This Is the End: Venezuela Runs Out Of Money To Print New Money, Submitted by Tyler Durden, 04/27/16
Back in February, when
we commented on the unprecedented hyperinflation
about the be unleashed in the Latin American country whose president just
announced that he would expand the "weekend" for public
workers to 5 days...... we joked that it is unclear just where the country will find all the
paper banknotes it needs for all its new physical currency. After all,
central-bank data shows Venezuela more than doubled the supply of 100-, 50- and
2-bolivar notes in 2015 as it doubled monetary liquidity including bank
deposits. Supply has grown even as Venezuela has fewer U.S. dollars to support
new bolivars, a result of falling oil prices.
This question, as morbidly amusing
as it may have been to us if not the local population, became particularly
poignant recently when for the first time, one US Dollar could purchase more
than 1000 Venezuela Bolivars on the black market (to be exact, it buys 1,127 as of today).
And then, as if on cue the WSJ
responded: "millions of pounds of
provisions, stuffed into three-dozen 747 cargo planes, arrived here from
countries around the world in recent months to service Venezuela’s crippled
economy. But instead of food and
medicine, the planes carried another resource that often runs scarce here:
bills of Venezuela’s currency, the bolivar.
The
shipments were part of the import of at least five billion bank notes that
President Nicolás Maduro’s administration authorized over the latter half of
2015 as the government boosts the supply of the country’s increasingly
worthless currency, according to seven people familiar with the deals.
More planes were coming: in
December, the central bank began secret negotiations to order 10 billion more
bills which would effectively double the amount of cash in circulation. That
order alone is well above the eight billion notes the U.S. Federal Reserve and
the European Central Bank each print annually—dollars and euros that unlike
bolivars are used world-wide.
Where things got even more
ridiculous for the government where the largest bill in denomination is 100
Bolivars, is how much physical currency it needed, and the cost to print it:
The high
cost of the printing binge is an especially heavy burden as Venezuela reels
from the oil-price collapse and 17 years of free-spending socialist rule that
have left state finances in shambles.
Most
countries around the world have outsourced bank-note printing to private
companies that can provide sophisticated anti-counterfeiting technologies like
watermarks and security strips. What drives Venezuela’s orders is the sheer
volume and urgency of its currency needs.
The
central bank’s own printing presses in the industrial city of Maracay don’t
have enough security paper and metal to print more than a small portion of the
country’s bills, the people familiar with the matter said. Their difficulties
stem from the same dollar shortages that have plagued Venezuela’s centralized
economy, as the Maduro administration struggles to pay for imports of
everything, including cancer medication, toilet paper and insect repellent to
battle the mosquito-borne Zika virus.
Wait a minute, why not just print a
single 100,000,000 Bolivar note instead of one million 100 bolivar bills? After
all the savings on the printing, let along the air freight, to the already
insolvent country will be tremendous and allow it to pretend it is not a failed
nation for at least a few more days? It is here that the sheer brilliance of
the rulers of this socialist paradise shines through:
Currency
experts say the logistical challenges of importing and storing massive
quantities of bank notes underscore an undeniable truth: Venezuela is spending a lot more than it
needs because the government hasn’t printed a higher-denomination bank
note—revealing a misplaced fear, analysts say, that doing so would implicitly
acknowledge high inflation the government publicly denies.
“Big
bills do not cause inflation. Big bills are the result of inflation,” said Owen
W. Linzmayer, a San Francisco-based bank-note expert and author who catalogs
world currencies. “Larger bills can actually save money for the central bank
because instead of having to replace 10 deteriorated notes, you only need five
or one,” he said.
The
Venezuelan central bank’s latest orders have been exclusively only for 100- and
50-bolivar notes, according to the seven people familiar with the deals,
because 20s, 10s, 5s and 2s are worth less than the production cost.
Mr.
Maduro and his allies say galloping consumer prices reflect a capitalist
conspiracy to destabilize the government.
Well, no, but at this point one may
as well sit back and laugh at the idiocy of it all. But at least we will
give Maduro one thing: he has done away with the pretense that when push comes
to shove, the state and the central bank (and thus commercial banks) are two
different things: "the president
in late December changed a law to give himself full control over the central
bank, stripping congressional oversight just as his political opponents took
control of the National Assembly for the first time in 17 years."
