But then you say, "the money in this country has a super high rotation, bills NEVER sit in your pocket or your wallet for more than 1 hour"
Dude the media appears to be right. I have bills in my wallet that have been there for years.
Inflation is a monetary phenomenon. It's not caused by a lack of trust.
> If you can cut down the influence of the black market you can restore goods being bought and sold using the local currency, which will slow down inflation.
That's not how inflation works.
Trust in the value of currency is how money retains value. Modern money has no intrinsic value, it's not backed by anything, it's gains its value from consensus that it holds value.
> Trust in the value of currency is how money retains value.
No, not running the printing presses to pay your bills is how money retains value. :) And a history of retaining value is how a currency becomes trusted.
The black market is the only place where you can get dollars for bolivars, not just bolivars for dollars, so it de-facto is the market for the exchange rate.
If the government persists in having this two-tiered exchange rate with no anchor in reality, no matter what they do, the black market will exist and be the only place normal people without connections can buy goods.
By changing the currency to make it more practical, it's possible to encourage more people to trade in Bolivars. The more people trade in Bolivars the less people need the black market.
This latest move isn't a silver bullet, but it probably is a step in the right direction. More work will be needed to ramp up production of goods for the local economy.
No one sane hoards bills in a currency with a 150%-200% inflation rate. Each month that you have a storehouse full of this bills, you can imagine that the rats eat a 10%-15% of them. People usually hoard dollars or euros or something with a low inflation rate. Also, people try to hoard big bills, like US$100, not bills with a low denomination, because the shipping and handling cost.
A few years ago we also had here scarcity of bills, because we have a 30% inflation that the government refused to acknowledge and refused to print bigger bills. We have even to import bills printed in Brazil, because the local printer were not fast enough. There were a lot of conspiracy theories about the bad people hording the bills.
The new government just decided to acknowledge the inflation and print ARG$500(US$34) bills instead of ARG$100(US$7). The inflation is still high (40%), but all the supposed hoarders have magically disappeared.
Except the government is creating more and more. You couldn't possibly create a scarcity of bolivars. Also, of all the things you could possibly say about Venezuela over the last few years, you've identified the issue as a shortage of currency?
> The losses incurred by hoarding increasingly worthless currency can be offset by the profits made elsewhere.
That's mathematically impossible.
> possible to encourage more people to trade in Bolivars.
Increasing the velocity of money is actually inflationary. Your proposal to solve inflation is...to have more inflation? That's like saying the cure for hunger is to not eat.
It's not. Increased profit can be made from the sale of fewer goods. There's nothing impossible about it.
>"Increasing the velocity of money is actually inflationary. Your proposal to solve inflation is...to have more inflation? That's like saying the cure for hunger is to not eat."
Is it though? Velocity of money does not necessarily move inflation in a single direction. Prices can rise and fall, based on supply and demand. If what you're suggesting is true, how does the liquidity of a market always result in inflation? It's also worth noting that healthy markets rely on a moderate level of inflation to counteract the value taken away from a market by inactive assets (such as housing).
Meanwhile, we have a much more plausible story: Venezuela has been hit hard by the decline in oil prices - their main export - yet has been unable to curtail spending to match. That money needs to come from somewhere.
Not necessarily in cash alone, but yes I'm suggesting it's in the interest of black market traders to create scarcity in the local economy.
To give an example of how this is possible, imagine you want to create artificial scarcity, where would you start? I'd suggest starting with the food supply, as there's constant demand no matter the cost. Imagine as a rich outside investor I go in and buy up huge volumes of food staples. What have I done by this? Two things:
1. I've reduced the volume of goods in the local market, increasing scarcity, driving prices up.
2. I've acquired goods that are in demand, which I can then sell on the black market at prices that are favourable to me.
The hoarding of Bolivars comes into play as you want to reduce the chances of other people muscling in on this game.
Is this the whole story? No. I'm sure the government's mismanagement of the economy also plays a large role, but I'm suggesting black market traders are by and large not motivated by altruism, and they have had opportunities to tilt the playing field further in their favour.
The argument of the government is people are hording the Bolivar; hoarding other things isn't relevant to that argument.
You haven't given me any reason to think black market entities would actually be hoarding the Bolivar. Meanwhile, it's quite plausible that part of the aim of this cash confiscation is to take money out of the money supply by any means possible, with political deniability. This reduces inflation, albeit at a high cost, and buys political time by making it look like they're doing something.
No, this is just not true. As gus_massa pointed out, with hyperinflation, no one hoards cash, you try to own things that will retain value. The value of money declines upwards of 50% a month in Venezuela and when you get something that loses value 50% a month, you try not to hold on to it for very long. Black Market traders probably hold on to their cash for less than a day and try to convert over to Columbian pesos or US dollars as quickly as they can.
