As 2017 progresses, all eyes have been on the Venezuelan inflation train wreck currently unfolding. While the unfortunate South American nation stopped publishing official (and embarrassing) inflation statistics some time ago, an informal index calculated by Bloomberg known as the “Venezuelan Café Con Leche Index” currently pegs the annualized inflation rate in beleaguered country at 616%.
This shockingly high inflation rate is even more alarming in light of the fact that the Venezuelan bolivar used to be Latin America’s strongest, most stable currency for most of the 20th century. In fact, the Venezuelan bolivar was one of the world’s few currencies to actually appreciate versus the U.S. dollar between the 1920s and the 1970s!
This feat was quite an accomplishment, underscoring Venezuela’s strong economy and fiscal position in the mid 20th century. Unfortunately, that previous monetary stability abruptly ended in dramatic fashion on February 18, 1983, when Venezuela experienced a shocking currency crisis referred to locally as “Viernes Negro” or Black Friday.
Before Venezuela’s 1983 Black Friday devaluation, the bolivar exchange rate had been fixed at 4.3 bolivars to the dollar. Currently, that same bolivar trades for over 5,100,000 to the dollar on the Caracas black market. That averages out to a staggeringly high Venezuelan inflation rate of about 50% per annum for the last 34 consecutive years.
Consequently, over the last few decades Venezuelans have learned that bolivars should be spent as quickly as possible in order to avoid the devastating effects of rampant inflation. Every government attempt to stem the inflationary tide, including lopping three zeros off the end of the old bolivar in 2008 and renaming it the bolivar fuerte – the “strong bolivar” – has failed miserably. At this point, Venezuela teeters on the brink of hyperinflation, effectively insolvent.
Reading this news about Venezuelan inflation got me thinking. Chronic, elevated inflation forces Venezuelan shop owners to constantly readjust their prices upward. If they don’t, they will quickly sell out of their below market price goods and then lack the necessary capital to restock. But developed countries with strong currencies, like the U.S., Japan and the eurozone, allow businesses to retain static prices on old goods, sometimes for many years at a time.
This point was driven home to me when I visited the website of an online gem dealer recently. Much of this dealer’s inventory was several years old. This state of affairs is completely normal for the industry, though. Jewelry stores and antique shops, as well as art, gem and coin dealers have notoriously slow inventory turnover. It takes these businesses time to find the right buyer for their goods.
But then it hit me. Even though much of this gem dealer’s inventory was relatively old, the prices hadn’t changed. I know this is true because I’ve frequented this dealer’s website for several years. The pricing on old stock has been absolutely static.
This is a situation that doesn’t exist in Venezuela. It is a situation that can’t exist in Venezuela. Yet it is a situation that we in the developed world take for granted today.
Investors and consumers in the U.S. and other developed countries have become complacent about stable prices. We believe, implicitly, that inventory prices will remain fixed and unchanging forever. But this is a poor assumption, justified only by looking in the rear view mirror of monetary history. Instead, it would be prudent to look at Venezuelan inflation for a glimpse of what a darker, rawer economic future might look like.
I know that many people naively believe “It can’t happen here.” Those people are wrong. Government officials and monetary authorities in the developed world are under exactly the same pressures for politically expedient solutions as their Venezuelan counterparts.
This is proven by how quickly and easily central banks around the world adopted quantitative easing during the financial crisis of 2008-2009. Quantitative easing – the outright printing of money by central banks – had been a forbidden, nearly unthinkable, practice for central bankers in ages past. Now this inflationary policy has been glibly justified and normalized by those in power.
This gradual slide into inflationism has important implications for investors in art and antiques. I have been personally guilty of the conceit of believing that alternative asset prices won’t meaningfully rise while I carefully consider my choices. I window shop art and antiques endlessly, yet only occasionally open up my wallet to buy. And yet I am keenly aware that the U.S. dollar’s reign as the global currency hegemon is gradually drawing to a close.
While I firmly believe that the dollar will strengthen over the next few years, I also know that the dollar will eventually one day join all other paper currencies in the dustbin of history. This isn’t a prediction so much as an inevitability driven by human fallibility. If we learn anything from Venezuelan inflation, it should be that no fiat currency lasts forever.
