Consequences of Inflationism: Caracas (Venezuela) and Kiev (Ukraine) Burns

Sad to see of what seems as escalating political instability around the world (mostly in emerging markets).

The backlash from hyperinflation by the Venezuelan government has become apparent as rioting has been intensifying. 

First the crashing bolivar and spiraling price inflation.  

Now writes Zero Hedge (bold original)

the situation in Venezuela has once again escalated as protest leader Leopoldo Lopez' arrest (and possible 10 year jail sentence) prompted more violence overnight. However, as we warned, the government crackdown is starting to raise concerns about the stability of the government.

• *VENEZUELA PROTESTS ESCALATING INTO NATIONWIDE UNREST: IHS
• *ESCALATION OF PROTESTS PUTS STABILITY OF GOVT AT RISK: IHS
• *RISING VIOLENCE COULD LEAD TO MADURO OUSTER BY MILITARY: IHS

As opposition leader Capriles asks Venezuela's military to uphold the constitution, he exclaims that "the poor' must participate for government to change.

• *VENEZUELA HATILLO MAYOR DAVID SMOLANSKY SPEAKS IN CARACAS
• *VENEZUELA PEOPLE WON'T STAY QUIET: SMOLANSKY
• *SMOLANSKY SAYS VENEZUELA SUFFERED TERROR LAST NIGHT
• *SMOLANSKY CALLS FOR MASSIVE VENEZUELA PROTESTS SATURDAY

The opposition leader speaks:

• *VENEZUELA OFFICIALS SHOT AT PROTESTERS YDAY: CAPRILES
• *VENEZUELA ARMED FORCES SHOULD ALLOW PEACEFUL MARCHES: SMOLANSKY
• *VENEZUELA STRENGTHENING TIES WITH CUBA, RAMIREZ SAYS
• *VENEZUELA GOVT USING VIOLENCE TO HIDE ECO PROBLEMS: CAPRILES
• *CAPRILES SAYS SOME IN VENEZUELA GOVT WANT MADURO OUT
• *CAPRILES ASKS VENEZUELA ARMED FORCES TO UPHOLD CONSTITUTION
• *VENEZUELA POOR MUST PARTICIPATE FOR GOVT TO CHANGE: CAPRILES
• *CAPRILES SAYS HE WON'T BE FORCED TO TALK TO VENEZUELA GOVT

And IHS warns:

• *VENEZUELA PROTESTS ESCALATING INTO NATIONWIDE UNREST: IHS
• *ESCALATION OF PROTESTS PUTS STABILITY OF GOVT AT RISK: IHS
• *RISING VIOLENCE COULD LEAD TO MADURO OUSTER BY MILITARY: IHS

Images from last night suggest this is getting considerably worse...despite Maduro's claims of "absolute calm"

The populist government recently even put a Happiness Ministry and promoted the public’s looting of “greedy”companies to enforce price controls.

The result has been obvious: the cumulative demand (printing money) and supply side (price controls) interventions has prompted businesses to refrain from operations. Thus all money printed by the government has emptied shelves and sent prices skyrocketing. The ensuing hunger now drives people into the streets. The riots even claimed the life of a Venezuelan beauty queen. 

Nonetheless Venezuela’s stock market continues to remain buoyant amidst all the unrest as people use stocks as shield against a collapsing currency.

In Ukraine, anti-government protests seem to have turned into a civil war as the riots have now claimed 26 lives as of this counting.

One region the Lviv has even declared independence from the Ukraine’s government

It is easy to look at the riveting rivalry between areas supportive of Europe on the one hand and areas supportive of Russia as causing the current troubles.

But there may be more than meets the eye.

Ukraine’s currency the hryvnia has seen a massive devaluation in 2008 and remained at this level prior to the political upheaval. Currently the hryvnia has been sold off as rioting spread.

But there has been a sharp deterioration in external and domestic financing even prior to the unrest. 

Ukraine’s government budget deficit has been widening since 2008. Ukraine has also swelling deficits in both trade and current accounts. 

