9 ms·

You seem knowledgeable. Why can external currency changes (USD to bolivar) cause such strong inflation internally? I would think that at some point no one in th

by imh 10y ago

You seem knowledgeable. Why can external currency changes (USD to bolivar) cause such strong inflation internally? I would think that at some point no one in the country can buy an iPhone, but how does that turn into no one being able to buy milk (or other essentials)? Do countries really rely so strongly on the international market for essentials? edit: I could see a terrible scenario playing out where domestic goods are now so damned cheap for anyone not in the country that the producers are incentivised to ship their stuff overseas to rich foreigners. It could be the domenstic buyers that are the only people who get screwed. This is all terribly complicated.

Spooky23 10y ago
It doesn't cause it, it is an artifact of the imploding value of the currency and future outloook. If I'm a guy with a cow and a gallon of milk is worth 1 boliviar today, but $0.80 tomorrow, I don't want your boliviar. I want a dollar, silver, 10 boliviars, or some bacon.
stevoski 10y ago
It's not just iPhones that get imported. Raw materials for plenty of goods need to be imported in modern economies. In Venezuela's case, an example might be cotton for making clothing. Or rubber for maintaining cars and other vehicles, (think brakes and tires). There are thousands of such examples.
- dwightgunning 10y ago
  I recently read a HN comment that used their once booming oil industry to illustrate this fact. They have vast amounts of accessible light crude oil but due to their currency they're struggling to purchase/maintain the machinery in order to efficiently extract/refine and monetise it. Talk about a vicious cycle.
  - Symbiote 10y ago
    The less reliable your country, the less likely foreign businesses are to extend credit. If European and American companies, who probably manufacture the machinery, see the risk is too high, they will demand full payment upfront. Venezuela can't pay for its banknotes: http://www.bloomberg.com/news/articles/2016-04-27/venezuela-faces-its-strangest-shortage-yet-as-inflation-explodes http://www.bloomberg.com/news/articles/2016-04-27/venezuela-...
    - zeroer 10y ago
      Printing Bolivars isn't profitable enough ...
edblarney 10y ago
"Why can external currency changes (USD to bolivar) cause such strong inflation internally?" Simply because 'most things' that are sold in Venezuela are either imported - or depend on imports. The Bolivar is crashing against all currencies, not just the USD - so anything: parts, fuel, TV's, entertainment - it all has to be imported, and it all got expensive. 'Internal inflation' can happen when there are more Bolivars floating around than before - even without outside currency markets to validate the price. Ex: if there are 1 Trillion Bolivars in existence, and the government simply prints '1 Trillion' more and dumps them on the market. Guess what happens to prices? They will basically double every where. So your shoes that cost 100 Bolivars, now cost 200.
- Spooky23 10y ago
  It's worse than that. Money is a store of value as well, a people will build in a price premium because the 200 bolivars will take another haircut.
- imh 10y ago
  I think the part I missed was why the solution to a crashing currency is to print more money. Let's say Venezuela cannot produce widgets, but they are necessary to modern living. Venezuela's currency drops in half, so now widgets are twice as expensive to a Venezuelan. Given a fixed exchange rate, as the government of Venezuela I could just double the amount of money all my people/companies have and everything would be fixed, but wouldn't that just lower the exchange rate again? Is there some lag in the market during which they can spend the new money at the old rate? At any rate, it's the Venezuelans and their corporations who need money. How does printing more money fix the issue of that poor citizen/company who is reliant on widgets? It's becoming clearer, but I'm still confused.
  - guard-of-terra 10y ago
    It will allow country to pay its bills (i.e. wages). Never mind that by paying their bills with freshly printed money they make all existing money cheaper. Average Venezuelan can now buy less for their wage, but at least they've got some wage and it is stable or even grows number-wise. That's what makes this trap so dangerous.
neffy 10y ago
It doesn't - the currency markets are just adjusting the relative price for supply and demand. The inflation itself is being caused by money printing. Their Government prints cash, M0 (expand out to Max to see it): http://www.tradingeconomics.com/venezuela/money-supply-m0 http://www.tradingeconomics.com/venezuela/money-supply-m0 And then the banking system multiplies it by f(reserve requirement) modulo any capital requirements: http://www.tradingeconomics.com/venezuela/money-supply-m3 http://www.tradingeconomics.com/venezuela/money-supply-m3 From the ratio of M0 to M3, most of the expansion is from M0, so the Basel capital controls are actually slowing down a runway hyperinflation - to some extent at least. Seems to start in 2012, so I would guess that they started money printing to cover civil service salaries when the oil price dropped, and haven't looked back.
spikels 10y ago
In this case the devaluation is almost entirely driven by Venezuela specific issues. This can be clearly seen by the fact that the US dollar exchange rate is relatively stable versus almost every other currency while the Venezuelan currency is rapidly depreciating versus every other currency. So you have it backwards. This almost entirely due to poor economic policies by the Venezuela, not something "external". While the fall in oil prices has exacerbated the problem the core issue is the policy of plugging a huge budget deficit by printing Bolivars. This almost directly causes the huge local inflation and rapidly falling exchange rate as measured in the black market (i.e. the "true exchange rate). Combine this with strict currency controls (i.e. "fake" government set exchange rates that are not available to most people) you get shortages since Venezuela must import many essentials. [EDIT: And, as pointed out below, price controls are a key cause of the shortages.) This situation while somewhat complex is a textbook example of these issues.
- ptaipale 10y ago
  And in addition to deficit and currency controls, also price controls which have destroyed markets. Then you have a political police enforcing silly laws about companies will have to continue to produce something even when it is economically unfeasible. In the short term you get some physical deliverables like bread next week; in the long term you get a dysfunctional economy.
- foobarian 10y ago
  This whole mess is causing us headaches at work, because some LatAm sales people requested a second exchange rate for Venezuela since the real one is so broken. But a lot of the code assumes a 1-1 country-currency mapping, so if we give in we'll end up with special cases for Venezuela everywhere... sigh.
