Venezuela's
Hyperinflation Crack-Up Boom On Its Way To Outer Space Submitted by Tyler Durden on 7/25/15, Submitted by Pater Tenebrarum via
Acting-Man.com,
Why Stock Markets Are Not an Indicator of the Economy
In a free unhampered market economy based on a sound
monetary system – this is to say a market-chosen monetary system with a free
banking industry and no central planning institution that is manipulating
interest rates and determining the size of the money supply – the gains and
losses of shares prices in the stock market will simply be a reflection of
entrepreneurial profits achieved in the past, plus embedded expectations of
profits likely to be achieved in the future.
Under
the assumption that such a free market money system would be largely
non-inflationary, this mixture of “historical record” and expectations would
primarily be expressed by the relative prices of shares. The bulk of the
returns achieved by investors would come from dividend payments, as a general
inflation of “the market” would be nigh impossible.
And yet, although the stock
market as a whole would barely appreciate in price in nominal terms, the
gains achieved in real terms as well as real economic growth, would be far
stronger than they are under our current, centrally planned system of constant
inflation. Moreover, economic progress would be far more equitable as well, as
the reverse redistribution of wealth caused by inflationary policy wouldn’t
exist.
This
is why a rising stock market tells us absolutely nothing about the state of the underlying economy in the present
inflationary system. In fact, we once again have a real life example providing
ample empirical confirmation of this assertion. Venezuela’s economy is in
free-fall. Its desperate socialist government, in an attempt to satisfy the
masses of voters who have voted for it in order to receive handouts, is
resorting to ever more repressive economic policy and money printing on a truly
gargantuan scale to at least keep up the appearance that bread and
circuses will continue. It has long lost the last shred of credibility, as
shortages of basic goods have become the major hallmark of the country’s
economy.
However, amid capital controls and a collapse of
Venezuela’s currency on the “black” market, the country’s stock market is
soaring:
Since the beginning of 2015, the Caracas stock
market is up by more than 300% – note that this index was trading at a mere
6 points in 2002 and currently stands at nearly 15,000 points. This is what is indicative
of a crack-up boom – as the currency system implodes, a flight into real assets
is underway and titles to capital are soaring in value when measured in terms
of the currency that is about to cease functioning as a medium of exchange.
This is happening in spite of the fact that most of the businesses behind the
stocks listed on the exchange are in fact consuming their capital and are no
longer making any real profits.
Currency Collapse
With oil prices under great pressure, the government of
Venezuela can no longer finance its socialist program. Having nationalized countless companies and replaced
their managers with cronies of the ruling party, while restricting the
remaining private sector in every imaginable way – de facto creating a full command economy that is a
mixture of the Marxist and fascist economic models, i.e. a mixture of Marxist
state-ownership of the means of production with a fascist Zwangswirtschaft (literally:
“coerced economy”) for what remains of the market economy – there is no way for
the government to obtain the revenue it needs to keep its socialist system
funded.
Consequently, the only source of revenue for the
government is the printing press of its central bank, which it is abusing quite
liberally. There are several fixed
exchange rates for the Venezuelan bolivar, which have long ceased to make even
the faintest shred of sense. The reality is better reflected by black market
exchange rates. Dolartoday.com keeps data on the black market in US dollars in
the border town of Cucuta, which we are charting further below. In recent
months, the bolivar has been in free-fall.
The plunge in the currency’s external value has become
relentless:
Venezuela’s
official inflation data lack credibility, but even so they are giving an idea
of how quickly the currency is depreciating internally as well. Below we show a
chart of the official consumer price index from late 2007 to the end of 2014,
based to 100 in December of 2007:
Venezuela’s official consumer price index between
December 2007 (=100) to December 2014. More recent data are not available yet
(it is probably no surprise that there is some foot-dragging with respect to
these data releases). In December 2014, the official annualized inflation rate
had accelerated to a new high of 68.5%. We imagine that even the official rate
of change of CPI must by now be well over 100% – click to enlarge.
We don’t know what the actual rate of price inflation is at this time, but it seems
likely that is is a multiple of the official rate. The recent increase in stock
prices is in fact providing us with a good hint.
Conclusion
Venezuela’s hyperinflation is reaching its final stages. It is probably already far too late for the government
to stop the complete collapse of its currency. The bolivar is in the process of
transforming from a medium of exchange to tinder for wood-stoves. Venezuelans who had the presence of
mind to convert their savings into gold or foreign currency in good time are
likely to survive the conflagration intact.
Those who bought stocks on the Caracas stock exchange
seem to have successfully side-stepped the effects of the devaluation as well,
but they need a plan for the post-inflation adjustment crisis, which will
bankrupt a great many companies very quickly. Also, the government can simply close the
market down at any time if it doesn’t like what is happening there, so there is
the ever-present danger of even more government interference as well.
It is quite fascinating to see that in spite of numerous
examples throughout history, governments never seem to learn. They all believe
they can somehow overrule economic laws by diktat. This is not only true of Venezuela’s
government, but of practically every government in today’s world. Central
planning of money has been adopted everywhere. Venezuela merely shows us what
the end game for every fiat money system looks like.
At some point the State is overwhelmed by the promises it
has made to its citizens. When it can no longer pay by means of confiscating
private wealth, the printing press is always the last resort. Recently one actually gets
the impression that it is often the first, rather than the last resort.
In developed countries, people believe that the planners
have everything in hand, and that their “price stabilization” rules will
protect them from such outcomes.
However, it should be clear that these rules will simply be abandoned in extremis. The independence of
central banks exists only on paper – it will mean nothing in a perceived
“emergency”. It is almost comical in this context that gold is being sold while
most of the world’s major central banks are seemingly hell-bent on aping John
Law’s Banque Générale Privée.
http://www.zerohedge.com/news/2015-07-25/venezuelas-hyperinflation-crack-boom-its-way-outer-space
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