Venezuela’s Grim Reaper: A Current Inflation Measurement – Current Annual Rate 2875%

Authored by Steve H. Hanke of the Johns Hopkins University. Follow him on Twitter @Steve_Hanke.

The Grim Reaper has taken his scythe to the Venezuelan bolivar. The death of the bolivar is depicted in the following chart. A bolivar is worthless, and with its collapse, Venezuela is witnessing the world’s worst inflation. 

As the bolivar collapsed and inflation accelerated, the Banco Central de Venezuela (BCV) became an unreliable source of inflation data. Indeed, from December 2014 until January 2016, the BCV did not report inflation statistics. Then, the BCV pulled a rabbit out of its hat in January 2016 and reported a phony annual inflation rate for the third quarter of 2015. So, the last official inflation data reported by the BCV is almost two years old. To remedy this problem, the Johns Hopkins – Cato Institute Troubled Currencies Project, which I direct, began to measure Venezuela’s inflation in 2013. 

The most important price in an economy is the exchange rate between the local currency and the world’s reserve currency — the U.S. dollar. As long as there is an active black market (read: free market) for currency and the black market data are available, changes in the black market exchange rate can be reliably transformed into accurate estimates of countrywide inflation rates. The economic principle of Purchasing Power Parity (PPP) allows for this transformation.

I compute the implied annual inflation rate on a daily basis by using PPP to translate changes in the VEF/USD exchange rate into an annual inflation rate. The chart below shows the course of that annual rate, which last peaked at 3473% (yr/yr) in late October 2017. At present, Venezuela’s annual inflation rate is 2875%, the highest in the world (see the chart below).

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Venezuela’s Grim Reaper: A Current Inflation Measurement – Current Annual Rate 3286%

Authored by Steve H. Hanke of the Johns Hopkins University. Follow him on Twitter @Steve_Hanke.

The Grim Reaper has taken his scythe to the Venezuelan bolivar. The death of the bolivar is depicted in the following chart. A bolivar is worthless, and with its collapse, Venezuela is witnessing the world’s worst inflation. 

As the bolivar collapsed and inflation accelerated, the Banco Central de Venezuela (BCV) became an unreliable source of inflation data. Indeed, from December 2014 until January 2016, the BCV did not report inflation statistics. Then, the BCV pulled a rabbit out of its hat in January 2016 and reported a phony annual inflation rate for the third quarter of 2015. So, the last official inflation data reported by the BCV is almost two years old. To remedy this problem, the Johns Hopkins – Cato Institute Troubled Currencies Project, which I direct, began to measure Venezuela’s inflation in 2013. 

The most important price in an economy is the exchange rate between the local currency and the world’s reserve currency — the U.S. dollar. As long as there is an active black market (read: free market) for currency and the black market data are available, changes in the black market exchange rate can be reliably transformed into accurate estimates of countrywide inflation rates. The economic principle of Purchasing Power Parity (PPP) allows for this transformation.

I compute the implied annual inflation rate on a daily basis by using PPP to translate changes in the VEF/USD exchange rate into an annual inflation rate. The chart below shows the course of that annual rate, which last peaked at 2662% (yr/yr) in the beginning of October 2017. At present, Venezuela’s annual inflation rate is 3286%, the highest in the world (see the chart below). 


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Venezuela’s Grim Reaper: A Current Inflation Measurement, Including a Note on the IMF’s Musings on Inflation

Authored by Steve H. Hanke of the Johns Hopkins University. Follow him on Twitter @Steve_Hanke.

The Grim Reaper has taken his scythe to the Venezuelan bolivar. The death of the bolivar is depicted in the following chart. A bolivar is worthless, and with its collapse, Venezuela is witnessing the world’s worst inflation. 


As the bolivar collapsed and inflation accelerated, the Banco Central de Venezuela (BCV) became an unreliable source of inflation data. Indeed, from December 2014 until January 2016, the BCV did not report inflation statistics. Then, the BCV pulled a rabbit out of its hat in January 2016 and reported a phony annual inflation rate for the third quarter of 2015. So, the last official inflation data reported by the BCV is almost two years old. To remedy this problem, the Johns Hopkins – Cato Institute Troubled Currencies Project, which I direct, began to measure Venezuela’s inflation in 2013. 

The most important price in an economy is the exchange rate between the local currency and the world’s reserve currency — the U.S. dollar. As long as there is an active black market (read: free market) for currency and the black market data are available, changes in the black market exchange rate can be reliably transformed into accurate estimates of countrywide inflation rates. The economic principle of Purchasing Power Parity (PPP) allows for this transformation.