Over the same period, loans to the private sector has been exploding to the upside, which likely means both the private sector and the government contributing to broadening deficits in the merchandise trade. 

Meanwhile Ukraine’s external debt has risen by almost 3.5x from 2006…

…as forex reserves plunge by almost half.

And soaring private and public sector loans has led to a spike in M3 from 2009 onwards.

And of course, driving all the soaring debt and money supply levels has been the same zero bound rates.

So Ukraine has been financing the splurge with debt which has resulted to the current financial and economic strains

And despite the so-called low inflation rate figures, what the above data suggests is that inflationism has driven a deep chasm to Ukraine’s fragmented society that has enflamed today’s violent riots.

Amazingly Ukraine’s easy money policies inflated a stock market bubble twice which also blew up in a span of 5 years. The above is a shining example of bubble driven volatility in both directions but with a downside bias.

Ukraine is largely a commodity commodity and energy based economy. The shadow economy has been estimated to contribute to about 40%. 

And energy geopolitics may have played a secondary role in the growing schism. The zero hedge quotes one analyst… (bold original)

BOTH the USA and EU will now fund the rebels as Russia will fund Yanukovych. At the political level, Ukraine is the pawn on the chessboard. The propaganda war is East v West. However, those power plays are masking the core issue that began with the Orange Revolution – corruption. Yanukovych is a dictator who will NEVER leave office. It is simple as that. There will be no REAL elections again in Ukraine. This is starting to spiral down into a confrontation that the entire world cannot ignore

Political instability seem to percolate into emerging markets, as we see the same violence in Thailand, Saravejo Bosnia and Conakry Guinea, which represents troubling signs of contagion (from economic sphere to the political sphere).

Yet political problems in Thailand, Ukraine and Venezuela has a common largely "invisible"denominator: inflationism

The advocate of inflationism John Maynard Keynes saw of  the destructive capacity of inflationism on society (yet ironically he still promoted this): 

Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security but [also] at confidence in the equity of the existing distribution of wealth.

Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become "profiteers," who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.

Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.

Political instability in the above countries reveals how “Lenin was certainly right” on how inflationism destroys society.

Venezuela’s Hyperinflation: When Fair Prices equals Government Sanctioned Looting

Here is a recent video of looting in action

No this isn’t from Tacloban, Leyte Philippines. This is from Venezuela. (video from Liveleak.com)

Severe shortages of goods and services combined with skyrocketing prices has forced the Venezuelan government to resort to populist squid tactics by pushing the blame of societal malaise to the private sector enterprises, where government “occupation” of businesses to impose “fair prices” has motivated widespread looting.

Also this is a prime example of the conditioning of people’s actions based on what I call as “steep cultural dependency on political solutions”.

From the International Business Times editorial

Looters: Venezuelan troops storm a local electronics retailer in the name of enforcing "fair prices," brazenly blaming the private sector for state policies. Sounds familiar — and not just because it's a communist takeover.

With municipal elections just around the corner on Dec. 8, it's no surprise to see Venezuela's failing socialist government turning to pork-barrel handouts to lure voters — as it always has.

Shovel the goodies to the red-shirted low-information voters and gain just enough votes in upcoming elections to claim a dictatorship is really a democracy.

Not coincidentally, President Nicolas Maduro declared that Venezuela would celebrate the beginning of Christmas in October — to distribute goodies.

But there's a new twist here: Venezuela is out of money to shovel pork. Its foreign reserves have fallen to $21.4 billion as oil prices slump. Instead of using its vast oil earnings to buy votes, as in the past, Venezuela's Marxist government is now making do by stealing from Venezuela's battered private sector.

Which is what brought the bizarre spectacle of the Venezuelan military occupation of Daka — the country's five-store equivalent of Best Buy, loaded with the flat-screen TVs, computers and smartphones favored by looters everywhere.

As troops stood by, crowds looted one Daka store, stripping its shelves bare. Call it government by looting.

Or in reality, call it communism. Because such destruction of private property in the name of redistribution has been a feature of every communist takeover from Russia to China, to Vietnam, to Cuba.

