When the inflation rate soared in Zimbabwe, people started washing worn out dollar bills. Since the dollar had value while Zimbabwean money did not, they overused their limited supply of U.S. currency until it was so dirty that it had to be laundered. Ultimately reaching a monthly rate of 80,000,000,000 percent, Zimbabwe’s hyperinflation self-destructed and the country spontaneously “dollarized.”
Below you can see a line-up of U.S. dollars hanging along a clothesline.
Where are we going? To the perversities of Venezuela’s hyperinflation.
Tipping in Venezuela
Normally it can be tough deciding how much to tip but with hyperinflation, it sounds impossible. As one visitor explained in a blog post, “I was probably over tipping the valets at my hotel, at US$ 20 cents (Bs. 200), they seemed to be jumping to help me whenever I showed up.”
Small charges were also a big problem. If you owe 4 bolivars for gas but small bills don’t exist, then what to pay? “I only had a Bs. 20 bill (2 cents in US$), so I just gave it to the guy. Was it too little? Too much? I have no clue, he seemed happy.”
We have also been following this blogger’s Arepa (corn cake) Index. Nearing the 1000 bolivar level, one arepa currently costs 431 percent more than a year ago.
For just one corn cake you need a small pile of bills: nine 100 bolivar notes and a 50. With everyday items costing thousands, imagine the logistics:
Those high prices meant people needed lots of money. To solve the problem (but actually making it worse ), the Venezuelan monetary authorities flew in 36 Boeing 747 cargo planes filled with cash. Too much for the local firms to produce, the money had been outsourced to printers around the world. In 2015, Venezuela reputedly ordered five billion bank notes and now the Wall Street Journal says that their new order is for 10 billion in 100 and 50 bolivar notes. (With a currency used around the world, the U.S. prints 8 billion bank notes each year.)
Our Bottom Line: Perverse Incentives
Lacking the normal signals of a price system responding to supply and demand, hyperinflation creates its own world of perverse incentives. With prices rising, a government needs to print more money which fuels still more inflation and worsens the country’s fiscal woes because the bank notes are an expensive purchase. Accessing the newly minted money, neither consumers nor businesses want to save because today’s money will be worth less (and be worthless) tomorrow. Further exacerbating the sinking economy, businesses have less information on which to base prices so they decrease production. But then less production further fueled the price increases which the government has capped with price ceilings.
The gray line represents the price ceilings imposed by the Venezuelan government. Between the quantity demanded and the quantity supplied, you can imagine shortages of toilet paper, rice, milk and other necessities.
The final result? As in Zimbabwe, laundering the small supply of bank notes that do have value.