Dollars as Napkins

Stories about plummeting stock markets, a sputtering Chinese economy, and the yuan versus the dollar have dominated financial news over the past few weeks. Lost in the din: the economic disaster continuing to unfold in Venezuela.

Venezuelans face crippling shortages of basic staples as their currency, the bolivar, continues to inflate at breakneck speed.

Hyperinflation has rendered the bolivar practically worthless. A photo uploaded to Reddit of a man using a 2 bolivar note as a napkin went viral last week. Business Insider reported that based on the official exchange rate, the makeshift napkin was worth about 32 cents. But in reality, the man didn’t waste nearly that much.

On the black market, the reality is completely different. You can get 676.88 bolivars to the dollar, according to dolartoday.com. That means holding food with a 2 bolivar note costs the holder less than a third of one US cent.”

The government stopped releasing inflation figures in December 2014 when the annual rate reached 68%. In the absence of official figures, a Miami based financial analyst came up with a creative way to track inflation in his home country. Earlier this month, the Wall Street Journal reported that Miguel Octavio uses the price of cornmeal cakes known as arepas to track the devaluation of the Venezuelan currency. Over nine months, he has recorded a fourfold increase in what he calls his Hyperinflated Arepa Index. According to the Mises Institute, the makeshift index suggests a current inflation rate of around 400%. Some economists estimate the annual inflation rate is actually 808%.

The socialist government’s meddling with the economy has not only spurred hyperinflation. Its price controls and central planning have also predictably led to shortages. The Wall Street Journal reports long supermarket lines for basic food such as milk and rice. Cooking oil, corn flour, sugar, sanitary pads, batteries, and even coffins are in short supply.

In a national survey, the pollster Consultores 21 found 30% of Venezuelans eating two or fewer meals a day during the second quarter of this year, up from 20% in the first quarter. Around 70% of people in the study also said they had stopped buying some basic food item because it had become unavailable or too expensive.”

A non-profit organization recorded 500 protests over food shortages in the first half of 2015. Fed up and desperate, protesters have turned to violence in some places. The Wall Street Journal calls it a “precarious situation” for the socialist government.

The unrest is a response to dramatically worsening living conditions for Venezuelans as the economy reels from oil’s slump following more than a decade of populist spending that left the government broke.”

Venezuela isn’t just an isolated case. It demonstrates what happens when central planners try to control the economy. As we reported back in 2013, the same dynamics led to a crisis in Argentina.

Americans tend to view hyperinflation and shortages as “it can’t happen here,” kinds of events. But as we’ve pointed out, Venezuela could serve as a crystal ball for America. In her Mises article, Carmen Elena Dorobăț points out that every government, including the US government, exercises similar control over currency.

As news of Venezuela’s suffering keeps coming through, one cannot help but feel a certain sense of dread. All governments control the money supply to essentially the same extent that Maduro’s administration does. All around the world we have monetary socialism, where national currencies are subject solely to political power. And one cannot help but wonder (and fear) how many more such economic disasters it will take before it becomes clear that socialism of all shapes, sizes, and degrees, is unrealizable, unbearable, and unforgivable.”

In an interview just last June, respected economic analyst Gordon T. Long issued a warning, saying he sees hyperinflation coming to America in the future.

[Hyperinflation] is coming, but not next. You have to remember, hyperinflation is a currency event. It’s not about prices going up, it’s about your currency going down, which means things are more expensive to you. When hyperinflation happens, it’s very quick and very short. It can be a matter of a few weeks or six months, and the currency implodes… It’s a matter of a lack of confidence…”

Americans should prepare for the possibility of hyperinflation and shortages in the future. Gold and silver historically provide a shield against hyperinflation, and can also serve as a means of obtaining goods and services in the event of shortages.

Reprinted from SchiffGold.com.