One would note that Venezuela’s currency the bolivar's collapse on the black market has been accelerating…

And this has reflected on Venezuela's intensifying hyperinflation. (from Cato’s Troubled Currencies)

After hitting a high of 475% return year-to-date, the Venezuelan stock market, as seen via the Caracas Index, has tumbled. That’s partly due to the crackdown by the Maduro government on alleged "speculators" whom the government accuses of engaging in an “economic war” with Venezuelans. 

So the newly instituted “happiness ministry” of Venezuela extrapolates to the pursuit of happiness of those in power to remain in power by appeasing voters through policies that encourage plunder. 

As the great Austrian economist Ludwig von Mises warned:

those engaged in futile and hopeless attempts to fight the inevitable consequences of inflation — the rise in prices — are masquerading their endeavors as a fight against inflation. While fighting the symptoms, they pretend to fight the root causes of the evil. And because they do not comprehend the causal relation between the increase in money in circulation and credit expansion on the one hand and the rise in prices on the other, they practically make things worse.

The unfolding currency crisis of Venezuela will deteriorate further until either the Venezuelan government desists from more financial repression and inflationism or a complete societal breakdown. 

Venezuela is real time paradigm to what governments will do to remain in power.

Venezuelan Hyperinflation: Prostitutes as Currency Traders

Implied inflation rates in Venezuela has been about 153% as against official rates of 59.34% (as of March 2014). This is based on estimates by CATO’s troubled currency project. 

So how are Venezuelans coping with such scenario? Well, aside from the government, prostitutes have been the biggest beneficiary. How? Because they are being paid in foreign currency!

From Bloomberg: (bold mine)

The arrival of a Liberian-flagged freighter with Ukrainian, Arab and Filipino sailors spells one thing for Elena -- dollars. And greenbacks are king in Venezuela, the 32-year-old prostitute says.

Within hours of hearing of the ship’s imminent arrival, she has packed her bags and is heading to the crumbling city of Puerto Cabello. It is a 450-kilometer (280-mile) journey from her home in the Western state of Zulia that Elena finds herself doing more often now as Venezuela’s economy contracts, the bolivar slumps and prices soar. 

Prostitutes more than double their earnings by moonlighting as currency traders in Puerto Cabello. They are the foreign exchange counter for sailors in a country where buying and selling dollars in the streets is a crime -- and prostitution isn’t. Greenbacks in the black market are worth 11 times more than the official rate as dollars become more scarce in an economy that imports 70 percent of the goods it consumes…

More…

The bolivar has fallen to 71 to the dollar from 23 on the black market since President Nicolas Maduro succeeded his mentor Hugo Chavez in April 2013. The government tightened currency handouts to stem the outflow of foreign reserves, which are near a decade low. The official exchange rate, reserved for imports of food and medicine, is 6.3 bolivars per dollar.

The dollar shortage is turning Venezuela into a two-tier society similar to the Soviet Union and Cuba, said Steve Hanke, professor of applied economics at Johns Hopkins University in Baltimore. Those with access to dollars such as prostitutes, tour agents, airport taxi drivers and expatriates are able to shield themselves from inflation by trading their greenbacks at ever higher rates. Those who can’t are seeing their living standards decline.

As the government smothers financial and economic activities the natural result has been a boom on the prostitution industry:

Officials have tried jailing traders, shutting down brokerages and setting up four parallel exchange systems to stem the rise of the unofficial rate in the 11 years since Chavez began controlling the bolivar’s price.

Prostitution has become the only boom industry in Venezuela’s biggest port. The Blue House brothel is clean and well-kept, with a patio and kitchen where women get three meals a day. Outside, the squares and cobbled streets of the colonial center stand in ruins, with the smell of sewage pervading the piles of garbage.

See what a policy of inflation does? It does not only destroy the people’s standard of living, they degrade humanity’s moral fiber.

This is a real time example of chief inflation exponent John Maynard Keynes’ observation of how inflationism annihilates society:

Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security but [also] at confidence in the equity of the existing distribution of wealth.

But neighboring Columbia has also been benefiting from the senseless hyperinflation policies by the Venezuelan government. Many of the Venezuelan government’s subsidized goods has found their way across the borders.

