When we reported last week that Venezuela’s government has finally thrown in the towel on the hyperinflation plaguing the bankrupt nation…
… and would agree to print bills with a denomination as much as 200x greater than the current, most “valuable” bank note, the 100 bolivar, we speculated that “by doing so the government will tacitly admit that it has lost control over prices, [and] will also create a self-fulfilling prophecy of even higher prices, sending the country’s hyperinflation into overdrive.”
We didn’t have long to wait for this prediction to be confirmed, and as the website tracking the value of the Bolivar on the black market (recall there are three separate prices for the Venezuela currency; the only one that matters is the Dolar Today black market value), the local currency has imploded, crashing by 22% in just the past week.
The spectacular chart below – one which awaits every fiat currency at some point – shows how many Bolivars one USD buys: as of today it is 1,567. It was 1,222 seven days ago.
Bloomberg has some additional observations on the sudden collapse in the currency:
“There are a combination of things going on, as the stability we saw for most of this year was because things last year had been so abrupt and the decline so steep,” Henkel Garcia, director of Caracas-based consulting company Econometrica, said in a telephone interview. “Public spending may be pressuring the black-market rate, in addition to the exasperation of the people and political tension. People see the decline and start to buy more” dollars.
While it may not provide joy for those whose purchasing power was just cut by a fifth in a week, Bloomberg has some soothing words: it could be worse. Last month’s 28% drop is “not unprecedented.” Some examples: the currency fell 29% in July of last year, 31% in May 2015 and a whopping 33% in November 2014. Monthly losses of more than 10 percent became frequent starting in mid-2012. Since the start of 2011, the currency has increased in value in only 15 of the past 70 months. The general trajectory has been down, and without a floor.
Again, none of this will comfort the local population, unless of course, it managed to convert some of their cash into paper dollars or, better yet, the useless pet rock known as gold.
Whenever the bolivar plunges on the black market in Caracas, Venezuelans can be heard asking the same question: Is now a good time to sell my dollars? If history is any guide, the answer is probably not. The ratio of the black market to the implicit rate hit a high of 4.28 in October of last year. It’s only 2.4 at the moment. To put it simply, dollars might actually be cheap. People have been willing to pay a much higher premium in the past.
“People are afraid of what happened last year,” Econometrica’s Garcia said, adding that the black market rate could end this year around 1,700 bolivars per dollar.
Actually, it may end the week around 1,700, if not the day.
Still, not everyone is a loser. As the WSJ reported yesterday, we now know who will be the primary beneficiary of Venezuela’s upcoming printing spree: the company which has been retained by the government to print its currency is Crane, the same one the US Treasury uses.
Venezuela’s Socialist government, a vocal critic of the dollar’s global dominance, has hired the exclusive supplier of U.S. currency paper to provide the bulk of its new bank notes. Earlier this month, Venezuela’s central bank awarded Boston-based securities printer Crane Currency the largest part of a contract for new bill denominations needed to keep up with triple-digit inflation, according to people involved in contract negotiations. “Given their antipathy towards the U.S., I’m surprised that they would even let a U.S. firm participate,” said Owen Linzmayer, a San Francisco-based banknote expert who catalogs world currencies.
Crane will produce Venezuela’s new 500 and 1,000 bolivar notes. Crane’s 500 bolivar note will have the same security features as the new $100 bill, despite being worth just 35 cents on the black market.
The best news for Crane is that many, many more orders of Venezuela banknotes are coming now that the “Zimbabwe scenario” has been officially unleashed. Unfortunately for anyone who wishes to jump along for the ride, the only option is to LBO Crane outright, as it has no public stock outstanding.