  - lokedhs 10y ago
    Don't you have support for other types of non-national currencies like XAU (gold) and SDR (IMF special drawing right). There are also other countries with multiple currencies. Like Zimbabwe that uses the USD and SAR as well as some others.
tasuki 10y ago
Wrt your edit, that's what happened during the Irish famine in the middle of the 19th century.
tremols 10y ago
The problem is that Venezuela imports everything, the policies are very hostile to national production and there is a mafia with access to government sponsored dollars that profits from the whole situation without moving a finger, in other words, corruption that actually pyramids to all society: people enters the game by reselling scarce goods and believing in a cardboard opposition - that never delivers any concrete result - obviously linked to the government and its corruption mafia.
raattgift 10y ago
Your edit is very close. "Imported inflation" listed as "2." under "Causes of Cost Push Inflation". http://www.economicshelp.org/blog/2006/economics/cost-push-inflation-2/ http://www.economicshelp.org/blog/2006/economics/cost-push-i... However, it misses the other side-effect of imported inflation, namely the effect of substitution. If good or service A is imported but priced in a relatively appreciating currency, and service B is non-imported and priced in the local currency, the price of B drops, driving demand upwards. If B is also exported, the export markets seeing a relative drop in the value of the currency B is priced in will also buy more of B, further driving demand upwards. Consequently, imports become more expensive even without a drop in demand. Exportable items (or even just substitutes for imports) become more expensive in response to increased demand. A bit more here: http://www.economicshelp.org/blog/1491/economics/imports-and-inflation/ http://www.economicshelp.org/blog/1491/economics/imports-and...
csomar 10y ago
Lived in a country with a similar effect albeit very very much lighter. > but how does that turn into no one being able to buy milk (or other essentials)? The problem is that these countries come with price controls for basic food. The food can be available on black market. The problem, it's much more expensive to produce than the current price tag on the controlled government market. So there are two possibilities: 1. The industry goes bankrupt because of the laws. And I witnessed this first hand. I saw people and farmer throw away milk on the street. It makes no economical sense to produce at all. 2. Sell it on the Black market, or smuggle it outside of the country. This will depend on how strong is the local government on controlling borders and commerce.
stale2002 10y ago
The reason is because, frankly, Venezuela doesn't have enough locally produced goods. The currency stuff is just a symptom of genuine lack of supply of goods/wealth.
qwrusz 10y ago
I see a lot of answers on here that are misleading or confusing. One problem with economics is it's really a bunch of made-up mind games related to social sciences, which in turn has led to all kinds of conspiracy theorists and cults even within more mainstream economics and some really crazy stuff at the fringes. The topic of inflation seems to be particularly of interest to conspiracy theorists who all claim to know exactly why it happens, who is to blame and how to fix it (it often sounds like "Government blah blah blah gold standard"...). The truth is there are some strong, well-researched but ultimately incomplete explanations regarding inflation, but really nobody knows. So here is my understanding of the best current guesses about the topic: Ignoring the specific example of Venezuela for a second. At a basic theory level: Inflation in country A does not depend on external currencies nor does it matter how much country A imports or exports or if they trade at all. Imagine a closed off country with no international currency exchange and no external trade. For some reason, it doesn't matter why really, citizens there expect prices for things to go up (maybe it's an island running out of space so landlords raise rents or maybe the government is increasing taxes or maybe everyone on the island is just really lazy wanting to sit on the island's beaches all day thus it is taking increasingly more $ to get anyone to get up and do anything one might need help with)... The citizens expectation of future higher prices leads those in the economy who sell a product or service and who can charge more for it to do so immediately (as they prepare for future higher expenses they will soon face). Specifically, the producers of inelastic goods like farmers who grow food or oil companies will do better in this scenario than regular employees who suffer more as they can't get an increase in salary so easily. But really everyone starts to struggle. Depending on how high prices are increasing, citizens may start soon switching to bartering and looking to store value in other ways other than their currency (like gold coins or magic the gathering card collecting, etc). Barter is not always possible and most landlords won't accept rent payment in the form of your magic card collection, not directly anyway. Where money is still used and accepted, people will try to get rid of any money they receive as soon as possible (as it's increasingly less valuable putting it in a savings account is bad). So people try to get their money into anything but a savings account and buy as quickly as possible something they need immediately or something that is a store of value. This is inflation and potentially hyperinflation without any international currency exchange or trade. Now, where a country is able to engage in trade with other countries (for good and services or sell each other debt), this will influence the economy and inflation there. And depending too much on imports one can't be sure they can afford is very bad. But external currencies doesn't cause inflation, rather currency exchanges become a mirror to reflect a country's relative credit-worthiness and growth prospects, as well as any inconveniences connected to the fact people don't want or need another country's currency so where someone does accept foreign currency they must be compensated for the process, time and risk of getting payment in a form they do want. The closed off simple economy thought experiment is quite useful and established, here is wiki link to the most basic version, one dude on island aka the Robinson Crusoe economy https://en.wikipedia.org/wiki/Robinson_Crusoe_economy https://en.wikipedia.org/wiki/Robinson_Crusoe_economy
huherto 10y ago
It is driven by fear. If you have bolivars and you know it they will be worth half in a month what do you do ? You buy USDs, and you will pay any price for them. So people are desperate just trying to save their savings. Sure. There are many fundamental economic problems. But it is fear that drives hyperinflation. And this is why it is hard to fix. Because even if you fix the fundamentals the fear will still create hyper-inflation.