From the Wall Street Journal (old mine)

Venezuelan President Nicolás Maduro's sliding popularity amid persistent street protests can be partly blamed on the humming smuggling market on this border, which shows how Colombia's unbridled free-market capitalism is eclipsing Venezuela's socialism and hurting ordinary Venezuelans.

When Norbis Berrocal, a homemaker on the Colombian side, buys baby formula in a bustling street market here in Cúcuta for a fraction of the usual retail price, Venezuela indirectly pays the rest.

"We're lucky to have Venezuela so close by," said Ms. Berrocal, as she bought a case of infant formula for shipment to relatives in Colombia's interior.

She is one of many Colombian consumers who benefit from a massive smuggling trade involving subsidized and price-controlled goods from oil-rich Venezuela—including near-free gasoline, car parts, corn flour and deodorant, all bought cheap in Venezuela and marked up before being sold here.

With its heavy intervention in the economy, Venezuela now imports three-quarters of what it consumes but loses a third of its goods to illegal cross-border trade, its government estimates. Some economists say Caracas exaggerates the smuggling problem to mask its own inability to keep supermarkets stocked.

The scarcity has eroded Mr. Maduro's popularity to a low of 37%, as recent polls show food shortages surpass rampant crime as citizens' top concern.

The informal economy pushes back against repressive regimes. This is real life economics in action.

Venezuela's Stagflation In Graphs

In yesterday's post Why The Current Market Volatility Does Not Imply A Repeat Of 2008, I made many references to Venezuela as example.

Here are some revealing charts...(except for the Bolivar money base all the rest are from tradingeconomics.com)

Venezuela's deep recession

The crashing bolivar!

surging inflation!

caused by massive money printing!

yet a soaring stock market!

While Venezuela is clearly in a stagflation phase there seems to be a big possibility that these would transmogrify into a hyperinflation, which I think could occur anytime within the next 3 years, given the current pace by which Mr. Chavez seems to be financing his conversion of Venezuela into a socialist nation.

Jonathan Finegold Catalan at mises.org dwells deeper into the Venezuelan disease.

Here is an excerpt,

``By printing money, Venezuela's central bank and government are not creating capital, they are only funding their ability to bid it away from the private sector and squander it on uneconomical public programs. Imagine the average Venezuelan who receives nothing but a currency that is consistently falling in value in exchange for his resources. Simultaneously, his savings are confiscated, because they are progressively worth less in the face of rising prices. How can anybody consider this a basis for a rise in wealth?

``In Venezuela, entrepreneurship is condoned when it doesn't interfere with the plans of Hugo Chavez. Unsurprisingly, entrepreneurs in the utility industries are not part of Chavez's plans, and as such the Venezuelan utility market has been almost completely nationalized. While prior to the recent global depression Chavez stuck to nationalizing certain sectors at a relatively slow (yet steady) pace, the onset of global crisis accelerated the socialization of Venezuela's economy. Indeed, few foreign-owned oil companies were left untouched after Chavez decided to solve his debt problem by simply taking over those businesses he owed money to.

``Other key industries nationalized include the telecommunication and electrical markets. Admittedly, Chavez's nationalizations did not consist solely of expropriating the property of others for the benefit of the "people of Venezuela." Like any good politician, Chavez pandered to big business, offering two Spanish electrical companies, Iberdrola and Elecnor, a total of nearly two billion dollars to build a 1000Mw electrical plant in the city of Cumaná, in eastern Venezuela. The average construction cost for the specific type of plant being built was $0.75 a watt. Chavez paid Iberdrola and Elecnor $2 a watt."

Read the rest here

Venezuela’s Socialist Disaster: Stock Market Crashes as Recession Deepens, Heightened Risk of War with Columbia

While updating on the end of week quotes of global stocks, I discovered that the once sizzling hot Venezuelan stock market has recently crashed.

The Caracas Stock Exchange Index cratered 8.61% this week. But the benchmark remains up for 214.13% for the year! From end 2012, the index has returned a fantastic 25.7 times!

