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BOHANON & CUROTT: Currency failure kills hope—and people—in Venezuela

May 18, 2018

Economic Analysis by Cecil Bohanon & Nick CurottIn this barter economy, a haircut costs five bananas and two eggs. We’re not talking about the post-apocalyptic world of “Mad Max,” but the post-socialist nightmare of real-world Venezuela, where hyperinflation has rendered the official currency so useless the population is resorting to barter. Taxis quote prices in cigarettes. Diapers are swapped for chicken. Parking can be paid for with a fresh baguette. The monetary economy is grinding to a halt.

The collapse of the currency is staggering. The yearly inflation rate is now over 18,000 percent. In May 2017, the price of a cup of coffee was 18,000 bolivars. Today, it costs 250,000 bolivars—a whopping 13,789 percent price increase. It takes so much money to buy groceries that stores are weighing cash for purchases with deli scales instead of counting it—and breaking scales in the process. Credit and debit card purchases are problematic on many card machines because the checkout price is too large to fit on the screens.

Venezuelan President Maduro blames inflation on his political adversaries and price-gouging businesses. What sophistry! Hyperinflation happens only when a government creates oodles of new money to pay for out-of-control deficit spending. If unchecked, government money-printing and public money-dumping chase prices up exponentially in a vicious cycle.

Maduro’s useless attempt to combat inflation with draconian price and currency controls has made matters far worse. Price controls haven’t prevented inflation, but they have created black markets, widespread shortages of basic necessities, and enormous lines at stores.

The crisis is heart-wrenching. Ninety percent of the population is hungry. The average Venezuelan lost 24 pounds in 2017. Six out of 10 garbage cans are rooted through for scraps. Fifty percent of operating rooms cannot function because of lack of supplies. One out of three visitors to public hospitals dies. Infant mortality is up 30 percent. Meanwhile, desperate Venezuelans use online platforms like Facebook to attempt bartering for medicine.

The only way out of hyperinflation is to introduce a new currency while making a credible commitment to lowering government debt. For a socialist like Maduro, this idea is anathema. So the crisis worsens.

Hyperinflation is not a relic consigned to the dustbin of history. It is a problem current governments struggle with. Sound money is a hallmark of good government. Let Venezuela serve as warning of the danger of social-justice warriors with a printing press.•

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Bohanon and Curott are professors of economics at Ball State University. Send comments to ibjedit@ibj.com.

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