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Venezuela has taken another step towards hyperinflation, as this week Unveiled President Maduro presented a brand new banknote with an even higher value of 100,000 bolivars. The new banknote, which is worth only two euros, should make it easier for locals to make payments.
Last year, a completely new series of banknotes was released, but they have now become virtually worthless. The smallest 500 bolivar note is worth about one euro cent, while the largest 20,000 bolivar banknote until recently has barely forty euro cents in purchasing power.
That means that people in Venezuela have to go out on the streets with piles of banknotes to buy groceries. All savings that had not yet been converted into foreign currency or into tangible things such as gold and silver have become worthless in a few years as a result of this hyperinflation.
Venezuela launches 100,000 bolivar banknote (Source: Wikipedia)
Venezuela has fallen into hyperinflation due to a combination of factors. The government has done too little in recent years to make the economy less dependent on oil, which made the fall in oil prices in 2014 fatal. The country had large trade deficits and saw its foreign exchange reserves dwindle rapidly, more or less forcing the country to print money.
According to Venezuelan President Nicolas Maduro, the new 100,000 bolivar banknote should stabilize the money supply, but in practice, printing larger notes is unlikely to help confidence in the currency's value retention.
By printing even larger banknotes, the total amount of money in circulation increases, while the effective purchasing power of the total available money supply decreases. The characteristic of hyperinflation is a shortage of money in circulation, which means that more and more of it has to be printed. But in the process, the value of each currency decreases faster than the number can increase.
Many economists will agree that Venezuela's economic problems are largely caused by a failed government policy, but President Maduro thinks otherwise. According to him, the currency is being attacked by speculators who speculate against the bolivar. He also blames the black market for the problems, because it makes the real value of the currency visible to everyone.
Last week, it was revealed that Venezuela's central bank did not have enough money to buy back the gold it had previously lent to Deutsche Bank. Venezuela then had to Selling gold to replenish its foreign exchange reserves. If the hyperinflation in the country gets further out of control, it is possible that Venezuela will sell more gold. According to Jeffrey Christian of the CPM Group, this can be a slight Negative effect have an impact on the Gold price.