Of course, the Venezuelan stock market episode isn’t what it seems.

Venezuela interests me, not only because of their gorgeous looking women, but because the nation have been a modern day or real-time epitome of the socialist disaster currently being manifested as hyperinflation. And the other symptoms of hyperinflation can be seen in the previous streak of record breaking stock market index and a crashing currency.

As previously discussed, unlike the popular establishment myth that sees rising stocks as equivalent only to G-R-O-W-T-H, since stocks are titles to capital goods, they also serve as safehaven to a system benighted by monetary abuse. And the Venezuela experience represents an extreme account of such dynamic.

So my guess was that the crash in Venezuelan stocks must have also reflected on the currency and CPI.

Well yes, the charts of implied inflation (top) and the bolivar (bottom) from Cato’s troubled currency project have coincided with the recent stock market crash.

This means the Maduro regime’s easy money has now transformed into tight money!

Perhaps Venezuela’s deepening economic downturn may be offsetting the hyperinflationary environment.

Bloomberg has an article on Barclay’s take on the Venezuelan economy:

Venezuela is suffering the deepest economic crisis in its history with output expected to contract 9.1 percent this year, Barclays Plc said Friday.

The economic contraction will likely reach 16.5 percent between 2014 and 2016, while inflation over that period will exceed 1,000 percent, Barclays wrote in a note to clients.

Moreover, the government may be relying more on asset sales than from more money pumping.

Instead of taking fiscal measures, the government is selling all its liquid assets to maintain an “extremely inefficient” exchange rate system and pay the external debt, Barclays said, adding that it would likely have enough money to pay its foreign debt at least through the first quarter of next year with a moderate increase in oil prices and further cut in imports.

If the above is true, then this could likely mean a hiatus in Venezuela’s hyperinflationary chapter.

Asset liquidations have limits. So unless the government overhauls its political system which has led to the deepening fiscal woes, those balance sheet problems will resurface again and spur more reliance by the government on the printing press or its digital equivalent.

But Venezuela’s socialist disaster doesn’t just stop with CPI, the bolivar, stocks and the economy. Since everything is interconnected, her economic woes has spread to escalate or drum up tensions with her neighbor Colombia, which has raised the risk of war. 

That’s partly because subsidized gasoline prices in Venezuela has found its way to be commercially sold in Colombia. And as previously pointed out, aside from gas, many of the other free or subsidized goodies that the Venezuelan government imported to give to her constituents has only flowed out into Colombia. Also, the deepening economic crisis may impel Venezuelans to emigrate to her neighbor.

So these has prompted the Venezuelan government mount a crackdown on smuggling, close its borders, tighten people (social mobility) movements and deport Colombians that has worsened diplomatic relations with the Colombian government.

So Venezuela’s socialist made economic crisis may even lead to war!

(updated to add: there has been ongoing peace talks between the two nations, which includes plans to reopen the border, as well as, to send their ambassadors  back into respective posts. The question is, given Venezuela's deteriorating economic conditions, will such peace agreement hold or last?)

In Socialist Venezuela, Even Money Printers Run Out of Money to Print

When governments spend more than the tax revenues and or resources it generates, they eventually first run out of money. And if they continue to do so, they then eventually lose access to credit or money.

And given the dearth of resources, desperate governments usually resort to internal financing or the monetization of political spending via the printing press or the modern day printers the digital press (inflationism).

These usually ends up with the destruction of the currency via inflationism—hyperinflation

All these goes to show that the more a society relies on government, the more funding pressures, the greater the risk of inflation or even hyperinflation.

Well, when it comes to impoverishing constituencies through inflationism, socialism provides many modern day examples.

And one of the shining template has been current developments at Venezuela

UK’s former Prime Minister Margaret Thatcher once said that “The problem with socialism is that eventually you run out of other people's money [to spend].”

In socialist Venezuela, Ms. Thatcher’s keen observations can be construed literally. To paraphrase: The problem with socialism is that eventually you run out of money to print.

From Bloomberg:

Venezuela’s epic shortages are nothing new at this point. No diapers or car parts or aspirin -- it’s all been well documented. But now the country is at risk of running out of money itself.

