How Venezuela's Currency Became So Worthless
ARI SHAPIRO, HOST:
Here's one vivid illustration of how much trouble Venezuela's economy is in. I was recently in the city of Cucuta on Colombia's border with Venezuela, and I met a man creating paper sculptures for sale by the side of the road. Jorge Cordero is 19 years old. He weaves and braids paper into swans, purses, owls, trucks. And all of the paper is Venezuelan currency - bolivars.
JORGE CORDERO: (Through translator) The bill itself isn't worth anything anymore. It doesn't have any value. People will throw it away, they'll tear it up. And that's why I started using the bills to make bags and other things.
SHAPIRO: How much money do you get for selling a small purse like this? How much do you charge?
CORDERO: (Through interpreter) Well, the small one is 30, 40, 50,000 thousand Colombian pesos - so $10, $15. But you're not paying for the cash. You're paying for the work.
SHAPIRO: When you were a child, this was worth a lot of money. How does it feel today to see how worthless it is?
CORDERO: (Through interpreter) I never imagined working with money. I used to make these things out of magazines or candy wrappers. Back in the day, this stack of cash would be a ton of money. You could buy food, give some extra to your girlfriend. Now it's worthless.
SHAPIRO: To explain how Venezuela's currency became so worthless, I called up Daniel Lansberg-Rodriguez at Northwestern University. He studies the economies of Latin America. He told me Venezuela built its entire economy on oil, and it boomed for decades after World War II. When Lansberg-Rodriguez was a kid in the '90s, going back and forth between the U.S. and Venezuela, inflation had started to creep up, but it was nowhere near what it is today.
DANIEL LANSBERG-RODRIGUEZ: It has sort of gone from kind of a joke, to a cautionary tale, to a Shakespearean tragedy.
SHAPIRO: The story of Venezuela's economic collapse is long and complicated. And so if you'll indulge me grossly oversimplifying things...
SHAPIRO: ...Hugo Chavez, Venezuela's last leader, built the economy on oil and imported everything from clothing to food. Then, in 2013, Nicolas Maduro replaces Chavez. And the next year, oil prices crater. What does that mean for Venezuela?
LANSBERG-RODRIGUEZ: Venezuela was already in recession. Venezuela was already - had oil production that was falling and declining very quickly. So there were already a lot of problems. At the same time, a lot of other petro states - Kuwait, Brazil even managed to save a great deal of money because there is an understanding that oil prices go up and they go down. Venezuela used that period to sort of project a lot more influence abroad. They were subsidizing other economies, and that left very little money in the till for when oil prices actually dropped.
SHAPIRO: That explains why the economy would tank and become weak, but it doesn't necessarily explain why the currency would become worthless. So what created the hyperinflation?
LANSBERG-RODRIGUEZ: So hyperinflation basically was created by two factors. The first was, since there was very little money coming in from oil rents - because oil had suddenly become very cheap - and the government didn't feel it was strong enough to actually make fiscal reforms, which tend to be unpopular, you have a situation where the government is essentially running the printing presses full time and using that to pay off any sort of domestic debt.
SHAPIRO: So you print money like crazy, and the money becomes more or less worthless.
LANSBERG-RODRIGUEZ: Exactly - because of supply and demand, essentially. You have a certain number of goods in the country, which are generally imported because Venezuela produces very little domestically other than oil. And that creates a situation where your money supply is growing, growing, growing. Anything that's not money supply is remaining relatively stable. So the amount of money it takes to actually procure anything ends up going up.
SHAPIRO: That's one aspect of it, but then there's also a psychological component. Explain what role that plays.
LANSBERG-RODRIGUEZ: When people start noticing this, especially people who had already lived with high inflation, people start hedging against that very quickly. And in Venezuela, that's what's essentially created this perfect storm. People treat the bolivar, and have for some time, as essentially an ice cube that you take out of the fridge. And you better have something to do with this ice cube because it's melting the moment it's out of the fridge.
In Venezuela, when people are paid every 15 and every 30 of the month, that's the ice cube game. They have to try and find out, what am I going to do with this paycheck in bolivars that's going to make that value last a lot longer than the coin that I think is already worthless and is going to be more worthless tomorrow than it is today.
SHAPIRO: Lansberg-Rodriguez told me breaking out of that psychological trap is exactly what Venezuela must do to get out of this economic death spiral.
LANSBERG-RODRIGUEZ: The most key component to getting out of a hyper-inflationary cycle, to breaking it, is essentially to win the psychological game. It's not about stopping the presses at this point. It's about convincing Venezuelans - and to some extent, international markets - that the bolivar tomorrow is going to be worth roughly the same as the bolivar today. And with this government, which has very little credibility, you know, towards any semblance of fiscal or economic reform, the chances that anything could realistically change while Maduro is in charge are essentially nil.
So this government right now is not in a position where it could credibly try and tack and say, we're going to make a bunch of long overdue economic reforms. We're going to fix this. Give us the benefit of the doubt. It's sort of gone beyond that. And the sanctions raise the stakes on foreign governments to give Venezuela the benefit of the doubt absent very marquee credible change.
SHAPIRO: That was Daniel Lansberg-Rodriguez. He teaches at Northwestern's Kellogg School of Management and consults on Latin American risk at the Greenmantle firm. Transcript provided by NPR, Copyright NPR.