Helicopter Money (Part 3)

Money is never free.

Photo: Jon Cutrer. Source: Morguefile

Even if all you do is print more bills, you still need to pay the printers. That’s what Venezuela is finding out. Late last year, the government needed to satisfy a growing currency shortfall. In December Venezuelans throng to the banks to cash in their bonuses, and like everything (but oil) in their economy, bank notes have to be imported.

Instead of inviting printers to bid for the job, the central bank told several of them to produce as many notes as possible—to run their printing presses flat-out. The companies filled the order—but haven’t been paid yet. They want to be paid in hard currency, not Bolivars, and for the last year that has been in short supply. Last year Venzuela imported more than 10 billion bank notes, 30% more than the US—for an economy less than 3% of our size.

Source: Bloomberg

The result is the world’s highest inflation—currently 180%. Usually, when prices spiral like this, countries start adding zeros to their bank notes. Venezuela is going into uncharted waters by not printing larger bills while not paying its printers, either.

Now, people have to use wheelbarrows of cash to buy basic goods. We know where this ends. In 2005 Zimbabwe’s economy spontaneously dollarized after its hyperinflation. Maybe Venezuelans won’t trust the gringos with their money—there’s too much bad blood between our countries. But for everyday commerce to continue, they need some sort of hard currency.

Maybe Yen?

Douglas R. Tengdin, CFA

Chief Investment Officer

Leave a Reply

Your email address will not be published. Required fields are marked *