When this article was originally published, Venezuela’s much-discussed socialist system was described as deteriorating rapidly. Shortages, rationing, electricity outages, and hyperinflation were said to be driving social unrest, with the article anticipating that the government and currency could both collapse soon. One illustration of the currency’s decline was a hamburger price reported a few days earlier as $170! The article stated that the official exchange rate was 10 bolivares to the dollar, while the black-market rate was reportedly 1000 to 1! According to this FT.com report, the government had sold an estimated $1.7 billion of its gold reserves in the first quarter of 2016 to meet debt obligations. The article then considered whether selling those reserves was futile or could stabilize the economy and reduce civil unrest.
Gold Holdings
Venezuela’s official gold holdings were estimated to rank 16th worldwide before the significant first-quarter gold sell-off in 2016. According to a report from the World Gold Council, the government held 272.9 tonnes as of May that year, with an approximate market value of $10.6 billion. Although that was still a sizable reserve on its face, Venezuela’s economic problems at the time suggested it might not offer support for long.
If the Venezuelan government went on to sell the country’s remaining holdings, the question in 2016 was whether those proceeds could adequately help resolve its debt and currency difficulties, or whether the sales would only delay a more serious outcome. Looking at other countries that had recently confronted comparable conditions can help indicate Venezuela’s likely fate.
Argentina & Zimbabwe
In the years preceding this article’s publication, Argentina and Zimbabwe were presented as countries where hyperinflation had led to currency collapse. In Zimbabwe, the domestic currency was replaced by a basket of currencies that included the U.S. dollar; in Argentina, the government devalued its currency and defaulted on a portion of its debt. During the peak of Zimbabwe’s monetary crisis, its government issued a $100 trillion bill in an attempt to preserve the currency. That effort did not last, and the government effectively left the Zimbabwe dollar behind in June of 2009. At the time of publication, the article noted that many people were surprised the $100 trillion note had genuinely circulated. Though it was worthless in Zimbabwe, the original article reported that a $100 trillion note cost about $25 as a novelty because it was the largest note ever printed. The article then asked whether Venezuela’s bolivar might recover in the months ahead and introduced a then-recent IMF forecast.
Predications on the Venezuelan Bolivar
When the article was published, the International Monetary Fund (IMF) forecast that the bolivar’s black-market exchange rate against the dollar would rise from the then-current level of 1000 to 1 to 6,699 to 1 by the end of the year. Put another way, the forecast estimated the bolivar would lose 83% of its value relative to the dollar by the start of 2017. The original article characterized that outcome as unsustainable and projected that a hamburger could cost more than $1,100 by year-end. It also argued that price controls and rationing offered little prospect of the country retaining its administration and currency through that year’s end. The article observed that hyperinflation can remove leaders through elections or military coups, and predicted that one of those possibilities was likely within the following six months.
Should Venezuela Sell its Gold Reserves?
Given the bleak conditions described above, the article concluded that selling Venezuela’s gold reserves was unlikely to support its economy over the long run. It characterized the approach as another attempt to postpone a problem in the hope that conditions would improve later, as it said had happened repeatedly in the past. The article’s view was that the then-current administration would be replaced somehow and that the government would default on most, if not all, of its debt. It argued that, if Maduro’s concern had been Venezuela and its citizens’ future, he should have chosen an outright debt default. The article cited Iceland, which did exactly that in 2008, and described it as one of the more stable economies in the years before publication. Returning to Venezuela, it reasoned that clearing the slate could give the government a firm starting point for rebuilding. It further suggested that retained gold could support a new currency and make that currency highly desirable internationally. At the same time, it acknowledged that reduced gold holdings would make a gold-backed currency harder to establish. The article next addressed the U.S. fiscal position and the prospect of a Venezuela-like event.
U.S. Fiscal Situation
At the time of publication, Atlanta Gold & Coin reported that many customers were watching Venezuela’s situation and preparing for what they believed could be a similar occurrence in the United States. The article’s position was that the dollar, considered alone, was seriously flawed, yet comparatively one of the strongest among major currencies—the cleanest dirty shirt. It stated that the United States then had more than $19 trillion in debt, an amount it said continued to rise, along with routine annual deficits of $500 billion to $1 trillion. When the article was originally published, readers were invited to view the U.S. debt clock in real time through here. It argued that the stated official debt of $19 trillion represented only a small part of the issue, citing Dr. Kotlikoff of Boston University’s estimate that the present value of then-current unfunded liabilities exceeded $210 trillion! The article asserted that some form of default was inevitable because the debt burden could not be repaid, and that even a modest increase in then-current interest rates could make debt-service costs exceptionally difficult to meet.
Hyperinflation in the U.S.?
At publication, The article acknowledged that no one knew whether hyperinflation would ever arrive in the United States. It argued, however, that the dollar’s purchasing power had declined since the Federal Reserve was created in 1913, and that the Federal Reserve considered a measured amount of inflation beneficial to the economy. According to the U.S. inflation calculator, an item bought for $1 in 1913 would have cost $24.16 at the article’s publication. The article calculated cumulative inflation of 2,316%, meaning the dollar had lost approximately 99% of its value during the prior 103 years. It also noted that the Federal Reserve had expanded its monetary base from $800 billion in 2007 to nearly $4 trillion today. Some, the article said, would call that hyperinflation of the currency, or at least mass inflation. It explained that this had not become price inflation because banks preferred holding excess reserves at the Federal Reserve rather than lending the money. If another recession occurred in 2016 or 2017—which the article considered possible because earnings were falling at their fastest pace since the Great Recession—it anticipated further expansion of the Federal Reserve’s asset base and currency debasement. Although it said a Zimbabwe-, Argentina-, or Venezuela-style outcome could not be forecast, the article expressed the opinion that a precious-metals allocation, including gold or silver, seemed a sensible hedge against currency collapse. It added that gold and silver had served as money for thousands of years and were, in its view, the only currencies to endure over time.
Conclusion
At publication, In closing, the article stated that Venezuela’s bolivar was neither the first currency to undergo hyperinflation nor likely to be the last. Based on the IMF projections available when it was published, it anticipated inflation increasing 6 to 7 fold by that year’s end, which it believed would nearly assure a bolivar collapse, regime change, and creation of a new currency. The article’s opinion was that Venezuela’s government should default directly on its debt, as Iceland had, while retaining its gold reserves for possible use in establishing a new currency. Whether the dollar would face hyperinflation, it said, could not be known. Still, the original article expressed the view that placing part of personal holdings in gold and similar assets appeared prudent.