by imh 10y ago

Spooky23 10y ago

It doesn't cause it, it is an artifact of the imploding value of the currency and future outloook. If I'm a guy with a cow and a gallon of milk is worth 1 boliviar today, but $0.80 tomorrow, I don't want your boliviar. I want a dollar, silver, 10 boliviars, or some bacon.

stevoski 10y ago

It's not just iPhones that get imported. Raw materials for plenty of goods need to be imported in modern economies. In Venezuela's case, an example might be cotton for making clothing. Or rubber for maintaining cars and other vehicles, (think brakes and tires). There are thousands of such examples.

dwightgunning 10y ago
I recently read a HN comment that used their once booming oil industry to illustrate this fact. They have vast amounts of accessible light crude oil but due to their currency they're struggling to purchase/maintain the machinery in order to efficiently extract/refine and monetise it. Talk about a vicious cycle.
- Symbiote 10y ago
  The less reliable your country, the less likely foreign businesses are to extend credit. If European and American companies, who probably manufacture the machinery, see the risk is too high, they will demand full payment upfront. Venezuela can't pay for its banknotes: http://www.bloomberg.com/news/articles/2016-04-27/venezuela-faces-its-strangest-shortage-yet-as-inflation-explodes http://www.bloomberg.com/news/articles/2016-04-27/venezuela-...
  - zeroer 10y ago
    Printing Bolivars isn't profitable enough ...

edblarney 10y ago

"Why can external currency changes (USD to bolivar) cause such strong inflation internally?" Simply because 'most things' that are sold in Venezuela are either imported - or depend on imports. The Bolivar is crashing against all currencies, not just the USD - so anything: parts, fuel, TV's, entertainment - it all has to be imported, and it all got expensive. 'Internal inflation' can happen when there are more Bolivars floating around than before - even without outside currency markets to validate the price. Ex: if there are 1 Trillion Bolivars in existence, and the government simply prints '1 Trillion' more and dumps them on the market. Guess what happens to prices? They will basically double every where. So your shoes that cost 100 Bolivars, now cost 200.