In a tale that highlights the chaos of unbridled inflation, Venezuela is scrambling to print new bills fast enough to keep up with the torrid pace of price increases. Most of the cash, like nearly everything else in the oil-exporting country, is imported. And with hard currency reserves sinking to critically low levels, the central bank is doling out payments so slowly to foreign providers that they are foregoing further business.

Venezuela, in other words, is now so broke that it may not have enough money to pay for its money.

This article is based on interviews with a dozen industry executives, diplomats and former officials as well as internal company and central bank documents. All of the companies declined official comment; the central bank did not respond to numerous requests for interviews and comment.

Here’s more

The story began last year when the government of President Nicolas Maduro tried to tamp down a growing currency shortfall. Multi-million-dollar orders were placed with a slew of currency makers ahead of December elections and holidays, when Venezuelans throng banks to cash their bonuses.

At one point, instead of a public bidding process, the central bank called an emergency meeting and asked companies to produce as many bills as possible. The companies complied, only to find payments not fully forthcoming.

Last month, De La Rue, the world’s largest currency maker, sent a letter to the central bank complaining that it was owed $71 million and would inform its shareholders if the money were not forthcoming. The letter was leaked to a Venezuelan news website and confirmed by Bloomberg News.

“It’s an unprecedented case in history that a country with such high inflation cannot get new bills,” said Jose Guerra, an opposition law maker and former director of economic research at the central bank. Late last year, the central bank ordered more than 10 billion bank notes, surpassing the 7.6 billion the U.S. Federal Reserve requested this year for an economy many times the size of Venezuela’s.

The above shows of the continuing to collapse by Venezuela’s currency the bolivar

The following accounts for Venezuela’s implied inflation rates (monthly and annually). (charts from Cato's Troubled Currencies web page)

Socialism has populist appeal, but they are uneconomical or unviable. 

At the end of the day, the socialism equates to social decay. Venezuela should serve as a paragon.

Venezuela’s Hugo Chavez Legacy: Hyperinflation

Venezuela’s controversial President Hugo Chavez passed away last March 5, 2013

I have frequently used Venezuela as an example of how inflationism influences stock prices

Let us see what the leader who promoted “Socialism in the 21st century” accomplished

From the Wall Street Journal, (bold mine)

The winner of the election will inherit an economy that has grown quickly over the past decade thanks largely to high oil prices and ramped up government spending, but which faces strains that could spell growing trouble in months and years to come.

A recent currency devaluation of the Strong Bolivar to 6.3 per dollar from 4.3 sent shock waves through the economy. The measure helped narrow a growing gap between what the government spends and takes in—mostly by making dollars earned via oil exports go further in local currency terms. But it also put renewed pressure on prices in a country where inflation is running at about 20%.

The devaluation also did little to stop growing shortages of basics like flour and meat, which are scarce due to a lack of dollars. Worse, the Strong Bolivar weakened after the devaluation on the black market, falling to about 25 per dollar from about 10 per dollar last October…

Venezuela's industrial base has largely been hollowed out by widespread nationalizations under Mr. Chávez, leaving the country increasingly dependent on imports. It also has a growing foreign debt load, at about $90 billion.

Even as Venezuela’s statistical inflation remains subdued (22%), it is important to realize that myriad price controls have been imposed to limit the statistical effects of Venezuela’s inflationism. 

When I wrote about the 32% official devaluation of Venezuela’s currency, the bolivar, a month ago, the black market rate was at 19.53. Currently the black market rate has been reported at 25, which implies that the bolivar devalued by 28% in a month! This also suggests that real inflation rate in Venezuela has now been over 50% which falls under the technical definition of hyperinflation.

Venezuela’s stock market continues to skyrocket where the major benchmark has been up 31% as of last Friday’s close (March 1) which adds to last year’s 302% gains in one year.

above charts from tradingeconomics.com

Soaring stock markets can represent symptoms of hyperinflation.

The other heritage of the Chavez regime has been corruption, criminality and poverty.