I compute the implied annual inflation rate on a daily basis by using PPP to translate changes in the VEF/USD exchange rate into an annual inflation rate. The chart below shows the course of that annual rate, which last peaked at 2662% (yr/yr) in the beginning of October 2017. At present, Venezuela’s annual inflation rate is 2712%, the highest in the world (see the chart below). 

Most musing about Venezuela’s inflation are just that – musings, finger-in-the-wind FORECASTS. The IMF October 2017 Economic Outlook contains the IMF’s FORECAST for 2018. The IMF’s FORECAST for inflation is 2300%. This musing is way off the mark. Annual Inflation today is MEASURED at 2712%, which is well above the IMF FORECAST for 2018. I do not report FORECASTS, but real MEASUREMENTS. 


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Only Private Property Will Save Africa’s Wildlife

The Wall Street Journal of August 31st carried an edifying op-ed by Kit Ramgopal and Matt Cooke. The title of their piece “Xanda the Lion Is Dead, but Trophy Hunting Helps His Kin” announces their thesis. That, as well as their argument and evidence, brought back memories of my first lunch in 1972 and subsequent collaboration with Richard Leakey – son of the famous paleontologists Louis and Mary Leakey, a famous paleontologist in his own right, bon vivant, etc…

At 72 years of age, Leakey is still going strong. Among other things, he is chair of the Turkana Basin Institute, which he founded. The Institute is a world-class research center located on the site in northern Kenya where the Leakeys made many notable discoveries, including an almost complete 1.6 million-year-old skeleton known as Turkana Boy. But, that’s not all Leakey is up to. In 2015, Leakey, founder and former director-general, was appointed by President Uhuru Kenyatta to chair the Kenya Wildlife Service. 

In addition to paleontology, Leakey has a passion for wildlife conservation. I learned of this during my first lunch with Richard Leakey in the spring of 1972. It was then that the anthropologist Neville Dyson-Hudson, an expert on East African pastoral peoples, and I broke bread with Leakey at the Johns Hopkins Faculty Club in Baltimore. I anticipated plenty of paleontology and anthropology, but those weren’t on the menu. The conversation quickly turned to the topic that most interested Leakey, and as it turns out, the reason why my former colleague Dyson-Hudson had invited me to lunch in the first place: to discuss the economics of wildlife resources.

Leakey had a vision of land use and wildlife resources in East Africa. His observation was that the East African savannahs were, in large part, common property resources. In addition, Leakey noted that the wildlife that roamed over these vast savannahs were fugitive common property resources, too. He concluded that, unless property rights could be established, both the savannahs and wildlife would eventually be destroyed. For him, this would be a great tragedy, not only for wildlife, but also for indigenous peoples living off the lands in East Africa.

Leakey questioned whether the current system — burdened with its common property problems and regulated by a very British-type system of hunting rules (charges for hunting licenses and penalties for unlicensed hunting, violations of closed seasons and the killing of protected species) — was sustainable. He also questioned whether parks and game reservations — coupled with restrictions on the trade of wildlife meat, skins, and trophies — would actually conserve wildlife. Leakey’s conjecture was that, if private property in the savannahs and wildlife resources could be established, they could be properly managed to enhance land-use productivity. This, he concluded, would give wildlife economic value, save it from destruction, and enhance the economic wellbeing of those indigenous peoples who co-exist among the wildlife herds in East Africa.

Leakey wanted to know what I thought of his ideas. Could good property rights cut down on poaching and corruption, save wildlife and enhance the productivity of East Africa’s savannahs? Could well-managed game cropping, trophy hunting, tourism and so forth, coupled with pastoral herding, generate more prosperity than the current land-use arrangements? Could such a wildlife-oriented economy co-exist with traditional herding? And on-and-on the questions flowed.

My response was that I thought Leakey, in principle, was on the right track, but that definitive answers as to how one would establish property rights in East Africa’s common property resources, as well as the economic values involved, would require practical, empirical investigation. Field work and the collection of primary data, among other things, would be required. In addition, I can also recall telling Leakey that the questions he raised posed a complex problem in production economics. On that point, I was certain, as I had learned my lessons on production economics from one of my professors, the great John M. Cassels, an economist who had written a classic essay on that topic in 1936: “On the Law of Variable Proportions.”

