This is the second of two SPOTLIGHT issues focusing on the effect of inflation in real life.
After looking at Lebanon and how a banking crisis and government mismanagement can affect a population’s wealth, let’s now look at…
Case study No. 2: Venezuela
Once Latin America's richest economy with the biggest oil reserves on the planet, Venezuela now finds itself trapped in a vicious circle of inflation, leading to devaluation… leading to more inflation.
Actually, it’s hyperinflation on steroids: according to the IMF, Venezuela’s average inflation rate in 2020 was around 65,000%.
It has made paper money so worthless that artists make handbags out of the country's currency.
What are the causes?
In short: corruption, mismanagement of the country’s wealth and spending, and high levels of debt.
What are the consequences?
- One of the largest currency devaluations* in history: authorities devalued the bolivar by about 95% against the US dollar and even launched a new currency called “sovereign bolivar” in an unsuccessful effort to tackle runaway inflation.
*Currency devaluation is the deliberate downward adjustment of a country’s currency value relative to another currency. Its benefits are believed to be short-lived if nothing else is done to slow inflation.
- Shortages of public goods, food, and medicine: this has resulted in large migration flows to neighboring countries.
How is it affecting people’s lives?
- Many salaries have become practically worthless: for example, an entry-level hospital worker in Caracas earns a minimum wage of $2.20 a month.
- Consumer prices have gone through the roof: according to Bloomberg’s Cafe Con Leche Index, (an index specifically created by the news company to track Venezuela’s hyperinflation), the price of a cup of coffee in Caracas jumped 2,365% in a year and now would cost you as much as 6,163,047 bolivars…
- Widespread food insecurity: according to a recent study by the U.N. World Food Program, one of every three people in Venezuela is struggling to put enough food on the table, with some living off tubers and beans.
What can that teach us?
That a spiral of inflation and currency devaluation can really bring a population’s wealth to its knees.
And if Venezuela’s situation seems unlikely to happen in most European and North American countries, rising inflation has become a global concern in the past few years. And the extreme level of government spending caused by the COVID-19 crisis has only exacerbated those concerns.
Some countries such as Turkey are already seeing their inflation rate go through the roof, reaching a two-year high and exceeding all forecasts at 17,53% in June 2021.
We could have made a third case study SPOTLIGHT on Turkey, but we think you got the point. 😉