Simon is a high school teacher who lives in Caracas, Venezuela. Introduced in a CNN report, Simon earned 96,000 bolivars a month as of October 2016. So, when we hear that prices are surging, the minimum wage is up, and the 100 bolivar note has been discontinued, let’s think of Simon.
Where are we going? To the disappearance of the invisible hand.
Prices are Surging
A year ago, a Caracas restaurant priced an arepa (aka the hot dog of Venezuela) at 800 bolivars. By July patrons were paying double.
One Venezuelan blogger expressed it this way: “…a 2 liter bottle of soda — which I drank on a daily basis until coke disappeared — went from Bs.150 last October to 360 in December, to 500 in February, to 750 in April, to 1,200 in June, to 1,500 in August.”
The Minimum Wage is Up
Responding, President Maduro has increased the minimum wage five times this year. But it’s not enough when today a dozen eggs cost more than 1800 bolivars at the local supermarket and tomorrow they will cost more.
Adding to the chaos, President Maduro has demonetized the 100 bolivar note. Because it made no sense to deposit money that was plunging in value, people used 100 bolivar notes for the majority of cash transactions or kept them. Now they have to take their stash to banks to get legal money. However, the banks cannot give it to them since the replacement notes haven’t arrived from the printers.
You can see that Venezuelans were not saving their money:
Our Bottom Line: The Disappearance of the Invisible Hand
In Venezuela, the incentives that motivate rational supply and demand behavior have gone haywire. The list starts with government controlled prices that are too low and a government controlled money supply that is too high. A recipe for disaster, the dysfunction has led to shortages, barter, looting and hyperinflation.
For individuals like Simon, the result is buying and saving incentives that are far from rational.
Our sources and more: As I read more, the insanity grew. The most interesting sources were the Venezuelan bloggers at devilexcrement and caracaschronicles. While their information was anecdotal, I found it much more meaningful than the facts at CNN and WSJ. Finally, Johns Hopkins scholar Steve Hanke tells us at zerohedge that Venezuela’s monthly inflation rate has soared to 221%.