At that point, Leakey, director of the National Museums of Kenya, responded positively: he invited me to prepare a research proposal, and, subject to his approval, join him as a Research Associate.

I agreed and wrote a proposal, which he approved. In the summer of 1972, I arrived in Nairobi, where I took up residence at the Norfolk Hotel. In addition to spending hot days in Nairobi going over records of hunting licenses, ivory, and game trophy export permits, I spent about a month in the field on safari. I have many remembrances of that. Two notable ones come to mind. While camping in the Masai Mara National Reserve, I observed a great deal of poaching, some of it by government employees. Never mind. I also ran into Joy Adamson of Born Free fame out in the bush. It was in the middle of the afternoon, so Adamson had her tracker and scout lay a fire, and we had tea. We spent an hour or so chatting about the economics of wildlife and conservation. Adamson gave my research project a thumbs up, which was very encouraging.

What was not encouraging were some of the findings I turned up in the records back in Nairobi. When I added up the number of hunting licenses issued each year and export permits for ivory, etc., there was a huge gap. Legal exports of wildlife trophies, ivory, etc., which were recorded at the Customs Department, exceeded hunting licenses issued by the Game Department by a wide margin. There was trouble in paradise. Indeed, all my arithmetic pointed to a massive amount of corruption at the highest levels of government. When the Chief Game Warden figured out where my collection and analysis of what was considered rather obscure primary data were pointing, I became persona non grata. Shortly thereafter, I caught a flight from Nairobi to Switzerland, where the World Wildlife Fund (WWF) is located.

Upon arriving at the WWF headquarters in Morges, Switzerland, I started to put some of my notes together. Eventually, many of my findings appeared in a piece I co-authored with Robert K. Davis and Frank Mitchell, “Conventional and Unconventional Approaches to Wildlife Exploitation,” which was published in 1973. We concluded that the system of parks, protection, prohibitions on trade, and traditional hunting rules and regulations — no matter how well intended — were destined to fail at generating prosperity and conserving wildlife. Only by establishing secure property rights for land and wildlife would these resources be rendered valuable. Markets for them would then develop. In consequence, they would be wisely used, protected, and conserved. The prudent use of resources is, and always has been, all about property, prices, markets, and legitimate trade.

As Ramgopal and Cooke make clear in their Wall Street Journal piece, my work on wildlife in the early 1970s is becoming more and more relevant with each passing day. On the one hand, conventional approaches to wildlife management in Africa have failed, as witnessed by the dramatic declines in wildlife populations. And on the other hand, the cost of establishing property rights in wildlife and reducing the problems associated with the commons have been dramatically reduced with the introduction of new technologies. For example, satellites and drones hold the potential to establish property rights at ever-declining costs. These new technologies would protect the savannahs and the wildlife that roam on them. A comparable new technology to eliminate the commons was introduced during the 19th century in the United States. Barbed wire represented the new technology. To appreciate the cost plunge that accompanied the introduction of barbed wire, just consider that 1874, a 100 pounds of barbed wire cost $20, and by 1897, this cost had plunged to $1.80, a 91% drop. At this reduced cost, barbed wire became widely used. And with that, private property was established and common property on the open range was eliminated. This allowed for conservation, wise land use, and enhanced animal husbandry. 

If Richard Leakey is to succeed during his second tour as the leader of the Kenya Wildlife Service, he must do something big, bold and unconventional. To that end, he should revisit the findings of the research project he initiated many moons ago at Johns Hopkins.

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Forget The Hype: Public Infrastructure Generates Waste, Fraud And Abuse

Authored by Steve H. Hanke of the Johns Hopkins University. Follow him on Twitter @Steve_Hanke.

Economic policy is subject to fads and fashions. The most recent economic-policy fad is public infrastructure. Its advocates include progressives on the “left” and populists on the “right.” It is an undefined hallmark of President Trump’s economic program. They all tell us to take the chains off fiscal austerity and spend — spend a lot — on public works. They allege that this elixir will cure many, if not all, of our economic ills. Let’s take a look at their arguments and evidence.

Although its picked up recently, economic growth remains muted throughout the world. The U.S. provides an important example. It has been over eight years since Lehman Brothers collapsed and the Great Recession commenced. But, the U.S. has failed to bounce back. The economy is still struggling to escape from a growth recession — a recession in which the economy is growing, but growing below its trend rate of growth. The U.S. aggregate demand, which is best represented by final sales to domestic purchasers (FSDP), is now only close to reaching its trend rate, with growth in nominal terms at a 4.43% percent rate (see the accompanying chart).

