Francisco Toro is a Venezuelan contributing columnist for Post Opinions and chief content officer of the Group of 50.
Hyperinflation is to economics what leprosy is to medicine: a hideous, cruel ailment that used to be widespread but is now well understood, easy to prevent and trivial to cure. Like leprosy, hyperinflation used to be common but is now rare and feels anachronistic. In both cases, there’s just no excuse for failing to cure it: It’s 2018, and researchers long ago figured out its mechanisms, its causes and the right way to treat it. And yet, in a handful of wretched places, both afflictions hang on, their presence a stinging indictment of those in charge.
On Wednesday night, President Nicolás Maduro announced his plan to tame Venezuela’s brutal hyperinflation, which the International Monetary Fund says is on track to top 1 million percent this year. The president announced that our nearly worthless currency, the bolivar, is to shed five zeroes. From September, Venezuelans will get a new “sovereign bolivar” for each 100,000 of their old bolivars.
Maduro’s speech was notable mostly for what it lacked: namely, any minimally credible plan to address the actual causes of hyperinflation. The president hardly mentioned Venezuela’s gargantuan budget deficit or the runaway rate at which its Central Bank creates new money out of thin air to finance it.
The omission is baffling: Economists on the left, right and center all know that to stop hyperinflation you have to stop covering budget deficits with newly printed money. It’s because this finding is now universally accepted that hyperinflation has become so rare. Maduro, it seems, never got the memo.
What little Maduro did have to say about tax policy belied the depth of his ignorance. He announced a tax holiday for Venezuela’s importers: a policy that will deepen the government’s budget deficit and its need to keep creating new money. Reducing the government’s already decimated tax base further still will fuel hyperinflation, not curb it.
Maduro’s speech was deeply dismaying. Trying to fix hyperinflation by lopping five zeroes off the currency and giving importers tax breaks is like trying to treat a leprosy patient by bleeding him with leeches. The prescription isn’t just bizarrely outdated; it’s also just plain wrong.
If you haven’t lived through hyperinflation, it’s hard to grasp the level of economic chaos it can bring. For Venezuelans, receiving wages in bolivars is a little like getting paid with ice on a sweltering summer day: Your salary decays from the instant you get your hands on it. The moment they’re paid, Venezuelans run to the nearest store, desperate to turn what little income they get into anything that will hold its value. Fewer than 1 in 10 can afford enough to eat amid the economic chaos the bolivar meltdown has brought.
Price distortions have reached hallucinogenic extremes. Today in Venezuela, 2 million bolivars will buy you either a single cup of coffee or half a million gallons of gasoline. (The government hasn’t allowed gas prices to rise significantly for several years, even as most other prices go insane.)
None of this is normal. Venezuela’s is the first episode of hyperinflation in Latin America this century and one of the worst in modern history. While our inflation rate reaches seven figures this year, the second-highest inflation rate on Earth is just around 100 percent — in war-ravaged South Sudan. No other country has an inflation rate above 50 percent. Even Syria, in the middle of a disastrous seven-year civil war, is seeing prices rise just 25 percent a year.
America faced hyperinflation once: in the middle of its Revolutionary War, as a desperate Continental Congress tried to print more and more money to fight the British. France, too, amid the chaos of war following its revolution. Germany suffered the same fate after its defeat in World War I. Normally it takes a catastrophe of that kind of scale to set off hyperinflation. But Venezuela has faced no war, only a government so incompetent that its policies are just as destructive.
The spectacle of the Venezuelan government trying to think up “solutions” to the problem is equal parts painful and bizarre. After touting his nonsensical importer-tax holiday, Maduro stressed that the new bolivar will somehow be “anchored” to the petro, Venezuela’s phantasmagoric state-sponsored, oil-backed cryptocurrency.
But the petro has been an unambiguous flop for Maduro. It has gained virtually no credibility in the cryptocurrency community. Despite breathless propaganda claims, analysis of its public blockchain shows it has attracted close to zero interest from buyers amid numerous red flags of corruption in its development. Announcing that the new bolivar will be anchored to the petro amounts to anchoring Venezuela to a scam.
Or, worse, to a ghost. Because hardly any petros have ever been transacted. The market for petros is so illiquid, it can hardly be said to exist as a currency at all. Anchoring our money to the petro is like offering a homeopathic infusion to someone dying of leprosy.
With no serious fiscal or monetary reform on the horizon, and with the government spewing demonstrable nonsense in its redenomination announcement, the direction of travel is clear. Shedding a few zeroes will do nothing to curb the dizzying rate at which Venezuela’s money sheds its value. Our country is dying of monetary leprosy, and our doctor is a demonstrable quack.