ON MONEY

What 52,000 Percent Inflation Can

Do to a Country

Image
CreditCreditIllustration by Andrew Rae
By Brook Larmer Nov. 1, 2018

I walked into the empty restaurant in Managua carrying a backpack stuffed

with cash, thick stacks of Nicaraguan córdobas bound by rubber bands. The
waiter, as expected, asked me to hand over the entire stash. It may have looked
like an illicit transaction. But this was Nicaragua, in 1990, at the end of its war
with the American-trained contra rebels, and I was only trying to buy a meal
before my money lost its value. A decade of guerrilla war and deficit spending
had whipped up a maelstrom of hyperinflation and shortages. Only two items
on the menu were available, and prices had doubled in a matter of weeks. With
inflation surging past 13,000 percent annually, the restaurant now demanded
payment upfront — to ensure that the staff had enough time to tally it. As I ate
my rice and beans, two waiters at another table counted every bill. I finished
before they did, even though the meal — and all those millions of córdobas —
added up to less than $10.

Hyperinflation is a mercurial phenomenon, a rupture that occurs when a

government persistently spends (or prints) money that it doesn’t have, and the
public loses confidence in the process. The distortions that emerge — like the
backpack full of soon-to-be-worthless cash — can seem absurd, even laughable.
Yet there is nothing amusing about the damage that hyperinflation can inflict
on the lives of people and nations. “If you can’t trust the money the
government issues, then you can’t trust anything,” says Steve Hanke, a
professor of applied economics at Johns Hopkins University and a leading
expert on hyperinflation (which he has defined as 50 percent monthly inflation
sustained for at least 30 days). Hanke has studied the 58 cases of
hyperinflation that have been recorded, from Germany’s Weimar Republic to
the episode I witnessed in Nicaragua, each one an earthquake that caused
people to lose faith in the very foundation — the value of money — on which
their lives depended.

The newest addition to the ignominious list, and a cause for alarm in
Washington, is the crisis in Venezuela. Even with the world’s most-abundant oil
fields, Venezuela has mismanaged its way to economic disaster. Hyperinflation
and its common companion, chronic shortages of food and medicine, have
impoverished almost all of the country’s 31 million people. Nine out of 10
Venezuelans do not earn enough money to buy sufficient food, according to a
recent survey. Over all, Venezuelans have lost an average of 24 pounds each.
Malaria is on the rise, as is crime. Those who can are getting out: More than
2.3 million Venezuelans have fled the country, including more than half of the
nation’s doctors.

The situation is still out of control. Venezuela’s economy shrank by 35 percent

between 2013 and 2017, and economists forecast another 18 percent drop in
2018. Oil production, crippled by the lack of maintenance and investment, fell
in July to its lowest point in nearly seven decades. According to Hanke, the rate
of inflation over the last 12 months was 52,000 percent. The chaos poses a risk
for the entire region. “Venezuela has sparked the most serious economic,
humanitarian and political crisis in the Americas in decades,” says the
Brazilian economist Monica de Bolle, the director of Latin American studies at
the Johns Hopkins University School for Advanced International Studies.
“There has never been a crisis quite like this in the region, and we’ve had
plenty.”
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Nearly a century ago, Vladimir Lenin was quoted in The New York Times
saying that hyperinflation was “the simplest way to exterminate the very spirit
of capitalism.” If a country were flooded with high face-value notes untethered
to anything of real value, he reasoned, “men will cease to covet and hoard
[money] so soon as they discover it will not buy anything, and the great illusion
of the value and power of money, on which the capitalist state is based, will
have been definitely destroyed.”
Lenin’s dark musings seemed almost prophetic in the jittery aftermath of
World War I. Weimar Germany had gambled, badly, in financing its losing war
effort with borrowed funds. Buried in debt and forced, in 1921, to pay
reparations to the victorious Allies, Germany printed bank notes and ignited
the most infamous bout of hyperinflation. By late 1923, prices were doubling
roughly every three and a half days, and at one point a single American dollar
was worth 6.7 trillion German marks. An even more severe hyperinflation
followed the end of World War II, when Hungary printed notes of ever-higher
value to finance its recovery. The fastest-ever recorded hyperinflation resulted:
At its peak in July 1946, prices doubled every 15 hours.

