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.