Many argue that fiscal “austerity” is the culprit that has kept growth tamped down. They advocate fiscal stimulus (read: spending on public works).

Another line of argument used to support massive increases in spending on public works goes beyond the standard Keynesian counter-cyclical argument. It is the secular-stagnation argument. Its leading advocate is Harvard Economist, Larry Summers, formerly U.S. Treasury Secretary and President of Harvard. He argues that private enterprise is failing to invest, and that, with weak private investment, the government must step up to the plate and spend on public works.

For evidence to support Summers’ secular-stagnation argument, he points to anemic private domestic capital expenditures in the U.S. As the accompanying chart shows, net private domestic business investment (gross investment — capital consumption) is relatively weak and has been on a downward course for decades.

Investment is what fuels productivity. So, with little fuel, we should expect weak productivity numbers in the U.S. Sure enough, the rate of growth in productivity is weak and has been trending downward. The U.S. is in the grips of the longest slide in productivity growth since the late 1970s. The secular stagnationists assert that the “deficiency” in net private investment and the resulting productivity slump can be made up by public works spending.

Both the counter-cyclical and the secular-stagnation arguments have been trotted out many times in the past. So, it’s old wine in new bottles. But, it seems to be selling as a means to escape fiscal austerity. If proposed public works projects proceed as projected, the government financing magnitudes would be stunning. The McKinsey Global Institute estimates that annual spending of $3.7 trillion per year from 2013 through 2030 would be “required” worldwide.

McKinsey’s “requirements” estimate was computed by using the 70 percent rule of thumb. As shown in the accompanying chart, the average value of the stock of infrastructure for representative countries is 70 percent of GDP. Based on this value, McKinsey then calculated the amount of spending required to keep the global infrastructure stock to GDP ratio fixed at 70 percent over the 2013-2030 period. That exercise yielded a whopping total of $67 trillion in public works spending, which is in the ballpark of most other estimates.

President Trump has jumped on this infrastructure bandwagon. He is proposing a $1 trillion public works program. Following the script of the public works advocates (read: big spenders), Trump has lifted a page from President Obama’s Council of Economic Advisers (CEA). The President’s CEA’s 2016 Annual Report contains a long chapter titled “The Economic Benefits of Investing in U.S. Infrastructure.” That title alone tells us a great deal. Infrastructure spending advocates focus on the alleged benefits, which are often wildly inflated, while ignoring, downplaying, or distorting the cost estimates.

This was clearly on display in an op-ed, “These are the Policies to Restore Growth to America,” which appeared in the Financial Times (12-13 November 2016). It was penned by Anthony Scaramucci, the short-lived adviser of President Trump. In it, Scaramucci asserted that infrastructure spending “has an estimated economic multiplier effect of 1.6 times, meaning Mr Trump’s plan would have a net reductive effect on long-term deficits.” This multiplier analysis is exactly the same one used by President Obama’s CEA to justify public works spending. The idea that a dollar of government spending creates more than a dollar’s worth of output is nothing new. Indeed, the multiplier originated in an article that appeared in a 1931 issue of the Economic Journal. The article was written by R. F. Kahn, who was one of John Maynard Keynes’ favorite students and closest collaborators. Since Kahn’s 1931 article, the multiplier has become an inherent part of Keynesian theory. The numerical values of the multiplier are not only sensitive to the assumptions employed, but also subject to misuse in the artificial inflation of benefits.

Once public works are installed, the hot air comes out of their alleged benefits. These projects are poorly maintained, and users are often not charged for what they use, or they are charged prices set well below the relevant costs incurred. Water is a classic case. For example, the accompanying chart shows that, on average, 34 percent of the water delivered to water systems is either stolen or leaks out of the distribution systems. In Nigeria, 70 percent is leaked or stolen. So, it’s hard to take seriously the claims that billions of dollars are required to develop more water-resource capacity when much of the water produced in existing systems leaks away. Adjusted for leaks and thefts, the alleged benefits for many new projects, which have been inflated by multipliers, wither away to almost nothing.

When we turn to the cost side of the ledger, something infrastructure advocates prefer to keep from the public’s view, we find that infrastructure projects are always subject to cost overruns. While the projects might look good on paper, reality is a different story. Detailed studies show that the average ratios of actual costs to estimated costs for public works projects in the U.S. typically range from 1.25 to over 2.0.