Image
CreditIllustration by Andrew Rae

War has often played a catalytic role in hyperinflation, but it rarely acts alone.
In the early 1990s, the phenomenon stalked countries in Eastern Europe
(Yugoslavia, Bosnia-Herzegovina, Armenia) that were confronting wars and the
fall of the Soviet Union. A decade later in Zimbabwe, despite a long slide in
agricultural output, Robert Mugabe’s regime printed money to pay the bloated
bureaucracy and to line its own pockets. By the time Mugabe declared inflation
illegal in 2007, people had lost belief in their currency. Within a year, inflation
shot up to 79.6 billion percent, so high that even the government’s $100 trillion
bills became useless souvenirs soon after they were printed.

Hyperinflation is not, as some might assume, just inflation gone bad. It’s a
different beast altogether, driven by politics and psychology as much as
economics. A government’s decision to continue spending (or printing money)
far beyond its means is political, whether done to finance war, win an election
or assuage its populace. Such monetary incontinence, unchecked, leads to a
spiral of food shortages, price hikes and currency devaluations. Those hit
hardest are not the rich (whose wealth is in property, stocks and commodities)
but the middle class, which depends on local-currency salaries, savings and
pensions whose value is siphoned off by hyperinflation.

No conflict or natural calamity can be blamed for Venezuela’s descent into

chaos. Its leaders did this on their own. With proven oil reserves of 300 billion
barrels — surpassing even Saudi Arabia’s — Venezuela should be rich. But the
country’s early oil boom, led largely by foreign companies, yielded only spotty
development. When Hugo Chávez won the presidency in 1998, he vowed to
give power and wealth to the people. Buoyed by a sustained rise in oil prices,
he nationalized companies and funneled oil revenues into welfare programs
and food imports. Poverty and unemployment rates fell by half. When oil prices
cratered in 2008, Chávez kept spending as if nothing had changed. Since his
death in 2013, his successor, Nicolás Maduro, has doubled down on Chávez’s
policies, even as he has violently repressed the opposition. In May, Maduro
claimed a re-election victory after polling marred by fraud — a result that was
not recognized by most countries in the Americas.

Venezuela now finds itself isolated, like a virus contained. In 1990, three South
American countries — Peru, Argentina and Brazil — were in the throes of
hyperinflation. Venezuela’s case doesn’t look contagious, but it could still have
destabilizing impacts on the region. The millions of refugees flooding into
neighboring countries are already sparking a backlash. In Brazil, where army
troops have been deployed to control the border, the presidential candidate
Jair Bolsonaro has used the Venezuelan migrants to fuel his Trump-like anti-
immigrant campaign — and warn against leftist populism.

Maduro has made only halfhearted efforts at reform. In August, he lopped five
zeros off the bolívar and introduced a new currency tied to the “petro”
cryptocurrency. The move has had no impact, in part because the petro isn’t
traded. But there has been one unexpected result: As people turn to credit
cards or bank transfers for even small transactions, Venezuela has accidentally
become a nearly cashless society.

Normally, a country facing insolvency would turn to the I.M.F. for a bailout.
But Venezuela broke off relations with the I.M.F. in 2007 and has turned to
China instead. For the past decade, China has kept Maduro’s bankrupt regime
afloat with more than $50 billion in loans. In September, Maduro traveled to
Beijing and received several billion dollars more of credit to boost oil
production and double oil exports to China. “We are taking the first steps into a
new economic era,” he said.

A new era isn’t likely to begin as long as Maduro remains in power. He has
shown no interest in taking steps that might restore economic balance, like
cutting spending and tying the bolívar to a solid foreign currency. Washington
murmurs about regime change. But the biggest threat to Maduro now may be a
series of civil cases in American courts against Citgo. The Venezuela-owned
company is the regime’s biggest generator of hard currency, the only asset
 creditors can go after. If these cases succeed in claiming damages for being
nationalized by the Chávez regime, Maduro’s main lifeline could be cut off. “If
the money disappears,” de Bolle says, “so does his support, and the regime
crumbles.” Only then, it seems, will Venezuelans be able to escape a nightmare
in which they can’t trust the money in their hands.

Brook Larmer is a contributing writer for the magazine. Next Week: On Technology, by
John Herrman

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A version of this article appears in print on Nov. 4, 2018, on Page 20 of the Sunday
Magazine with the headline: What 52,000 Percent Inflation Can Do to a Country. Order
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Opinion

Still Haunted by Grocery Shopping

in the 1980s
By Rodrigo Zeidan

● Sept. 22, 2018

Image
CreditCreditRachel Levit Ruiz

At age 10 in 1980s Brazil, my job was to run around the aisles of the
supermarket trying to beat adults, who walked around raising prices
throughout the day with comically large label guns. Since I was good at math,
my mother would hand me our monthly grocery budget, and I would run
through the supermarket filling our shopping cart — not having to stop to input
values on a calculator saved us precious time against the labelers.

