Maduro's "Solution" of Exchanging One Worthless Currency for Another is Unsustainable

dumbgoomba (25)in #venezuela • 7 years ago

Hola peeps!

I recently read an article in the Washington Post regarding President Maduro's "solution" to Venezuela's crippling hyperinflation: simply trade one worthless currency for another. This would effectively slash three zeros off of the 100,000 note. People who are able to trade in their currency for the new one will see their savings drop by 1,000 percent!

Hyperinflation and the Effects

There are multiple explanations as to why hyperinflation occurs. For the sake of simplicity, one of the main reasons that I find myself referencing is that government debt and spending runs rampant. When governments borrow, currency is created out of thin air. The bolivar's value decreases as the currency supply increases. The effect is that prices rise to astronomical levels. To combat this, price controls and minimum wage laws are implemented. This increases costs for businesses and their ability to provide people with vital resources like food, water and clothing. This discourages investment and economic prosperity.

Why Maduro's Solution is Unsustainable

Maduro's solution is not an uncommon one. The notion of trading one currency for another is in layman's terms a reevaluation. We have seen this multiple times throughout history and it has never worked, EVER. For example, in the 1990's, Mexico had a peso crisis. Capital investment was fleeing as the peso became stronger. The reliance on imports into Mexico was growing. In response, the Mexican central bank devalued its currency against other foreign currencies in order to stimulate production and increase exports. This frightened foreign investors and they began liquidating their assets (Mexico's central bank increased interest rates to make their debt more attractive, which ultimately constricted investment). Prices began to rise dramatically and from 1994 to 1995, the country's inflation rose past 50%. This led to big unemployment and a massive recession.

Intervening in a market that looks to free itself from restrain results in negative, unintended consequences. Sure, it might relieve some short term pressure. In the long run, however, it creates more problems.

Let Venezuela Heal

Increased intervention and additional restrictions will not relieve the country of its issues. The people must be left to be free. I believe the whole cryptocurrency scene is a response to the system from the masses. It makes sense why so many people on the Steemit platform sought refuge from failing currencies and limited expression, particularly, the Venezuelan people.

I do not know if I could ever truly understand what is going on over there since I come from the U.S. Just know that there is good people here and that they are sympathetic to the struggle, including myself.

-Dumb Goomba