In addition to cost overruns, the financing of infrastructure requires the imposition of taxes, and taxes impose costs beyond the amount of revenue raised. The excess burdens of taxation include “deadweight” distortions and enforcement and compliance costs. In short, it costs more than a dollar to finance a dollar in government spending. The best estimates indicate that, on average, it costs between $1.50 to $1.60 to raise a dollar in tax revenue.

Taking proper account of cost overruns and the costs of collecting taxes, one wonders if there are any public works projects that could justify federal financing, let alone financing to the tune of $1 trillion. Welcome to the wonderful world of infrastructure waste, fraud, and abuse.

 

 

This piece was originally published on Forbes.

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Inflation Is Among The Costs Of Venezuela’s War On The Private Sector

Authored by Steve H. Hanke of the Johns Hopkins University. Follow him on Twitter @Steve_Hanke.

Venezuela is engaged in a multifaceted “war.” The Bolivarian Republic of Venezuela’s main enemy is the private sector of the economy (read: those who hold title to private property) and anyone else (internal or external) who opposes Chavismo (read: socialism).

Wars always wreak havoc; life, property, and dreams are destroyed. In the process, wars – like Venezuela’s – progressively consume a country’s accumulated capital stock, too. In other words, as wars rage on, the destructive war economy gradually eats away at productive assets like land, factory capacity, and raw materials. Just where this process leads was well illustrated by the great Austrian economist, Prof. Fritz Machlup, in a 1935 article about Austria’s World War I inflation:

A dealer bought a thousand tons of copper. He sold them, as prices rose, with considerable profit. He consumed only half of the profit and saved the other half. He invested again in copper and got several hundred tons. Prices rose and rose. The dealer’s profit was enormous; he could afford to travel and to buy cars, country houses and what not. He also saved and invested again in copper. His money capital was now a high multiple of his initial one. After repeated transactions — he always could afford to live a luxurious life — he invested his whole capital, grown to an astronomical amount, in a few pounds of copper. While he and the public considered him a profiteer of the highest income, he had in reality eaten up his capital.

In Machlup’s parable, “copper” represents the capital in an economy. Over time, war consumption and inflation eat up the economy’s physical capital. And, without capital, peoples of war-torn lands face a bleak future. Alas, when the dust finally settles, new questions will have to be addressed. Indeed, citizens of war-torn lands are always left asking, “Where’s our capital?” Yes, the “seed corn” will be nowhere to be found.

But, some of the costs of war are hidden under a shroud of inflation. Inflation, too, is a problem — one that always accompanies wars. But, why?

Let’s start with a typical bogus explanation for inflation troubles — one that is often trotted out by governments dealing with war induced inflation — shifting the blame. True to form, the Chavistas have claimed that the enemies of the state were engaged in a conspiracy to undermine the bolivar by flooding Venezuela with counterfeit bolivar notes.

Indeed, a similar claim was made during Yugoslavia’s civil war. In October 1999, Minister for Information Goran Matic claimed that I was in charge of shipping huge quantities of counterfeit Yugoslav dinars into Milosevic’s Serbia, in an attempt to cause the dinar to collapse and inflation to soar. At the time, I was operating as an adviser to President Milo Djukanovic — who had become an arch foe of Milosevic —and was also State Counselor to the Republic of Montenegro. While the Matic fairy tale captured headlines in the Balkans for a few days, it was too far-fetched to result in anything but fleeting amusement for the chattering classes. And, I might add, the story was completely false.

In the case of Venezuela, Maduro’s explanation for Venezuela’s inflation problems is as phony as a counterfeit bolivar. Nevertheless, during wars, it is a standard refrain.

So, what about the real causes of inflation during times of war? During a war, government expenditures typically must increase, or at least remain the same. After all, the army must be fed, war materiel must be purchased, civil servants must be paid, subsidies for basic food and fuel items must continue, and so on… While government expenditures remain robust during war, the sources of government finance become problematic. The tax system and government administration begin to break down, and tax revenues dry up. Bond financing is nowhere to be found, since investors don’t want to invest in a country that is in a state of war.

Often, combatants, including the central government, pass the begging bowl, seeking foreign aid to fill the fiscal gap. In the case of Venezuela, Russia, China, and other allies of Venezuela,  are an obvious source of finance, but others are not so obvious.