I doubt very much that you can have greater control over the local market by hoarding Bolivars, especially around border areas. You don't think that merchants/people would accept columbian pesos/brazilian reals as legal tender in border areas? Or euros/US dollars in all areas?
> By creating artificial scarcity I'm then able to increase the demand for goods on the black market, which is where I make my money.
There is already a huge unmet demand for goods on the black market. The artificial scarcity is not produced by hoarding currency, it's produced by price controls/disincentives by producers.
> The losses incurred by hoarding increasingly worthless currency can be offset by the profits made elsewhere.
It's unclear to me why hoarding money increases the profits made elsewhere. Why wouldn't you just skip to the profits being made (eg taking advantage of government subsidized goods) and ignore the hoarding of a rapidly depreciating currency?
This problem is entirely the creation of a government hell-bent on pursing discredited economic theories.
That doesn't hold that much water. Nigeria and Russia are both dependent on petroleum dollars as well, and neither of them are convulsing the way Venezuela is. They're not doing well, but they're not running out of food either.
Huge problems are the policies of state price controls and confiscation of means of production, as well as (until now) the refusal to even acknowledge inflation as symptom of economic mismanagement, rather than external economic warfare.
The state price control board (SUNDEE) just went through and slashed prices for all consumer goods by 30% in retail stores for Christmas. That is not the way to control inflation.
To some extent I agree with you. I accept that the Venezuelan government has mismanaged their economy, and the idea that they can keep using wildly different exchange rates for the same currency seems baffling to me. However, regarding the impact of oil revenues...
https://en.m.wikipedia.org/wiki/Economy_of_Venezuela
"Revenue from petroleum exports accounts for more than 50% of [Venezuela's] GDP and roughly 95% of total exports."
https://en.m.wikipedia.org/wiki/Petroleum_industry_in_Nigeri...
"As of 2014, Nigeria's petroleum industry contributes about 14% to its economy. Therefore, though the petroleum sector is important, it remains in fact a small part of the country's overall diversified economy."
https://en.m.wikipedia.org/wiki/Economy_of_Russia
>"As of 2012 the oil-and-gas sector accounted for 16% of [Russia's] GDP, 52% of federal budget revenues and over 70% of total exports."
...based on those numbers it seems fair to say that the economy of Venezuela is more dependent on oil revenues than Nigeria or Russia, so even without economic mismanagement they would've probably been hit harder by the price drop.
Sort of a chicken and egg problem. It's only through economic mismanagement (price controls, subsidies on imported goods, subsidies on utilities and commodities, government takeovers of property) that Venezuela is more dependent on oil revenues than Nigeria or Russia.
what would prevent those criminals to exchange their 100 VEF notes for new ones? what if they'd ask their friends to help them? or hire other people to change money of their behalf?
First off, money laundering shouldn't be a crime or on that list.
Second, there's no need to force a recall of notes except to exert more government influence and potentially "steal" money from people.
Explain why it shouldn't, please.
They gave people 15 days to exchange the bank notes for smaller ones or deposit their old notes in the banks or exchange for new ones, we can all agree that this looks like a really small period of time but due to the nature of our economy it's actually a decent time. But the bill is not really "banned" it will be tho and I will explain you the reasons a bit later.
In my case, I deposited all my 100 notes without any problems by monday. I just use debit/credit cards now and other small notes to make cheap purchases.
It's incredible hard to find actual correct information on whats going on because all the media is focused in creating chaos and missinformation, this is an actual good source where you can see the explanation of why only the 100 notes are being replaced on this 1st phase
http://www.analitica.com/economia/canje-de-billetes-en-banca...
But an small resume is that only the 100 VEF notes are being replaced now because they represent the biggest percent over all the notes (is around 50%) so people will want to have a bill of 20.000 instead of 200 bills of 100 VEF.
Once the 500, 1.000, 5.000, 10.000, 20.000 notes are around, they will finish replacing the other small notes 10, 20, 50 and 100 leftovers for coins.
But well, as I said before, the media has started a campaing to make people belive that right now their money will have no value at all and a bunch of other lies, this of course leads to desperation and to problems like we had today where there was violence at diferent banks around the country.
And to explain why the bill will be banned after 15 days is pretty simple, the money in this country has a super high rotation, bills NEVER sit in your pocket or your wallet for more than 1 hour, aditional to this, money in cash is barely used now, a huge percent of the transactions are made electronically because is just not confortable to have a pack of 300 bills to buy food for 3-4 days so cash is actually not really used because of high inflation
So yeah if after 15 days you still have bill leftover you pretty much were into corruption, drugs, money laundering, smuggling, etc and thats exactly what the gov wants to avoid, to all those guys who spend years smuggling in the borders and have containers or warehouses full of 100 VEF notes.
Take a look of this video: https://www.youtube.com/watch?v=p23Fn1LVGv0
This is an asian guy (well known to have smugglings business) showing how many 100 VEF bills he had, it's just hillarious.