Venezuela Devalues Currency by a Third; Symptoms of Hyperinflation

Venezuela’s stock market has been a favorite example of mine in projecting two things:

First, stock markets hardly represents what public sees as economic “growth” conditions but about the state of monetary disorder. This has been especially pronounced today as political interventions has been intensifying across the globe.

Two, how statistics have been patently incompatible with the real state of economic affairs.

From Bloomberg, (bold mine)

Venezuela devalued its currency for the fifth time in nine years, a move that may undermine support for ailing President Hugo Chavez and his allies ahead of possible elections later this year.

South America’s biggest oil producer may have to call elections if Chavez, who hasn’t been seen for two months after undergoing cancer surgery in Cuba, dies or steps down. He ordered his government to weaken the exchange rate by 32 percent to 6.3 bolivars per dollar starting Feb. 13, Finance Minister Jorge Giordani told reporters yesterday in Caracas.

A spending spree that almost tripled the fiscal deficit last year helped Chavez, 58, win a third six-year term. The devaluation can help narrow the budget deficit by increasing the amount of bolivars the government receives from oil exports. Yet the move also threatens to accelerate annual inflation that reached 22 percent in January.

So the Chavez led Venezuela’s government finally admits to what black markets have been exposing all along: The imminence of shortages of foreign currency (US dollar) and an insatiable and profligate government financed by money printing engineered to buy votes.

Importantly, the above dynamics has been leading to real and not statistical inflation.

Proof? More from the same article: (bold mine)

Annual inflation accelerated to 22.2 percent in January, the fastest pace in eight months, led by a jump in food prices. Prices climbed 3.3 percent in January after rising 3.5 percent in December.

In the unregulated market, the bolivar weakened 6 percent yesterday to 19.53 bolivars per dollar, according to Lechuga Verde, a website that tracks the rate. Venezuelans use the unregulated credit market because the central bank doesn’t supply enough dollars at the official rates to meet demand.

Notice that the estimated price inflation figures has been only 22% (mostly skewed because of price controls and possible manipulations) whereas even considering the recent 32% devaluation, black market rates are way way way distant from the official rates: 19.53 black market versus 6.3 official. Black market rates signify more than twice the official rates.

So black markets are simply saying that real inflation are substantially more than media and official pronouncements. Signs of which are likewise being manifested on the stock market.

Venezuela’s IBVC returned 300% in 2012 in nominal domestic currency terms. As of Friday’s close the index has been up 20% year to date (chart from tradingeconomics.com)

Venezuela’s IBVC’s parabolic moves reverberates with the Zimbabwe’s Industrial Index in 2007, which I earlier posted here. The Zimbabwe bellwether skyrocketed until the climax of her hyperinflation episode in 2008, where consumer prices doubled everyday!!!.

Despite the hallelujahs from the recent devaluation by mainstream experts, Venezuela seems as exhibiting symptoms of the transition towards hyperinflation.