Venezuelan Economic Crisis: An Outsider's Perspective

reverseacid (56)in #economics • 6 years ago

Everybody is looking for that one investment that will make their wealth explode. The latest such investment is in cryptocurrency. 2018 was an off year for global stocks. After seeing a huge boom, markets corrected about 20% but have gone up by 16% since then. While looking at stock market cycles in South America, I noticed something unbelievable. The IBVC index of the Caracas Stock Exchange (Venezuela) was up by 39,900%! What initially seemed like a data error spiraled into a deep study of the Venezuelan economy and what was happening.

Source: Reddit

Headlines show up in every major news outlet about the condition of Venezuela. A socialist regime is in charge of the country and the economy has been in free fall for quite some time now. Nicholas Maduro has evanesced for major countries. The US, Germany, France, and other powerful nations have recognized Juan Guaido as the real head of state. The stock market catastrophe that was a result of this turmoil is at the heart of the issue. Let’s take a look at this before digging into the economics.

IBVC Volatility – An Investors Worst Nightmare

On the 1st of January 2018, the IBVC index opened at 1263 points and closed at 3668 points. That’s 290% in a single day. On November 1, 2018, the index saw its high at whopping 504,835 points. At first look, this seems like heaven. But understanding the inflation of the money invested in that market will turn this around. As of 2nd November, inflation in Venezuela stood at 1,300,000%. Currency inflation beat the stock market by 1,260,000%. To add salt to the wound, on the 6th of November, the index dropped from the high of 504,835 points to a mere 486 points. This was a drop of 99.9904%.

At this point, the government mandated closing down of all trading institutions including the exchange itself. Nobody was allowed to log on to a trading terminal or place any transactions. This wasn’t a very shocking thing for Venezuelans as they have been witnessing a massive reduction in investment inflows and trading volume since the 1990’s. The volume of LocalBitcoins in Venezuela is 8 times that of the Caracas Stock Exchange. That one line speaks a mountain of detail on the condition of the country’s financial system.

Economic Woes – An Understatement?

There’s a lot more going on in the country so the average citizen is not too worried about what’s happening in the stock market. They are wondering how to feed their families. Food inflation in Venezuela was 315% over a 4 month period. 90% of Venezuelans live in poverty and 60% cannot afford to buy food. Inflation in the country is expected to hit 10 million % by the end of 2019. Yet, there are no visible steps being taken to remedy the situation. Rather, the current regime is resorting to pathetic psychological monetary policy (which we will touch upon in a while).

To provide some background, Venezuela is an oil dependent nation. Their economy is desperately dependent on oil. They have the largest reserves of oil in the world. In case you didn’t know, oil prices have been free falling since October 2018. This has only added to the woes of the country and its people. It has put the government in a tight spot they do not wish to acknowledge or fix. The 2014 flash crash in oil price was disastrous for a country over-reliant on its oil production. They were left with virtually no foreign currency reserves.

Do foreign currency reserves matter? To put it simply, it matters for Venezuela than it does for most other countries. They import 70% of their food out of which 33% is from the USA. The only positives here are political support from Turkey, Russia, and China. This is hardly surprising as they are the 3 countries continuously opposing any Western decisions and attempting to derail American hegemony. China especially sunk billions into Venezuela in the form of exports. Since Venezuela doesn’t have any Yuan or Dollar reserves and China refuses to accept any Bolivar, Venezuela has a huge debt to China which they repay the only way they can; with oil.

Other than pure monetary and fiscal issues, Maduro has resorted to mindless tactics to gain public support. He has aggressively raised the minimum wage in the country to appease the masses. ‘Aggressive’ is not from $10 an hour to $15 an hour. Try 34x in one calendar year. A person who made $1 an hour on Jan 1 2018 now makes $34 an hour. Does that seem like sustainable government policy to you?

Psychological Monetary Policy

In the words of economist Steve Hanke, Maduro has given the Bolivar a ‘face lift’. The government decided to issue a ‘new’ currency called the ‘Bolivar Soberano’ which translates to ‘sovereign Bolivar’.
1 Bolivar Soberano = 100,000 Bolivar. Now, if the logic behind this was just to reduce the amount of notes in the economy, it is still flawed. This is because at 1.3 million % inflation rate, it’s only a matter of time before another ‘face lift’ is needed. How many face lifts will Venezuelan currency receive before the government realizes the distress is from root level economic and policy issues?
Despite this, Maduro did not do this for ease of transactions. He called it a move to kill dollarization in Venezuela and remove the political overlord that doomed their economy. So, instead of using the Bolivar which is tied to the dollar, they are now using the Bolivar Soberano which is tied to the Bolivar which is tied to the dollar. The illusions of reducing 0’s doesn’t change facts.

Source: Reuters

What Has Helped Them So Far?

The answer is exactly what you would expect from a long-time blockchain evangelist; Bitcoin. It isn’t anything that is limited to Bitcoin alone, but the concept of a decentralized currency where power doesn’t lie with an inefficient government. Other payment protocols would serve a purpose too, but Bitcoin is secure, trustable, and has much more adoption than any other decentralized payment protocol. Ground level reports from Venezuela show just how much it is helping families afford basic necessities like food and water. Moreover, it helps people secure their money while leaving the country. Venezuelan border forces are notorious for seizing money from people leaving the country. With Bitcoin, it isn’t possible for them to do so unless they find a hardware or paper wallet while checking the person.
Transactions above $50 render your account frozen until you can explain where the funds came from. Many Venezuelans are resorting to freelancing to access foreign job markets. Freelancers in North America are often paid through PayPal, but this isn’t feasible for Venezuelans as the country allows banks to only in a deal in Bolivars. Cryptocurrency in general is turning the tide of people’s fortune by allowing them to secure the value of what they earn instead of allowing a daily inflation rate of 3.9%.
I’ve read the story of a Venezuelan who found freelance work abroad but was unable to receive payment in a stable currency due to stringent banking regulation. He asked the clients to send it to him via Bitcoin and has been able to feed himself and several hungry people simply because Bitcoin’s volatility is nothing compared to Venezuela’s inflation. Moreover, no government or entity can stop you from using Bitcoin unless they physically restrain you.

The Endgame

From a third party perspective, the situation is grim and I genuinely feel for the people of Venezuela who have been forced into such an unfortunate situation due to poor political choices and overreliance on a single commodity for national cash flow. Hopefully, the situation gets resolved, but one thing is for sure – non-government, censorship resistant cryptocurrency can help ease the pain of the citizens of the country. The adoption of cryptocurrency isn’t a choice at this point, it is the only option in order to secure their survival. The problem arises for people who find work within the country; there are several regulations barring them from converting too much Bitcoin ($50 worth of bank transfers is the maximum before the government freezes your account).

Censorship resistant cryptocurrency adoption relies on a multitude of factors. Ultimately, it is up to the people to stand up for themselves and for what they believe is right. As someone who isn’t on the ground level, it is difficult to draw a conclusion as to what the best solution would be. But as someone who is witnessing and assessing the situation from afar, the best option lies in code-backed currency protocol.

Source:

https://doosar.com/venezuela/the-volume-of-localbitcoin-in-venezuela-exceeds-8-times-that-of-the-caracas-stock-exchange-cryptonews/

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6 years ago in #economics by reverseacid (56)

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