Sadly, that did nothing for the
imploding economy and country, whose morgues
are now overflowing due to rampant
social violence.
Of course, the punchline of all the
above means that Venezuela has to
buy bolivars from abroad at any cost. "It’s easy money for a lot of
these companies," one of the people with details on the negotiations
said.
The problem is that it is "very difficult money" for
Venezuela which needs to pay in hard dollars to print its rapidly devaluing
domestic currency. In fact, among the sources of funds to purchase its own
money was the liquidation of its gold reserves, which as we reported
recently, Venezuela
has been quietly selling to
willing offshore buyers.
All of this brings us to today's
latest update in the sad story of Venezuela's terminal collapse: today Bloomberg
wrote a story that basically covers
everything said above, noting that "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."
Indeed, as we hinted three months
ago, "Venezuela, in other words,
is now so broke that it may not have enough money to pay for its money."
Among the new information revealed
by Bloomberg is that 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.
Venezuela had prudently diversified
its money printing relationships, and ahead of the 2015 congressional
elections, the central bank tapped the U.K.’s De La Rue, France’s Oberthur
Fiduciaire and Germany’s Giesecke & Devrient to bring in some 2.6 billion
notes, Bloomberg adds. Before the delivery was completed, the bank approached
the companies directly for more. De La Rue took the lion’s share of the
3-billion-note order and enlisted the Ottawa-based Canadian Bank Note Company
to ensure it could meet a tight end-of-year deadline.
As we reported four months ago, the
cash arrived in dozens of 747 jets and chartered planes. Under cover of
security forces and snipers, it was transferred to armored caravans where it
was spirited to the central bank in dead of night. But while Venezuela was already
planning its future cash orders, the cash vendors were starting to get worried.
According to company documents, De
La Rue began
experiencing delays in payment as
early as June. Similarly, the bank was slow to pay Giesecke & Devrient and
Oberthur Fiduciaire. So when the tender was offered, the government only
received about 3.3 billion in bids, bank documents show.
Which led to an interesting
phenomenon: when it comes to counterparty risk, one usually has in mind digital
funds or electronic securities. In this case, however, the counterparty risk
involved cold, hard cash: "Initially, your eyes grow as big as dish
plates," said one person familiar with matter. “An order big enough to
fill your factory for a year, but
do you want to completely expose yourself to a country as risky as Venezuela?"
As Venezuela's full implosion
emerges, the answer has now become obvious, and companies are backing away.
With its traditional partners now unenthusiastic about taking on new business,
the central bank is in negotiations with others, including Russia’s Goznack,
and has a contract with Boston-based Crane Currency, according to documents and
industry sources.
We expect these last ditch efforts
to obtain much needed paper currency for the hyper-inflating nation will break
down shortly, forcing Venezuela into one of two choices: do away with cash
entirely and resort to barter, or begin printing high-denomination bills which
in turn will only facilitate even faster hyperinflation as there will be no
actual physical limit on how much something can cost; as of right now the very
physical limit is how many 100 bolivar bills one can put on a wheelbarrow.
Steve Hanke, a professor of applied
economics at Johns Hopkins University, who has studied hyperinflation for
decades, says that to maintain faith in the currency when prices spiral,
governments often add zeros to bank notes rather than flood the market.
“It’s a very bad sign to see people
running around with wheelbarrows full of money to buy a hot dog,” he said.
“Even the cash economy starts breaking down." In Venezuela's case it is
sadly too late.
Comments
When a
Communist government runs out of revenue, it needs to collapse. Venezuela
needed to reduce government expenses to match revenue when oil prices began to
drop from $100/bbl. They didn’t do that. They are incompetent. If they had done
that, they wouldn’t be in this death spiral. There is a temptation to live on
credit, but it’s never a good idea. If
you lose your job, you move back home with your parents or other
relatives.
The
inflation is caused by the government printing money to continue operating.
Their continued operation is making things worse for its citizens and they need
to lay off all government employees and let their citizens fend for
themselves. If they had cut their costs
earlier, they could have cut enough to at least be able to operate water, sewer
and electric plants and avoid money printing completely.
Norb
Leahy, Dunwoody GA Tea Party Leader
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