Spooky23 10y ago
It's worse than that. Money is a store of value as well, a people will build in a price premium because the 200 bolivars will take another haircut.
imh 10y ago
I think the part I missed was why the solution to a crashing currency is to print more money. Let's say Venezuela cannot produce widgets, but they are necessary to modern living. Venezuela's currency drops in half, so now widgets are twice as expensive to a Venezuelan. Given a fixed exchange rate, as the government of Venezuela I could just double the amount of money all my people/companies have and everything would be fixed, but wouldn't that just lower the exchange rate again? Is there some lag in the market during which they can spend the new money at the old rate? At any rate, it's the Venezuelans and their corporations who need money. How does printing more money fix the issue of that poor citizen/company who is reliant on widgets? It's becoming clearer, but I'm still confused.
- guard-of-terra 10y ago
  It will allow country to pay its bills (i.e. wages). Never mind that by paying their bills with freshly printed money they make all existing money cheaper. Average Venezuelan can now buy less for their wage, but at least they've got some wage and it is stable or even grows number-wise. That's what makes this trap so dangerous.

neffy 10y ago

It doesn't - the currency markets are just adjusting the relative price for supply and demand. The inflation itself is being caused by money printing. Their Government prints cash, M0 (expand out to Max to see it): http://www.tradingeconomics.com/venezuela/money-supply-m0 http://www.tradingeconomics.com/venezuela/money-supply-m0 And then the banking system multiplies it by f(reserve requirement) modulo any capital requirements: http://www.tradingeconomics.com/venezuela/money-supply-m3 http://www.tradingeconomics.com/venezuela/money-supply-m3 From the ratio of M0 to M3, most of the expansion is from M0, so the Basel capital controls are actually slowing down a runway hyperinflation - to some extent at least. Seems to start in 2012, so I would guess that they started money printing to cover civil service salaries when the oil price dropped, and haven't looked back.

spikels 10y ago

In this case the devaluation is almost entirely driven by Venezuela specific issues. This can be clearly seen by the fact that the US dollar exchange rate is relatively stable versus almost every other currency while the Venezuelan currency is rapidly depreciating versus every other currency. So you have it backwards. This almost entirely due to poor economic policies by the Venezuela, not something "external". While the fall in oil prices has exacerbated the problem the core issue is the policy of plugging a huge budget deficit by printing Bolivars. This almost directly causes the huge local inflation and rapidly falling exchange rate as measured in the black market (i.e. the "true exchange rate). Combine this with strict currency controls (i.e. "fake" government set exchange rates that are not available to most people) you get shortages since Venezuela must import many essentials. [EDIT: And, as pointed out below, price controls are a key cause of the shortages.) This situation while somewhat complex is a textbook example of these issues.

ptaipale 10y ago
And in addition to deficit and currency controls, also price controls which have destroyed markets. Then you have a political police enforcing silly laws about companies will have to continue to produce something even when it is economically unfeasible. In the short term you get some physical deliverables like bread next week; in the long term you get a dysfunctional economy.
foobarian 10y ago
This whole mess is causing us headaches at work, because some LatAm sales people requested a second exchange rate for Venezuela since the real one is so broken. But a lot of the code assumes a 1-1 country-currency mapping, so if we give in we'll end up with special cases for Venezuela everywhere... sigh.
- lokedhs 10y ago
  Don't you have support for other types of non-national currencies like XAU (gold) and SDR (IMF special drawing right). There are also other countries with multiple currencies. Like Zimbabwe that uses the USD and SAR as well as some others.

tasuki 10y ago

Wrt your edit, that's what happened during the Irish famine in the middle of the 19th century.

tremols 10y ago

The problem is that Venezuela imports everything, the policies are very hostile to national production and there is a mafia with access to government sponsored dollars that profits from the whole situation without moving a finger, in other words, corruption that actually pyramids to all society: people enters the game by reselling scarce goods and believing in a cardboard opposition - that never delivers any concrete result - obviously linked to the government and its corruption mafia.

