by Jas Keith and Sāyan Jha
Inflation can be defined as a simple rise in prices. If the price of good increases from say, £20 to £30 then we can say the price inflated. However, if the price of good increases to £2,000 then we say the price hyper-inflated. We understand hyperinflation to be an out of control rise in prices of all goods and services which depreciates the real value of the currency due to a sharp and sudden rise in prices.
Hyperinflation is often associated with stress to the government budget, such as wars or their aftermath, socio-political upheavals, a collapse in aggregate supply or one in export prices, or other crises that make it difficult for the government to collect tax revenue.
Inflation in the economy is initially treated as a good sign as the exports are boosted, but this rise is good only for a short period and only till a particular limit. Hyperinflation starts when a country's government begins to print more and more money to pay for its purchases and spending. This increases the money supply and prices rise1.
Risks of hyperinflation are severe. It destroys the value of savings and exposes middle and low-class families to high-interest debts. It increases the cost of borrowing both domestically and internationally. The government is pressurized to increase the value of state pensions and other welfare payments as the cost of living climbs higher. There is a lot of business uncertainty, political protest, and social unrest. Hyperinflation destroys the internal purchasing power of money and undermines its value as a medium of exchange and as a unit of account, overall promoting poverty.
An example of hyperinflation leading to currency devaluation is in Germany in the 1920s. In 1922, the largest banknote was 50,000 Reichsmark that changed to 100,000,000,000,000 Mark a year later. In December of 1923, the exchange rate was 4,200,000,000,000 Marks to 1 US dollar, deeming it worthless in the foreign market2.
But coming to twenty-first century, Venezuela, the country with the highest oil reserves in the world, thriving in the 60s and 70s well above its neighbours like Columbia and Brazil, has turned into a war zone. People are broke as their savings have become superfluous due to inflation.
The cause of this can be traced back to the government of Hugo Chàvez, who started to spend nearly 50% of the country's GDP on social welfare and kept the country's treasury empty in case of an impending economic crisis. Now, Venezuela's economy is based on oil and anything change that happens in the oil market affects Venezuela directly. So when the oil prices plummeted from nearly $100 a barrel in 2014, to $70 a barrel in 2015 and finally to $33 in 20163, it was a direct hit on Venezuela. To fight back, the government started printing more notes which turned the crisis into a doom. The currency instability that started in 2016 continued to increase with 500% inflation according to IMF with a 10% contraction in GDP. It reached 82,700% in July of 20184. In other words, a cup of coffee that cost 450 Bolivars in 2016 cost a whopping 2.5 million Bolivars 2 years later. Saying that the situation depreciated since it would be an understatement.
The amount of consideration it got was only in media and with the passing passage of time, it got ignored and now even talking about it seems redundant. Nothing seems to help Venezuela and the lack of trust in the authoritarian government has led more than 50 countries in the UN to recognize the opposition leader Juan Guaido as the country's interim leader. The United States has imposed sanctions that have been described as no short of ‘economic terrorism' by the current government5. If the IMF can let a country get down with the amount of hyperinflation that Zimbabwe underwent, then Venezuela wouldn't concern them now.
For now, the current president Nicolas Maduro has come up with some groundless ideas to get their economy on track. This involves cutting the last 5 zeroes from any product so a product that costs 100000 Bolivar will cost 1 Sovereign Bolivar. He has also considered boosting the minimum wage by 3000%, boosting corporate tax rates and increasing highly subsidized gas prices6. Considering the underlying cause of haphazard in the government policies and the decreasing oil prices, the new policies have no substantial fiscal reforms in the work, no reform to build up the institutes lying in disarray and most importantly, no real shifts in the economic policymaking.