The cycle was repeated on the fifth of every month, when most Brazilians with
a steady job received their monthly paycheck. The most privileged public
employees were paid twice a month, and we envied their ability to shop on a
day when supermarkets were not bursting with anxious families.

No wonder I became an economist, as I had to select enough food to last us a

month on a tight budget. We were three brothers fighting for the better spoils
— the two-liter ice cream, the one soda bottle — that we knew would vanish
soon after we got home.

As Venezuela plunges into hyperinflation, we are surrounded by images of

huge piles of cash being used to buy simple groceries. The recent plan of the
government to cut five zeros of the currency was met with mockery or
befuddlement. Hyperinflation seemed an exotic disease that had mostly
disappeared, but it seems that governments at times go out of their way to
make the lives of their people worse.
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There are lots of people speculating about the long-term emotional impact that
political repression and institutional breakdown will have on Venezuelans.
Amid all this, it’s easy to overlook the impact of something more abstract like
hyperinflation. But the legacy of hyperinflation is insidious and pervasive, and
it too will leave scars.

The hyperinflation in Brazil in the 1980s and 1990s was fundamentally

different from what Venezuela is going through today. In Brazil, life was
bad, right until it wasn’t. Hyperinflation (like extreme income inequality, which
unfortunately is still a problem) was the result of gross economic
mismanagement but was not coupled with tyrannical oppression.

Still, Brazil’s experience with hyperinflation has lessons for today. We talk
about physical and emotional abuse and the toll that it takes on mental health.
We should add economic trauma. Poverty, hyperinflation andincome
inequality all lead to less than healthy behavior later on.

Research has found that children living in poverty are at increased risk of
difficulties with self-regulation and executive function, such as inattention,
impulsivity, defiance and poor peer relationships. It takes generations until
society fully heals from periods of deep instability. A study in the early 2010s
showed that Germans were more worried about inflation than about developing
a life-threatening disease such as cancer; hyperinflation in the country ended
almost 100 years ago.

I am a finance scholar and still struggle with planning for retirement. The point
is people in countries that have experienced bouts of hyperinflation take a long
time to learn to deal properly with money.
MENT

Hyperinflation commonly leads to two shortsighted types of behavior: short-

termism and ultra-conservativeness.

When prices are rising more than 10 percent every month, either you spend
the money in your pocket or you lose it. While today I am happy to find a
crumpled bank note in a forgotten pair of trousers, I would have cursed my
stupidity for failing to spend it.
I still spend most of what I earn immediately. My brothers went in the opposite
direction. They started saving immediately upon getting their first paycheck,
much more than they should; they were traumatized from the uncertainty
brought by volatile income and prices, and from having to move constantly as
rent prices fluctuated wildly.

It was only after I started writing about it that I realized that hyperinflation
was also a major contributor to my unhealthy eating habits. We were never
food insecure in the strict sense. At our worst, we were lower-middle class, so
there was never any lack of food.

But the good stuff? I grew up knowing that it would arrive infrequently. So
when I was lucky enough to get high-quality, expensive food, I gorged on it.
And I still do. Today, given my economic status, I may find that I’m gorging on
food in a fancy restaurant, but also on simpler pleasures like salmon and
Camembert. To this day I eat all salmon in front of me.

People who are not financially literate have been shown to

overestimate inflation and are less likely to plan adequately for retirement.
Brazilians do better than most in financial literacy, but there is still a long way
to go.

The tragedy in Venezuela is costing thousands of lives and the toll is rising. In
the end, the Venezuelan humanitarian crisis will last much longer than
President Maduro’s regime and its hyperinflation.

Hyperinflation can be reined in, as the experiences of Israel and Latin America
in the 1980s and 1990s show. The boogeyman of rising prices will eventually
be shooed away, but having to dance with the beast will leave scars on the
financial behavior of Venezuelans for generations. Even those who should know
better.
Correction: September 25, 2018

An earlier version of a biographical note with this article misspelled the name
of the business school where the author is a visiting professor. It is Fundação
Dom Cabral, not Fundação Com Cabral.

Rodrigo Zeidan is an associate professor at New York University Shanghai and a visiting
professor at Fundação Dom Cabral. He is the author of “Economics of Global Business.”

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A version of this article appears in print on Sept. 23, 2018, on Page SR6 of the New York
edition with the headline: Grocery Shopping in the 1980s.
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