Writes Tad DeHaven at the Cato Blog, 

Chavez also centralized political power as he gained control of the main institutions of Venezuelan society—the military, the judiciary, the congress, the central bank, the electoral council, the most important broadcast media, etc.—and did so by trampling on due process and basic civil and political liberties.

The vast expansion of state power led to a neglect of traditional functions of government such security or keeping up infrastructure, and to an increase in corruption. Crime under Chavez skyrocketed. When he came to power in 1999, the country experienced less than 6,000 homicides per year; in 2012 that number reached about 21,700. By 2012, Venezuela’s ranking in Transparency International’s Corruption Perceptions Index fell to 165 out of 174 countries. The systematic corruption of the Chavez regime that Gustavo Coronel documented in a 2006 Cato study only got worse in subsequent years.

At the end of the day, Mr. Chavez will be remembered as typical dictators who run their economy aground.

As this article from Huffington Post blog observed,

Chavez will go the way of many highly theatrical dictators. Once upon a time there was a statue of Francisco Franco in almost every city and town in Spain, his profile appeared on Spanish coins, and he paraded himself from the King's Balcony at Madrid's Royal Palace, resplendent banners dating from the Spanish Empire draped in front of him.

Now? Franco is seen for what he truly was -- a dictator with a megalomaniacal self-regard and a willingness to commit violence in order to stay in power. Today, no more statues, no more coins, nada. That is the fate of Hugo Chavez's place in history as well.

Socialism of the 21st century will be remembered as a great hoax.

Venezuela's Path To Hyperinflation

My prime candidate for the next episode of hyperinflation (which I mentioned here) has long been Venezuela.

That's because accelerating socialism, espoused by the dictatorship regime translates to profligate spending which generates intractable financial claims and economic inefficiencies (which impedes the capacity to pay the incurred liabilities) that has resulted to ballooning deficits.

And this translates to massive printing of money in order to fill or cover such shortfalls for the preservation of power by the incumbent political leader. In short, using the printing press as political tool.

So while hyperinflation is technically about sustained excessive money printing, the underlying incentives that beckons it is political.

The end result: the demonetization of money.

According to Professor Ludwig von Mises from his Stabilization of the Monetary Unit? From the Viewpoint of Theory,

``If people are buying unnecessary commodities, or at least commodities not needed at the moment, because they do not want to hold on to their paper notes, then the process which forces the notes out of use as a generally acceptable medium of exchange has already begun. This is the beginning of the “demonetization” of the notes. The panicky quality inherent in the operation must speed up the process. It may be possible to calm the excited masses once, twice, perhaps even three or four times. However, matters must finally come to an end. Then there is no going back. Once the depreciation makes such rapid strides that sellers are fearful of suffering heavy losses, even if they buy again with the greatest possible speed, there is no longer any chance of rescuing the currency. In every country in which inflation has proceeded at a rapid pace, it has been discovered that the depreciation of the money has eventually proceeded faster than the increase in its quantity.” [all bold emphasis mine]

Seen in the context of Venezuela, which massively devalued its currency last week, this from Wall Street Journal account, (hat tip Douglas French and Mises Blog) [bold highlights mine]

``President Hugo Chávez's decision to devalue Venezuela's bolivar and impose a complicated new currency regime may paper over some growing cracks in the economy, but it is also setting the stage for bigger problems down the road for the country's oil-rich nation and its populist leader.

``Over the weekend, there were signs that Mr. Chávez's slashing of the "strong bolivar" currency could create as many problems as it solves in Venezuela's economy, provoking a wave of anxiety that sent Venezuelans scurrying to spend cash they feared could soon be worthless.

``At Caracas's middle-class Sambil shopping mall, lines at cashiers reached 50-deep. Carmen Blanco, a 28-year-old accountant, waited to buy a 42-inch flat-screen television she doesn't need because she already has one at home.

``"It doesn't make any sense to keep my savings," Ms. Blanco said Saturday. "I'd love to see how things work in a normal country."

``On Sunday, Mr. Chávez vowed to fight speculation and price increases that could result from the devaluation, which raises the price of imports.

