Unless you’ve been strategically avoiding the news (not necessarily a terrible thing in this day and age) you’re at least topically informed on the ongoing crisis in Venezuela, where Nicolás Maduro’s hardline socialist (and at this point authoritarian; go figure) administration is desperately struggling to cope with deep-rooted economic woes sown during the previous administration of ‘Bolivarian Revolutionary’ Hugo Chavez, who ruled the nation from 1998 to his 2013 death.
Central to the escalating implosion of the Venezuelan economy is the hyperinflation of their currency the Bolívar Fuerte. Of course, this denomination is on its way out as, in a pathetic last-ditch effort to halt spiraling devaluation, Maduro just recently implemented a new currency the bolívares soberano on August 20th to replace the fuerte. In practical terms his administration is doing what in Venezuela has unfortunately become familiar as ‘slashing zeros’. Essentially the new currency is just the old one with exchange rate five zeros smaller. Not exactly rocket science, and definitely not a realistic solution.
Since carrying around 2 million in bills to buy a simple cup of coffee is impractical to the point of absurdity, this move makes practical sense even though it’s completely useless in terms of solving root inflation. In fact, in an utterly glaring epitome of irony the now defunct fuerte’s origins can be traced back to Hugo Chavez pulling the exact same stunt in 2008 when he implemented the fuerte to replace the original Bolivar that had been the country’s currency since 1879, but under Chavez’s control had seen its own untenable bouts of hyperinflation. Socialism kids… not even once.
But here’s something you may not realize; your money is equally worthless.
Yes! Those crisp US dollars have the same inherent value as the toilet paper Maduro is printing (not all bad since there’s a chronic shortage of that and basically all other commodities there) out by the billions. The only difference, and the reason you don’t need 50 pounds of greenbacks for a 1-pound chicken, is the US does a really good job pretending it isn’t the completely worthless paper it is. More importantly they do a great job convincing everyone else, including you and me.
What it all boils down to is your presidential portraits (and Venezuela’s) are what economists refer to as Fiat Currency. At its most basic definition, fiat currency is money that has nothing to back it up (like gold or silver). That is to say, if you strolled into the US Treasury asking to trade your pitiful papyrus for a couple samples of Fort Knox’s collection you’d be laughed out the room.
It wasn’t always this way. In fact, for most of history currency simply *was* a stamped chunk of precious metal (known as coinage). But asking people to walk around with pounds of metal was risky and cumbersome so over time Governments began to issue promissory notes which were essentially official government documents of a declared value that could, in theory, be exchanged for that value in gold etc. from Government coffers.
The history of the US’ flirtations with fiat currencies and the evolution to the modern US dollar is extensive and merits its own discussion (in fact keep an eye out for a part 2 from me focused on solely this) but the defining moment of total transition to a fiat system was in the early 1970s, when President Nixon officially took the US off the gold standard and as a consequence turned the dollar into worthless fiat.
Now, of course, as you go about your day-to-day trading these dollars for very real goods and services you might be inclined to regard me an alarmist fool for such warnings. And by all means; the US has managed to keep the dollar relatively stable and reliable to the point that the world often defers to it as a default standard.
This is true. The massive US economy and the Fed’s historical reputation as a reliable payer of debts and general steward of the economy lends itself to the dollar being globally accepted as worth something.
But the inescapable immutable reality that we absolutely must remain conscious and wary of is that at their cores, US dollars and whatever currency Venezuela comes up with this month are the same; worthless pieces of colored paper. We’re simply fortunate enough stateside to not have to face this uncomfortable reality with the Venezuelan people, for now.