Venezuelas Monetary Disaster Continued

About two years ago I reported on Venezuela’s messy monetary system, which I intended to update with the new news surrounding the creation of a cryptocurrency they call the Petro. However, I am beginning with a refresher about what Venezuela’s monetary system has looked like since 2014.

Venezuela began to face detrimentally high inflation in 2014, right after the death of previous President Hugo Chavez. Although this was not the beginning of the country’s monetary problems, high inflation has led to a huge decrease in the value of the Bolivar, Venezuela’s currency. Now prices of regular goods and services have skyrocketed. Not only has inflation led to the devaluation of the bolivar but it has also caused Venezuela’s government to panic and take precaution in order to make some goods and services cheap while others are staying severely expensive.

In the attempt to resolve and or manage the high inflation, the government created a system that has four different exchange rates. This includes the black market within the four. To explain this complex system simply, we can divide the four exchange rates into categories in which prices are set to particular goods and services. Basically, the government sells dollars at an exchange rate of 6.3 and 12 bolivars per dollar. These first two rates buy necessity imports such as food and medicine. Although that may not seem like a high exchange rate, it severely impacts the country in other ways, which will be discussed later. The third rate is 172 bolivars per dollar. This rate is for people who are unauthorized to exchange their bolivars to dollars at the other preferred rates. In terms of the black market rates, goods and services could start anywhere from 170 to 3,500 bolivars according to Venezuela Live Economic Data. While those exchange rates still hold, the government of Venezuela has grasped onto the idea of cryptocurrencies as they still struggle to fix their monetary problems.

Here in the US, we have seen an increase in the use of cryptocurrencies due to its success. The most commonly know is Bitcoin, where at the beginning of its development people would “mine” for them in order to obtain them. By mining, we really mean solving complex algorithms on computers. Since then other blockchains have been developed in order to mimic the success of Bitcoin. However, the Venezuelan government is doing quite the contrary. The newly formed Petro is a cryptocurrency backed by oil. Well, if you can even call it that. The Petro does not hold the same characteristics as other cryptocurrencies and it can even be argued that it isn’t even a currency at all. This is how it works, first Petros can only be bought using American Dollars. This essentially means that people in Venezuela are discouraged and are incredibly unlikely to even be able to buy it given the shortage of dollars in the economy. Second, you can’t just make any kind of transaction like other cryptocurrencies, it can only be used towards taxes. So the only people who can buy Petros can’t really use them, and the only people who can buy them cannot afford them. The only true purpose for Petros is supposedly the return in oil. However, when you exchange by paying taxes the Petro is valued at whatever price it calculates oil at, but the return on oil is not actually made. It’s seemingly scam, and probably the worst investment to make in oil.

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