``Harried by recession and sliding popularity, Mr. Chávez on Friday weakened the bolivar to 4.3 per dollar from 2.15 in a bid to shore up government finances, which have been hit by weaker oil prices, and to stimulate economic growth ahead of key elections."

And where does Mr. Chavez gets his ideas? Unfortunately from the stereotyped self-righteous protectionist mindset.

Again from the same WSJ article, (all bold highlights mine; comments added)

``In Mr. Chávez's favor, a weaker currency helps narrow a growing budget shortfall by instantly giving his oil-rich government more local currency to spend per barrel of oil exported by the state petroleum company, PDVSA. That is a key consideration with congressional elections looming in September.

[yes inflationism shifts spending power to the government and his allies at the cost of less spending power for the people-Benson]

``Mr. Chávez has watched his popularity slide amid corruption scandals, a shrinking economy, rising crime and shortages of food and electricity. Increased spending could boost Mr. Chávez's popularity.

[note: Venezuela is a major oil exporter-Benson]

``Mr. Chávez also predicted a weaker currency would breathe life into a domestic economy that depends on imports for everything from beef and milk to cars.

[this is an example of the currency magic wand mindset at work-Benson]

``The measure may buttress the banking system, which has been rocked by the closure of several institutions amid an embezzling scandal. Many Venezuelan banks head into the devaluation holding large stocks of dollars.

[governments almost always favors the banking system because it can help in the financing of its political goals-Benson]

``Holders of dollar-denominated bonds issued by Venezuela and PDVSA will be encouraged by the move. Devaluation narrows Venezuela's financing gap to around 3% of economic output from around 7%, said Boris Segura, a Royal Bank of Scotland economist."

``However, the devaluation does little to assuage the deeper problems plaguing the Venezuelan economy, economists say. Devaluation isn't enough to revive the domestic manufacturing base. Few investors are willing to brave Venezuela's maze of price caps, currency controls and the ever-present fear of nationalization."

[Here's the rub: the rubber finally meets the road, this is a vivid example where fallacious theories don't square with reality. The currency magic wand can't offset domestic policy distortions-Benson]

``Higher inflation from the move will also keep chipping away at the value of the bolivar, even at its new peg."

``What is more, by keeping a subsidized dollar rate for importing food, medicine and essential items, Mr. Chávez removes any incentive for Venezuelans to produce what they need most."

From Murray Rothbard in Mystery of Banking, ``But if government follows its own inherent inclination to counterfeit and appeases the clamor by printing more money so as to allow the public’s cash balances to “catch up” to prices, then the country is off to the races. Money and prices will follow each other upward in an ever-accelerating spiral, until finally prices “run away,” doing something like tripling every hour. Chaos ensues, for now the psychology of the public is not merely inflationary, but hyperinflationary, and Phase III’s runaway psychology is as follows: “The value of money is disappearing even as I sit here and contemplate it. I must get rid of money right away, and buy anything, it matters not what, so long as it isn’t money.”

We seem to be witnessing unfolding chaos from the demonetization process.

Another observation: It's been a common fallacious notion that stock markets respond negatively to intensified inflation.

In Venezuela, this hasn't been the case.

Perhaps this could be true depending on the degree of inflation.

But in cases where the state of money swiftly deteriorates, where its store of value comes into question or comes under severe strain, stock markets become haven from the demonetization process.

Why?

Again from Professor von Mises, ``If the future prospects for a money are considered poor, its value in speculations, which anticipate its future purchasing power, will be lower than the actual demand and supply situation at the moment would indicate. Prices will be asked and paid which more nearly correspond to anticipated future conditions than to the present demand for, and quantity of, money in circulation. The frenzied purchases of customers who push and shove in the shops to get something, anything, race on ahead of this development; and so does the course of the panic on the Bourse where stock prices, which do not represent claims in fixed sums of money, and foreign exchange quotations are forced fitfully upward."

And this has been the case of Weimar Germany and just recently Zimbabwe.

If present political trends won't reverse, then Venezuela would be another real time example of paper money based system that will evaporate soon.