SPINNING HYPERINFLATION AT 3.268 TURNS (Sep, 2017)

 In Case Study

ORIGINAL

SUMMARY

Stating historic Monetary Aggregates in traditional bolivars (VEB) at a log scale helps us compare August 2017’s total of VEB 33 million billion vs. February 1999’s VEB 10 thousand billion and reserves of $10 billion versus $14 billion, respectively.

Whatever reasons justified implementing this ruinous economic path, become more sinister as one expands the study to include the 23 years prior to 1999, when currency debasement amounted to less than 6% of its current magnitude.

The only way to restore faith in the Bolivar is to make its convertibility to any currency and material resource unlimited.

Succeeding with this announcement means convincing users prone to spend their bolivars as soon as they get them, to stop doing so. Such an attainment implies a vote of confidence that would reduce money velocity long enough to implement the second step. 

1st Step

There are only two solutions to restore confidence in the currency:

The model implemented by Bolivia in 85 and ourselves since the late 80s: slowing down money velocity by devaluing the Bolivar to an exchange rate low enough to be defensible with whichever level of international reserves truly exists in the central bank.

The implementation of unlimited currency conversion at a fixed exchange rate linked to a stable currency such as the dollar, the euro, or even the yuan. In this case, the central bank commits to exchange any number of bolivars at a fixed proportion (within a price range) against another currency; this is how Argentina resolved its hyperinflationary crisis in 91.

 2nd Step

Following the unlimited convertibility decree, the government team must develop the reform plan, by analyzing how to finance long-term public spending and the immediate transition to that arrangement, while:

  • Giving priority to the poorest sector of the population
  • Stimulating local and foreign investments in economic sectors prone to generate the highest amount of revenue in the shortest period
  • Ridding itself of all state companies where private sector buyers can be subjected to carry the losses or to promptly pay all taxes on subsequent gains, while meeting all legal requirements, e., working conditions, health insurance, accounting standards, etc.

At the same time, the government should analyze any preferential financing offered by the global monetary-cooperation entities and their ability to certify to the Venezuelan people, the feasibility of its reform proposal plus monitoring its success/failure and timing vs. plan.

Oswaldo Lairet

CIO SYSTEMIC RISK AVERSE FUNDS

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