For example, when economic sanctions are imposed on a country like Venezuela, smuggling and other illegal activities run rampant. Misha Glenny, in his fascinating account of the Balkan wars in the 1990s — contained in McMafia: A Journey through the Global Criminal Underworld (Random House, 2008) — makes the following little understood point:

The arms embargo played a key role in establishing the smuggling channels to Croatia and Bosnia, and soon drugs were accompanying the guns along the same routes. But this was nothing compared with the Balkan-wide impact of the comprehensive UN economic sanctions imposed on the rump of Yugoslavia, comprising Serbia (including the troubled province of Kosovo, with a large Albanian population) and Montenegro… Criminals and businessmen throughout the region worked feverishly to create a dense web of friendships and networks to subvert the embargo. Virtually overnight, the vote at the UN Security Council ordering sanctions created a pan-Balkan mafia of immense power, reach, creativity, and venality.

The profits generated by sanctions busting and other nefarious activities were split between the state and the deep pockets of the mafia. So, the Milosevic war machine was financed, to some extent, by smuggling and other illegal activities. This, no doubt, is playing a role in Venezuela.

But, at the end of the day, as a war rages, these sources of funds fail to come close to the level of government expenditures. What to do? Well, the government simply orders its central bank to start the printing presses and fill the deficit gap. It is this surge in the supply of money that generates higher inflation rates.

Again, let’s look at Yugoslavia, whose civil war began in June 1991. During the 1991-98 period, the Yugoslav dinar was devalued 18 times, with a total of 22 zeros being lopped off that unit of account.

In 1991, facing a tremendous budget deficit, Milosevic ordered the central bank to crank up the printing presses. The resulting hyperinflation peaked in January 1994, with a monthly inflation rate of 313 million percent — the world’s third highest hyperinflation. By that time, the central bank was funding virtually all of the government’s expenditures by printing money.

Indeed, Belgrade’s Top Cider Mint was working at full capacity, turning out bank notes that were worthless before the ink had dried. Finally, the mint’s physical capacity  was reached. The authorities could not print enough cash to keep up. On 6 January 1994, the dinar officially collapsed. 

Over the past year few years, Venezuela has been forced to let the central bank’s printing presses roll, though not to the extent they did in Yugoslavia. Nevertheless, the Banco Central de Venezuela (BCV) has turned on the money pumps. In consequence, the bolivar has collapsed and inflation has soared (see the chart below).

As the bolivar collapsed and inflation accelerated, the BCV became an unreliable source of inflation data. Indeed, from December 2014 until January 2016, the BCV did not report inflation statistics. Then, the BCV pulled a rabbit out of its hat in January 2016 and reported a phony annual inflation rate for the third quarter of 2015. So, the last official inflation data by the BCV is almost two years old. To remedy this problem, the Johns Hopkins – Cato Institute Troubled Currencies Project, which I direct, began to measure inflation in 2013.

The most important price in an economy is the exchange rate between the local currency and the world’s reserve currency — the U.S. dollar. As long as there is an active black market (read: free market) for currency and the black market data are available, changes in the black market exchange rate can be reliably transformed into accurate estimates of countrywide inflation rates. The economic principle of Purchasing Power Parity (PPP) allows for this transformation.

I compute the implied annual inflation rate on a daily basis by using PPP to translate changes in the VEF/USD exchange rate into an annual inflation rate. The chart below shows the course of that annual rate, which previously peaked at 1823% (yr/yr) in early August 2017. At present, Venezuela’s annual inflation rate is 2060%, the highest in the world (see the chart below).

Does this inflation mean that President Maduro will be shown the door tomorrow. No. Milosevic stayed in the saddle for five years after Yugoslavia’s hyperinflation peaked. 

 

This piece was originally published on Forbes.

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Venezuela’s Grim Reaper – A Weekly Report

Authored by Steve H. Hanke of the Johns Hopkins University. Follow him on Twitter @Steve_Hanke.

The Grim Reaper has taken his scythe to the Venezuelan bolivar. The death of the bolivar is depicted in the following chart. A bolivar is worthless, and with its collapse, Venezuela is witnessing the world’s worst inflation. 

As the bolivar collapsed and inflation accelerated, the Banco Central de Venezuela (BCV) became an unreliable source of inflation data. Indeed, from December 2014 until January 2016, the BCV did not report inflation statistics. Then, the BCV pulled a rabbit out of its hat in January 2016 and reported a phony annual inflation rate for the third quarter of 2015. So, the last official inflation data reported by the BCV is almost two years old. To remedy this problem, the Johns Hopkins – Cato Institute Troubled Currencies Project, which I direct, began to measure Venezuela’s inflation in 2013. 

