Hyperinflationary Venezuela – A Glimpse into America’s Future?

This article was submitted by Addison Quale, SchiffGold Precious Metals Specialist. Any views expressed are his own and do not necessarily reflect the views of Peter Schiff or SchiffGold.

The Wall Street Journal recently reported on a fascinating phenomenon unfolding in Venezuela. As many are aware, the nation is beset by a multitude of economic problems as its government has vainly attempted to produce a socialist paradise – with, of course, devastating results.

Things are apparently going to the next level. Recent air cargo shipments to Venezuela have not only included the usual fare of goods and supplies. Rather, 36 Boeing 747 jumbo jets recently arrived filled to the brim with, of all things, millions and millions of bolivars – Venezuelan paper currency

Yes – this is a mind-boggling amount of physical cash!

Sadly, Venezuela has actually had to outsource most of the printing of its currency due to shortages in supplies as well as a need for anti-counterfeit technology.

No doubt, all of these printed notes will end up sloshing around the Venezuelan economy driving up prices massively. Venezuela, according to sources, is effectively doubling the physical currency supply in circulation which will only worsen the country’s hyperinflation problem. It is projected to reach an inflation rate of 720% in 2016. And the currency is already nearly worthless. Last summer, a photo uploaded to Reddit of a man using a 2 bolivar note as a napkin went viral.

This brings to mind Germany’s experience with hyperinflation during the Weimar Republic in the post-World War I 1920s. During this period, people actually pushed wheelbarrows full of bank notes to the store. ZeroHedge has a great summary of the WSJ article along with some helpful graphics.

The Weimar Republic serves as the whipping boy for the perceived intrinsic flaws of Keynesian economics and its handmaiden, government-run fiat currencies. Whenever the issue of fiat currency arises, an Austrian School economist will inevitably remind you of this bogeyman—the Weimar Republic — and encourage you to buy physical gold and silver to get ready for the end-times.

On the one hand, the Austrians do have a point and this example of 36 Boeing jumbo jets transporting bank notes should give us all pause and remind us that this sort of thing can and does happen. Governments after all, cannot be trusted with our money and they will take advantage. This is the fairly inevitable result.

But it does raise crucial questions –what about the United States today? If the Federal Reserve is “printing” tons of currency, why is hyperinflation not happening with the US dollar already? And if not, should we expect something like this to eventually happen here?

These are key questions, because while Austrian School economists have talked relentlessly in recent years about the inflation that is definitely coming our way, generally speaking, these chickens have not yet come home to roost. In fact, looking at the price of oil, copper and other commodities, it looks like it’s actually headed in the other direction – towards deflation.

But there may be some misconceptions about how currency is brought into existence at work here. For one, US dollars are not merely printed into existence. There is no big printing press down in DC that just churns out physical dollars whenever the Fed decides. If they really were coming that easy, then a hyperinflation scenario would probably be more plausible.

The reality is that US dollars are not just printed. Instead, they are “borrowed” into existence. The USD is credit. In fact, when it is “borrowed” into existence it becomes a credit (or asset) on somebody’s balance sheet, and a liability on the Fed’s balance sheet at the same time. So the Fed is not just printing cash with no strings attached. It has a liability to watch out for. As such the creation of currency is, in effect, limited, and cannot entirely run amok. Economist Keith Weiner actually offers an insightful article on precisely this subject.

The point is, the USD is not just being printed “willy-nilly” into existence by the Fed. It comes into being as both an asset and a liability. As such, there are some checks and balances at work in the dollar monetary system which prevents it from immediately spiraling out of control—as it did in the Weimar Republic.

So, why is there little evidence of inflation? Well, when they borrow these dollars into existence from the Fed, most banks often just buy US Treasuries with the funds – which they are required to hold anyway. The result is that interest rates are being pressured lower and lower, while the value of the bonds they bought rises. This is one of the main reasons why all this quantitative easing has not resulted in high inflation of day to day goods. It’s because it is mainly affecting the bond market and causing them to rise substantially in value, all the while depressing interest rates.

Nevertheless, the US dollar, despite some extra built-in protections against its abuse, is a fiat currency. Just like every other fiat currency that has ever existed, it is slowly failing and will ultimately collapse. It’s just on a different timeline compared with the Venezuelan bolivar.

In the end, it doesn’t matter if you are in Venezuela or the USA – eventually you will feel the disastrous financial effects of a collapsing fiat currency.

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