Sep 24, 2020
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Venezuela, Where Robbing A Bank Doesn’t Make Money But Making Change At One Does

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A useful little rule of thumb is that after a central authority manages to make money worth nothing then they ve been doing something wrong. There were hyperinflations of this way before: Weimar Germany (no not what brought Hitler to power a decade before that) post WW II Hungary and of course modern Zimbabwe


Where it got so bad at the end that they couldn t actually print banknotes of sufficient value to purchase the ink with which to print banknotes. That s why the Z $ finally died. Venezuela hasn t got quite that bad as yet. With the black market rate for the Bolivar Fuerte at around 400 to the U


S. dollar the money remains worth more than the paper that’s printed upon. So Reason is using a bit bit of rhetorical hyperbole here in place of strict fact: Back in February when the Venezuelan government introduced its official and complicated three-tier exchange rate 190 bolivars bought you one U. S. dollar at the black market—which is where real people without government connections shop for hard currency in Caracas


Now just some months later the bolivar is worth about half that much. It is a brilliant testimony to the innovative power of the govt. s socialist policies: faced with a crushing shortage of loo paper the Bolivarian regime has converted its own currency into butt-wipe. The smallest Venezuelan note is currently the 2 bolivar that’s worth around half of a US cent


Toilet paper would not cost up to half a US cent per sheet so hyperbole not strict fact at play here. Which brings us to the belief of seigniorage. That’s the profit you could make by making money. Take a sheet of that bathroom paper print 2 bolivars on it and if you re the govt


at least then people provides you with 2 bolivars for it. In precisely the same way that during the U. S. some paper some ink and the right incantations (or more accurately laws allowing you to do this) turns into a $100 bill. There s wonderful profits to be made in doing this


And those profits are called seigniorage. The profit that accrues to the money maker throughout the act of creating money. As above that’s actually possible for seigniorage to go into reverse: it did in Zimbabwe the published notes were worth lower than the ink used to print them. Reverse seigniorage is so much more common in coins though


It s happened pretty much everywhere over the last century too as the long inflation of the 20th century passed by. Inside the 19th century a gold $1 coin (if such existed) was worth $1 and may well be and was spent like $1. The silver dollar as well. The gold sovereign of my native UK had a nominal value of one pound and may well be and was spent as one pound the equal value to 20 shillings


As inflation took hold over the decades gold went out of circulation then silver then the partially silver coins vanished (usually mid 60s wherein that happened in US and UK) and so on. Coins are actually cupro-nickel nickel silver (which doesn t contain any silver) and the lower values usually steel with a coating of a few kind


That’s how we ve kept the currency value of coins just before the metals values and thus stopped people hoarding them to soften down. PROMOTED UNICEF USA BRANDVOICE | Paid Program
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And that s the point we ve got to in Venezuala. The coins are worth more as scrap metal than they’re as coins. Here s a list of the weights and compositions of these bolivar fuerte coins. And a bit calculation. If it s 400 bolivars to 1 US$ then each bolivar is worth 0


25 cents (note that s a quarter of a cent not a quarter of a dollar). And 1 centimos is worth 0. 0025 of a cent US. There s 1 million grammes to a tonne (one thousand kilos of one thousand grammes each) and the one centimos coin is 1. 36 grammes


Thus 735 300 one centimos coins to 1 tonne. This has a currency value of around $18 (735 300x 0. 0025 cents or x 0. 000025 dollars). This isn t quite right because there s a copper coating at the steel blanks and dependent upon the thickness of that you may get a stronger price (copper is worth more than steel) or a lower one (copper is something you don t want in steel scrap) but the steel scrap price is around $100 a tonne at the moment


So turning the money into scrap metal makes a profit: or the wrong way around turning metal into coins loses money for the Venezuelan government. That s our reverse seigniorage. The 50 centimos coin looks safe for the instant its weight value being above the scrap value but the bolivar coin appears like an exceptionally tempting indeed profit opportunity


I m simplifying a bit I m not differentiating the bimetallic nature of the coin (a cupro nickel heart with a brass circlet just treating it all as 70/30 cupro nickel) but that’s still indicative. The scrap value of such cupro nickel is around $3. 50 a lb or some $7 700 a tonne


The one bolivar coin is 8 grammes meaning 125 000 to a tonne. And the money value of one bolivar is 0. 25 of a US cent. So the price of one tonne of bolivar coins as money is 125 000 x 0. 25 US cents or $312 dollars. The scrap value (roughly recall) of those same coins is some $7 700


A country really has come to something when robbing banks isn t a way to make money. Instead go and make change at the bank is. Swap paper money for metal money and make a 2 000 percent profit by melting it down. There s something called Gresham s law bad money drives out good


And my prediction here would be that there s going to be a terrible shortage of bolivar coins real soon now in Venezuela if there isn t already. Because people aren t dumb if this hasn t been worked out already locally then it soon will be. And that good money the stuff worth more as metal than as money will disappear into the furnaces and the bad money the paper and ink will replace it


Public policy comes in two flavours here. The 1st being that obviously the Venezuelan government should stop making at least the bolivar coins if they haven t already. Whether they have or not would be an exceptionally interesting test of the fundamental competence of that government. Turning $7 000 worth of metal into $300 worth of coins just doesn t seem like something sensible people would do


So if they’re doing it then we ve a guide to their good sense: if they ve already stopped then a guide to the undeniable fact that at least someone inside that structure has some good sense. The second one is that after the sort of situation exists we are able to be very certain that there s been some appalling public policy inside the recent past


Because recall what actually happens here. You could walk into a bank in Venezuela with $300 worth of banknotes and someone provides you with $7 000 worth of metal. Assuming they’re going to make change for you of course. And who would rob banks when that’s true when such profits are available in entirely legally? Otherwise of putting that’s that the Venezuelan government is managing to subtract value from copper and nickel by turning it into money


That doesn t bode well for their other public policies does it?

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