The most important price in an economy is the exchange rate between the local currency and the world’s reserve currency — the U.S. dollar. As long as there is an active black market (read: free market) for currency and the black market data are available, changes in the black market exchange rate can be reliably transformed into accurate estimates of countrywide inflation rates. The economic principle of Purchasing Power Parity (PPP) allows for this transformation.

I compute the implied annual inflation rate on a daily basis by using PPP to translate changes in the VEF/USD exchange rate into an annual inflation rate. The chart below shows the course of that annual rate, which previously peaked at 1823% (yr/yr) in early August 2017. At present, Venezuela’s annual inflation rate is 1892%, the highest in the world (see the chart below).

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A Market Solution For Dangerous Disputed Territories

Authored by Steve H. Hanke of the Johns Hopkins University. Follow him on Twitter @Steve_Hanke.

Earlier this week, China and India said they had resolved their differences over the sovereignty of the Kingdom of Bhutan. Both claimed victory over their two-month-long dispute in the remote Himalayan Kingdom. But, statements by both sides created confusion and doubts over how long stability would prevail. And, Bhutan is not the only piece of real estate in the Himalayas that India is in a flap over. Kashmir remains a tinderbox. And just this week, Prime Minister Benjamin Netanyahu proclaimed that Israel would not force any more of its so-called settlers to move from the occupied territories of the West Bank.

There are many other disputed and potentially dangerous territories. Don’t forget the Falklands. It has recently flared up in an ongoing spat between the United Kingdom and Argentina. Indeed, both Prime Minister Theresa May and the Chancellor of the Exchequer Philip Hammond began dueling it out over the Falklands with Buenos Aires earlier this month. 

This brings back memories of the Iron Lady and the Falklands War – a war that officially commenced on 2 April 1982, only three short years after Margaret Thatcher assumed the reins as Prime Minister of the United Kingdom. Since 1833, Britain has been able to maintain its colonial settlement of the Falklands against the objections of Argentina. The Falklands? Well, even Samuel Johnson had something to say about the Falklands. This is what he wrote in 1771:

What, but a bleak and gloomy solitude, an island thrown aside from human use, stormy in winter, and barren in summer; an island which not even southern savages have dignified with habitation; where a garrison must be kept in a state that contemplates with envy the exiles of Siberia; of which the expence will be perpetual, and the use only occasional; and which, if fortune smiles upon our labours, may become a nest of smugglers in peace, and in war the refuge of future Buccaniers.

When Margaret Thatcher took over from Jim Callaghan, her government was given a brief on the festering Falklands sore. As Sir Lawrence Freedman summarized in his authoritative two volume The Official History of the Falklands Campaign:

The briefing note prepared for the incoming Government described the problem. A remote set of islands, with a dwindling population and limited economic prospects, was reliant for communications and supplies upon a neighbouring country. This country claimed sovereignty, and if it acted on this claim with armed force then the small RM garrison would provide scant defence, and a subsequent effort to retake the Islands would involve a major amphibious operation. The sovereignty claim might be ‘unsound’ but it still cast a shadow over relations with Argentina and caused Britain difficulty in the UN. Any long-term development of the Islands required a solution to this problem but efforts to find a negotiated settlement had not got very far. The islanders had been given an undertaking that only solutions that they supported would be brought to Parliament, but no proposals that were of interest to Argentina appealed to them.

The Thatcher government did not realize that danger was lurking, as is always the case when disputed territories are in the picture. Indeed, Britain’s intelligence about what Argentina’s military government was up to was wanting. When the Galtieri government struck, Britain was caught off guard and the Falklands War ensued, resulting in more than 900 casualties. And, as they say, what goes around comes around. As the preparations for next year’s G2O summit, which will be hosted in Buenos Aires, proceed, tensions are on the rise, yet again. 

Before we have more nationalistic posturing, sanctions, protracted skirmishes, a new war, and only then a “solution,” let’s move the Falklands dispute out of what is mucha teología (many theological arguments) territory, try to think creatively and design market-based treaties applicable to dangerous disputed territories (see the accompanying table). 

