After months of mass-printing bolívares to keep his sinking government afloat, Maduro went on television last Sunday night and decreed the country’s largest-denomination bank note, the 100, would cease to be legal tender within 72 hours. That set off a scramble to find smaller bills.
The bolívar had regained nearly 40 percent of its black market exchange value against the U.S. dollar by Friday afternoon, trading at 2,500 to 1.
But few Venezuelans are cheering. Maduro’s cash-sop appears to be sucking up money too fast, creating a volatile shortage of currency just in time for holiday shopping. With stores and banks no longer accepting the 100-bolivar notes, scattered protests broke out in Venezuelan cities Friday, and angry crowds looted several stores.
New bank notes in denominations up to 20,000 bolívares that the government promised to release as it absorbed the 100s were nowhere to be seen, with bank managers acknowledging that they had no idea when the new bills would arrive.
Maduro told the country that his moves would strike a blow at what he called the “international mafias” waging a U.S.-directed “economic war” against the country by hoarding 100-bolivar notes and whisking them over the border into Colombia. His critics have ridiculed the idea that anyone would stockpile Venezuela's currency, given how its value has plunged amid galloping inflation in the past year. Venezuelan authorities said they have seized at least 138 million bolívares this week along the border from currency traders trying to sneak their soon-to-expire bank notes back into the country.
But while Maduro has propped up the bolívar, his gambit has more to do with alchemy than economics, analysts say.
The 100-bolivar notes that the government has essentially banned amount to nearly 80 percent of the total currency in circulation, said Venezuelan economist Francisco Rodriguez, a former Bank of America analyst how with the New York-based investment firm Torino Capital.
“Tightening monetary policy by taking out four-fifths of an economy’s cash is like killing a mosquito with a flamethrower,” Rodriguez said. The measures are a huge blow to poorer Venezuelans who lack bank accounts, he said, rendering their savings worthless, and “tantamount to a major expropriation of wealth.”
Caracas construction worker Luis Jimenez, 40, said he doesn’t have a bank account, and because of the sudden shortage in paper currency, he hasn’t been able to cash his paychecks. “I need that money to eat,” he said Friday.
Maduro has essentially reduced the availability of currency but hasn’t changed the underlying fundamental economic problems that were driving inflation in the first place, including a collapse in productivity, shrinking oil revenue and soaring debt.
“Inflation is always a monetary phenomenon,” said Steven Hanke, an economist at Johns Hopkins University who tracks Venezuela’s inflation rate closely. “Venezuela's currency in circulation has been temporarily cut,” he said, “so inflation has temporarily slowed.”
There were signs that the lack of cash was wreaking havoc on the country's already-limping economy.
“I was running out of gas today, and I had stop my car, call my brother and ask him to lend me some money,” said Manuel Gutierrez, 21, who spent the morning trying to find a gas station that would accept his 100-bolivar notes. Many Venezuelan retail businesses only accept cash, and Venezuelan automated teller machines were still dispensing 100s this week — or had run out of cash completely.
“We haven't been able to sell a single empanada today” said Marisol Herrera, who runs a fried pastry stand in Caracas. “Nobody has enough cash, and we can't accept the 100s anymore — they are garbage!” she said.
Seizing most of the country's currency to drive down the inflation rate is “not a sustainable strategy,” said economist and pollster Luis Vicente Leon. “The country will further contract, and the economy cannot survive this kind of strangulation for very long,” he said.