raattgift 10y ago

Your edit is very close. "Imported inflation" listed as "2." under "Causes of Cost Push Inflation". http://www.economicshelp.org/blog/2006/economics/cost-push-inflation-2/ http://www.economicshelp.org/blog/2006/economics/cost-push-i... However, it misses the other side-effect of imported inflation, namely the effect of substitution. If good or service A is imported but priced in a relatively appreciating currency, and service B is non-imported and priced in the local currency, the price of B drops, driving demand upwards. If B is also exported, the export markets seeing a relative drop in the value of the currency B is priced in will also buy more of B, further driving demand upwards. Consequently, imports become more expensive even without a drop in demand. Exportable items (or even just substitutes for imports) become more expensive in response to increased demand. A bit more here: http://www.economicshelp.org/blog/1491/economics/imports-and-inflation/ http://www.economicshelp.org/blog/1491/economics/imports-and...

csomar 10y ago

Lived in a country with a similar effect albeit very very much lighter. > but how does that turn into no one being able to buy milk (or other essentials)? The problem is that these countries come with price controls for basic food. The food can be available on black market. The problem, it's much more expensive to produce than the current price tag on the controlled government market. So there are two possibilities: 1. The industry goes bankrupt because of the laws. And I witnessed this first hand. I saw people and farmer throw away milk on the street. It makes no economical sense to produce at all. 2. Sell it on the Black market, or smuggle it outside of the country. This will depend on how strong is the local government on controlling borders and commerce.

stale2002 10y ago

The reason is because, frankly, Venezuela doesn't have enough locally produced goods. The currency stuff is just a symptom of genuine lack of supply of goods/wealth.

qwrusz 10y ago

I see a lot of answers on here that are misleading or confusing. One problem with economics is it's really a bunch of made-up mind games related to social sciences, which in turn has led to all kinds of conspiracy theorists and cults even within more mainstream economics and some really crazy stuff at the fringes. The topic of inflation seems to be particularly of interest to conspiracy theorists who all claim to know exactly why it happens, who is to blame and how to fix it (it often sounds like "Government blah blah blah gold standard"...). The truth is there are some strong, well-researched but ultimately incomplete explanations regarding inflation, but really nobody knows. So here is my understanding of the best current guesses about the topic: Ignoring the specific example of Venezuela for a second. At a basic theory level: Inflation in country A does not depend on external currencies nor does it matter how much country A imports or exports or if they trade at all. Imagine a closed off country with no international currency exchange and no external trade. For some reason, it doesn't matter why really, citizens there expect prices for things to go up (maybe it's an island running out of space so landlords raise rents or maybe the government is increasing taxes or maybe everyone on the island is just really lazy wanting to sit on the island's beaches all day thus it is taking increasingly more $ to get anyone to get up and do anything one might need help with)... The citizens expectation of future higher prices leads those in the economy who sell a product or service and who can charge more for it to do so immediately (as they prepare for future higher expenses they will soon face). Specifically, the producers of inelastic goods like farmers who grow food or oil companies will do better in this scenario than regular employees who suffer more as they can't get an increase in salary so easily. But really everyone starts to struggle. Depending on how high prices are increasing, citizens may start soon switching to bartering and looking to store value in other ways other than their currency (like gold coins or magic the gathering card collecting, etc). Barter is not always possible and most landlords won't accept rent payment in the form of your magic card collection, not directly anyway. Where money is still used and accepted, people will try to get rid of any money they receive as soon as possible (as it's increasingly less valuable putting it in a savings account is bad). So people try to get their money into anything but a savings account and buy as quickly as possible something they need immediately or something that is a store of value. This is inflation and potentially hyperinflation without any international currency exchange or trade. Now, where a country is able to engage in trade with other countries (for good and services or sell each other debt), this will influence the economy and inflation there. And depending too much on imports one can't be sure they can afford is very bad. But external currencies doesn't cause inflation, rather currency exchanges become a mirror to reflect a country's relative credit-worthiness and growth prospects, as well as any inconveniences connected to the fact people don't want or need another country's currency so where someone does accept foreign currency they must be compensated for the process, time and risk of getting payment in a form they do want. The closed off simple economy thought experiment is quite useful and established, here is wiki link to the most basic version, one dude on island aka the Robinson Crusoe economy https://en.wikipedia.org/wiki/Robinson_Crusoe_economy https://en.wikipedia.org/wiki/Robinson_Crusoe_economy

huherto 10y ago

It is driven by fear. If you have bolivars and you know it they will be worth half in a month what do you do ? You buy USDs, and you will pay any price for them. So people are desperate just trying to save their savings. Sure. There are many fundamental economic problems. But it is fear that drives hyperinflation. And this is why it is hard to fix. Because even if you fix the fundamentals the fear will still create hyper-inflation.