For the Falklands, the governments of the United Kingdom and Argentina would agree that those Falklanders who were qualified to vote would be allowed to do so in a referendum. The referendum would allow the settlers — who are English-speaking and English by custom, institutions and loyalties — to vote on whether they prefer the status quo, or whether they would agree (“yes”) to an Argentine take-over. A super-majority “yes” vote, of say 80%, would be required by the Falklanders to allow Argentina to claim sovereignty.

This is where markets come in. The Falklanders would have to be compensated by Argentina. The referendum would be designed so that Argentina could offer a cash incentive. Before the referendum, Argentina would deposit an amount (let’s say USD $500,000) in escrow, in Swiss bank accounts for every man, woman and child who had proven their Falklands residence prior to the referendum. If the referendum went in Argentina’s favor (over 80% of eligible voters casting a “yes” vote), then the funds in escrow would be transferred to the Falklanders, and Argentina’s unambiguous sovereignty over the Falklands would be established. Argentina’s cost, in this hypothetical, would be about USD $1.6 billion.

A transparent market solution for the Falklands and other disputed territories would be a cost-effective way to unambiguously establish sovereignty — a way that avoids blundering into unwanted wars and spilling blood, sweat and tears.

 

This piece was originally published in Forbes.

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Venezuela’s Grim Reaper – A Weekly Report

Authored by Steve H. Hanke of the Johns Hopkins University. Follow him on Twitter @Steve_Hanke.

The Grim Reaper has taken his scythe to the Venezuelan bolivar. The death of the bolivar is depicted in the following chart. A bolivar is worthless, and with its collapse, Venezuela is witnessing the world’s worst inflation. 

 

As the bolivar collapsed and inflation accelerated, the Banco Central de Venezuela (BCV) became an unreliable source of inflation data. Indeed, from December 2014 until January 2016, the BCV did not report inflation statistics. Then, the BCV pulled a rabbit out of its hat in January 2016 and reported a phony annual inflation rate for the third quarter of 2015. So, the last official inflation data reported by the BCV is almost two years old. To remedy this problem, the Johns Hopkins – Cato Institute Troubled Currencies Project, which I direct, began to measure Venezuela’s inflation in 2013. 

The most important price in an economy is the exchange rate between the local currency and the world’s reserve currency — the U.S. dollar. As long as there is an active black market (read: free market) for currency and the black market data are available, changes in the black market exchange rate can be reliably transformed into accurate estimates of countrywide inflation rates. The economic principle of Purchasing Power Parity (PPP) allows for this transformation.

I compute the implied annual inflation rate on a daily basis by using PPP to translate changes in the VEF/USD exchange rate into an annual inflation rate. The chart below shows the course of that annual rate, which peaked at 1823% (yr/yr) in early August 2017. At present, Venezuela’s annual inflation rate is 1805%, the highest in the world (see the chart below).

 

The post Venezuela’s Grim Reaper – A Weekly Report appeared first on crude-oil.news.

Venezuela’s Grim Reaper – A Weekly Report

Authored by Steve H. Hanke of the Johns Hopkins University. Follow him on Twitter @Steve_Hanke.

The Grim Reaper has taken his scythe to the Venezuelan bolivar. The death of the bolivar is depicted in the following chart. A bolivar is worthless, and with its collapse, Venezuela is witnessing the world’s worst inflation. 

As the bolivar collapsed and inflation accelerated, the Banco Central de Venezuela (BCV) became an unreliable source of inflation data. Indeed, from December 2014 until January 2016, the BCV did not report inflation statistics. Then, the BCV pulled a rabbit out of its hat in January 2016 and reported a phony annual inflation rate for the third quarter of 2015. So, the last official inflation data by the BCV is almost two years old. To remedy this problem, the Johns Hopkins – Cato Institute Troubled Currencies Project, which I direct, began to measure inflation in 2013. 

The most important price in an economy is the exchange rate between the local currency and the world’s reserve currency — the U.S. dollar. As long as there is an active black market (read: free market) for currency and the black market data are available, changes in the black market exchange rate can be reliably transformed into accurate estimates of countrywide inflation rates. The economic principle of Purchasing Power Parity (PPP) allows for this transformation.

I compute the implied annual inflation rate on a daily basis by using PPP to translate changes in the VEF/USD exchange rate into an annual inflation rate. The chart below shows the course of that annual rate, which peaked at 1823% (yr/yr) in early August 2017. At present, Venezuela’s annual inflation rate is 1581%, the highest in the world (see the chart below).

The post Venezuela’s Grim Reaper – A Weekly Report appeared first on crude-oil.news.