Richard Segovia is a Venezuelan citizen who migrated to Columbia with his wife and a cousin to sell handmade artwork made of paper. The origami-made paper wallets, belts and even purses sell at a price of 10 to 15 dollars each. His earnings are far from a fortune, but at last he can make a living and send to his family in Venezuela 15 dollars from time to time, “enough to have a breakfast,” as he says.
That is a big deal: according to the annual Survey on Living Conditions released by three Venezuelan universities, in 2017, 90 percent of Venezuelans reported that they don’t have enough food for a healthy living. 74 percent of Venezuelans reported involuntary weight-loss caused by starvation, at an average of 11.4 kilograms (25 pounds) per person. More than 61 percent of respondents said they had gone to bed hungry over the past three months. Alarmingly, workers of the PDVSA, the National Oil Company in Venezuela, are quitting their jobs by hundreds because of anemia. They just don’t get enough calories to be able to do the hard work in the one industry that brings some wealth to the country.
Segovia has no worries getting cheap paper to produce his items. His artwork is made of Venezuelan bolivar bills. He had this idea while looking at a pile of bolivars with his cousin back in Venezuela. “We had a lot of cash but nothing to buy, because in Venezuela your money is worth nothing,” he says. Each item that Segovia crafts is made of 800 to 1000 bolivar notes, mostly worth either 50 or 100 bolivars. That makes roughly 70,000 bolivars which value is less than 50 US cents on the black market.
With an inflation level in the three zeros range, Venezuela’s national currency loses value from one day to another. And the International Monetary Fund projects an inflation of 13,000 percent by the end of 2018. The destruction of the bolivar by state-driven hyperinflation ended with Venezuelans using foreign currency and doing barter for daily exchanges. Even the Venezuelan government tries to replace it with the Petro, a cryptocurrency based on oil.
To prevent us following Venezuela to hyperinflation and misery, we must understand why the Venezuela’s government has come to issue so much money. Chavez and Maduro’s socialist programs promised a social welfare greatly exceeding the taxpayer’s possibility to sustain it. To make up for the difference, Venezuela borrowed money up to the point where creditors stopped trusting that it will ever pay back. At that point, the only way to pay for the welfare was to print money. Far from being specific to Venezuela, today most world governments spend more than their tax revenues, either for welfare or for war. The difference is covered largely by adding to the debt, and slightly by printing money. Moreover, governments pay the interest on current debts by issuing more debt, thus spiraling up the total. When the trust that governments will pay back the debt is lost, the only way to cover for all the expenses and to pay back the debt will be by printing even more money.
This pattern ascended ever since the creation of central banks. But it really went wild with the end of the Bretton Woods system back in 1971, when currencies where totally deprived of their linkage to gold: the only mechanism that was keeping the quantity of money in control. If we use gold as a reference, using CPI statistics, the US paper dollar has lost 96 percent of its purchasing power since the creation of the Federal Reserve system in 1913, from which 82 percent were lost since the end of the Bretton Woods.
A few weeks ago, a new bipartisan spending bill was signed into effect in the US which allows for another trillion-dollar-size increase of the national debt over the next two years. This adds to the current debt of almost 21 trillion dollars. That, once monetized, will bring America on the list of devastated countries. But at least we are not alone on this path.
If world governments and central banks haven’t learnt the consequences of monetary debasement from thousands of years of economic history, at least they could learn from the present day’s tragedies in countries like Zimbabwe and Venezuela. If the US Government won’t match its spending with the budget, and it won’t back the US dollar by gold as it once did, we could all possibly follow Segovia to handcraft origami paper artwork out of dollar bills in the future.
Alexandru Cojocaru is the founder of Gold’N’Roll, an online marketplace priced in gold.