months, the International Monetary Fund has gone from forecasting that Venezuela’s inflation rate would hit 12,875 percent by the end of the year to now saying that it will get to 1 million percent. Now, this isn’t the type of prediction you should take literally — the IMF says it’s more a “signal that the situation in Venezuela is similar to that in Germany in 1923 or Zimbabwe in the late 2000s.” Instead, as we said, it’s a reminder that even a failed state such as Venezuela can still fail some more. Which it almost certainly will.

How has Venezuela gotten to this point, though, where we’re debating whether its inflation rate is about to reach either “only” five figures or seven? Well, the Chavista regime’s spending plans have been so extravagant, and its management of its state-owned oil company so inept, that it hasn’t had enough petrodollars to pay its bills even when oil was $100 a barrel — so it really doesn’t now that the shale revolution has sent crude prices down so much. Which is to say that it’s always had to print a little money, but now it has to print a lot. The result has been a downward spiral that has sent prices on an ever-faster upward trajectory, to the point that, going by black-market rates, Venezuela’s currency has lost 99.9997 percent of its value in the past 6½ years. To put that in perspective, $333,333 worth of bolivars in 2012 would be worth $1 today.

And nobody knows how much worse this is going to get. That, at least, is what Johns Hopkins professor Steve Hanke, one of the world’s foremost experts on hyperinflation, told me. “You cannot forecast the course and duration of hyperinflations,” he said, and it’s “irresponsible” for the IMF to even try. That’s because hyperinflation is more a political phenomenon than an economic one, to the extent that it’s about governments choosing to continue to print money even after it has started to kill their currencies, so it can last a lot longer than you’d think.

Part of the problem is that this kind of self-destructive behavior by the government isn’t always self-destructive for the government. In fact, the opposite. Regimes that are going through hyperinflation, you see, will often try to deny that it’s happening by setting an official exchange rate that says it’s not, an exchange rate to which only party leaders and their corporate cronies have access.

Practically speaking, that means they can get dollars for just pennies on the dollar, if even that. In Venezuela, Hanke estimates, you can make a 2,092 percent profit doing this in a single day — and that’s after they just got rid of the super sweetheart deal insiders used to be able to get. This is one way, Hanke told me, that “the regime is able to keep their chosen group around them.”

But like all unsustainable things, hyperinflation eventually comes to an end. What makes that happen? Well, in cases where the government doesn’t belatedly do so itself, there are two things that can force its hand. The first is what Hanke called the “physical constraint on redenomination,” which is just another way of saying that it can’t print money fast enough. That might sound like something out of “The Onion” — Area Central Banker Ends Hyperinflation by Trying to Print More Money — but it’s a pretty good description of what happened in Yugoslavia in the 1990s. Back then, Serb strongman Slobodan Milosevic had tried to pay for all his wars by setting off what is still the third-worst hyperinflation in history, until his mint simply hit full capacity. So he had no choice but to stop. This is obviously an extreme example, but a similar situation is already underway in Venezuela. The difference is that it doesn’t print its money itself but, rather, imports it from a specialized dealer — when, that is, it can afford to. It’s having trouble doing that, though. Venezuela, in other words, barely has enough dollars that are worth something to create bolivars that aren’t.

The second way a hyperinflation stops is when people stop accepting the currency en masse. This isn’t coordinated in any way but is just a matter of people quite reasonably not wanting to hold their money in a currency that is appreciably dwindling in value on a monthly, weekly or even daily basis. It’s what’s known as spontaneous dollarization, because that’s what everyone starts doing business in instead, and it’s what brought Zimbabwe’s hyperinflation, the second worst on record, to an abrupt halt nearly a decade ago. “The citizens just went on strike,” Hanke told me, “and refused to get paid in Zimbabwean dollars" so that the government had no reason to keep printing them — and so it didn’t. This, again, is something we’re starting to see in Venezuela. “I can’t think in bolivars anymore,” one Venezuelan craftsperson told Reuters, “because you have to give a different price every hour.” For her, this means that “to survive, you have to dollarize.”

The good news, then, is that Venezuela’s hyperinflation might end up burning out as those other ones did. The bad news, though, is that’s probably a long, long ways away from happening. Consider this: It took a monthly inflation rate of 313 million percent for Yugoslavia to reach the point where it couldn’t print any more money, and 79.6 billion percent for Zimbabwe to decide that it wouldn’t. But Venezuela, according to Hanke’s calculations, has a monthly inflation rate in only the low hundreds. That corresponds to an annual inflation rate of more than 40,000 percent, which, while certainly a disaster by humanitarian standards, “has been quite modest,” he said, by “hyperinflation ones." It’s only the 23rd worst out of the 58 in history.

Venezuela, then, won’t come close to 1 million percent inflation for now, but it might not for long. The only thing we can say for sure is that things are going to get worse.