Unbridled inflation tends to wreak havoc with economies, but one would think that if any industry were to benefit from rampant rising prices it would be that of paper currency manufacturers.
A country which is churning out billions of bank notes has got be good for the folks who run the printing press, right?
Leave it to Venezuela to botch that line of business, along with just about everything else.
As the country’s hard currency reserves sink to critically low levels, Venezuela’s central bank is paying foreign paper currency providers so slowly that the latter are beginning to back off on taking on additional contracts. In addition, it was disclosed recently that one company under contract to print money for the South American nation was owed more than $70 million.
Venezuela began its downward spiral with Hugo Chavez’s “Bolivarian Revolution,” which involved nationalizing different industries, implementing price controls and expropriating farmland.
Today Venezuela’s inflation is the highest in the world; it’s expected to rise to nearly 700 percent this year.
Adding to the nation’s fiscal difficulties is the fact that it takes a boatload of money for even the most basic transactions. Venezuela’s largest bill, the 100-bolivar note, barely pays for a loose cigarette at a street kiosk, according to Bloomberg.
Venezuela differs from other countries that have struggled with hyperinflation because it hasn’t reacted to raging prices by printing bank notes of astronomical denominations, such as the $100 trillion note produced by Zimbabwe not too long ago.
As inflation skyrockets and hard currency reserves plummet in Venezuela, paper currency manufacturers find themselves reluctant to commit sizeable resources as the nation’s ability to repay dwindles daily.
“The first signs of the currency shortage date back to 2014 when the government began increasing shipments of bank notes as wallet-busting wads of cash were already needed for simple transactions,” according to Bloomberg.
Today, Venezuelans spend hours waiting in line for consumer staples, lining up first at banks and cash machines, and often carrying money in backpacks and gym bags to pay for dinner out.
In 2015, the nation’s central bank selected companies in the United Kingdom, France and Germany to produce 2.6 billion bank notes. Before the delivery was even completed, the companies were approached by the central bank seeking even more notes.
UK-based De La Rue, which handles work for more than 150 nations, took the lion’s share of the order and enlisted Ottawa-based Canadian Bank Note Company to ensure it could meet a tight end-of-year deadline.
How big an order are we talking about?
Once printed, they arrived in Venezuela in dozens of 747 jets and chartered planes, according to Bloomberg. Under cover of security forces and snipers, it was transferred to armored caravans where it was spirited to the central bank in the dead of the night.
Even as the cash was still arriving authorities began planning for 2016. In late 2015, the central bank more than tripled its original order, offering tenders for some 10.2 billion bank notes.
But currency manufacturers began to grow concerned.
“According to company documents, De La Rue began experiencing delays in payment as early as June,” Bloomberg reported. “Similarly, the bank was slow to pay (Germany’s) Giesecke & Devrient and (France’s) Oberthur Fiduciaire. So when the tender was offered, the government only received about 3.3 billion in bids, bank documents show.”
Just last month, De La Rue 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.
(Top: Even simple transactions require stacks of paper currency in Venezuela, thanks to massive inflation.)
6 thoughts on “Venezuela: Continuing down the rabbit hole of ineptitude”
Am tempted to make suggestions on the lines of having government officials rubber stamp leaves of loo paper with appropriate denominations…..but that’s not far off the QE experiments undertaken in the U.S. and Europe…
I left out the part where Venezuelan government officials have denied the existence of inflation. That’s the kind of foolishness that will get you strung up when people get hungry enough.
If you want to see what a failed state looks like, go no further than Venezuela.
Unfortunately, that is the inevitable and fatal flaw of the central bank system, if “The Creature from Jekyll Island” is to be believed. In that mind-blower of a book, author G. Edward Griffin gives the best history of banking I have ever seen. He claims our currency–and that of every nation in the world–is “fiat money” backed only by debt and government promises to pay. When the government loses credibility–as when revenues fall below obligations–so does the money. The US and other “world powers” have gotten away with using this pseudo-money so far because they have expanded their reach to tap into other economies and to deepen domestic debt to meet current obligations.
According to Griffin, the Federal Reserve Act put Congress into the debt-creation business, meaning the Fed manufactures money to pay for congressional appropriations, not unlike the central bank of Venezuela. Congress keeps raising the debt ceiling because the US is not getting enough in revenues to meet ever-growing expenses.
The evidence of this scam becomes apparent when you realize that if the money were legitimate, the printers could just keep enough of the money they print to pay their own costs.
An interesting fact of history, by the way, from Benjamin Franklin’s autobiography, is that he got his first big break when he landed the contract to print Pennsylvania’s paper money. Even Adam Smith (“Wealth of Nations”) in 1776 noted how the paper money system began with banks who issued bank notes that could only be redeemed in their banks.
Individual states and the federal government issued paper money to make it easier to pay taxes, as a way to get this cheap money into circulation. Now, with digital money, it’s even easier to disappear or create money with the click of a mouse.
I’ve heard of Griffin’s book but never read it. However, I agree with the premise. Once people lose faith in fiat currency that’s when the real trouble starts. Without something to back it up, whether its gold, silver or some other form of specie, paper money is only worth what we believe it’s worth.
Excellent comment, and thank you for sparking the thought of my need to pick up Griffin’s book.
I salute your interest. The book is a sleeper. Originally published in 1994, my 2007 copy was the 19th printing.
The implications are frightening. As you note, the Fed is doing a delicate high-wire balancing act trying to maintain credibility.
Instability in the financial system is bad for business, worse if you’re in debt or have savings. My advice to the wary is to save coins and grow food. Coins–even if they are made of zinc (pennies), nickel and copper (nickels, dimes and quarters)–have intrinsic metal value, can’t be lost in fire or floods, are hard to steal, and buy their money’s worth every time they change hands. If there is major financial upheaval, coins may end up with more buying power than paper or electronic money.
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