100 Bolivars = 0.03 US

Today Ecuador goes to the polls to express the collective will through democracy. Despite the Citizen’s Revolution and its inevitable mercantilism, Dollarization remains firm in its popularity and will be the cornerstone of the Ecuadorian recovery. Let’s hope that for Ecuador, the nightmare of “Socialism of the 21st Century” will end soon and with its demise begin to return to the course that began in 2000 with Dollarization. It does not take a leap of faith to believe in dollarization and its benefits, and Ecuadorians know it well. After all, Dollarization saved the country from deep crisis and laid the foundation for real growth. As if that were not enough, Dollarization has saved Ecuador from suffering what Venezuelans suffer today.

In Venezuela the population continues to be impoverished daily. There is nothing more emblematic of the absurd process of impoverishment like the 100 Bolivar bill. This bill is in the process of being replaced by bills of higher denomination. However, until a few weeks ago, this bill was the highest denomination in a hyperinflationary economy. The purchase value of a 100 Bolivar bill today is equivalent to 3 cents of a USD and it costs 6 cents USD (at least) to print it. That’s right, you read well, during the hyperinflationary heyday of Venezuela, the government still had the luxury of printing bills that bought less than the ink and paper, making 100% of the Venezuelan Monetary Base (M1 in monetary aggregates) an absurd transfer of wealth that has no explanation without the existence of a hidden incentive.

How do you explain that by circulating bills you pay more than they are worth if there is no gain by anyone? The logical conclusion is that this distortion is only possible given the great disparity between the official dollar (of 10 or 600 bolivars) and the free market (3,200 Bolivars). For the Central Bank it is still very profitable that 100% of Venezuela’s monetary base costs more than it can buy with it. In a classic spiral of inefficiency, the Central Bank of Venezuela prefers to pay 3 cents abroad (and payment is in dollars) for each 100-bolivar bill it puts into circulation. At the same time it has done so at a rate so fast that Venezuela officially entered the records of world hyperinflation.

The clearest explanation of what is happening in Venezuela is explained by the concept of “closer to the source of money”. Inflation moves through the national economy as a wave that affects prices as it is being felt. The closer to the source (to the formation of the wave), always have the greater force of the wave to push forward and take advantage of its relative proximity to the source. As the wave continues the inflation is distributed to the shore, where finally it reaches its last gasp. Inflation acts as a wave that in the end, sweeps the resources of the beach and takes the wealth of the poor to the rich. The printing of 100 bolivars only makes sense when this type of plunder is possible.

With the central bank issuing national currency the privilege of a few (the closest to the source) is done at the expense of everyone. Under dollarization “Socialism of the XXI Century” could not resort to that source of financing and continue creating misery.  Dollarization no longer allows this type of democratization of misery.

Dollarization saved Ecuador from the possibility of the democratization of misery through inflation. This condition of stability and justice in the currency is necessary but not sufficient for the economic development of a country. Ecuador suffers from the same ills that Venezuela suffers such as the lack of basic institutions such as moral and independent justice that is the natural result of the rule of law, but Dollarization is a steady step in the right direction. Although the exchange rate changed from 5,000 sucres to 25,000 sucres in a year, the announcement of the intention to dollarize the economy helped to curb inflation and never experienced real hyperinflation in Ecuador, as is the case in Venezuela. To stop hyperinflation, Venezuela must learn from Ecuador and dolarize its economy immediately. The efficiency of dollarization in Ecuador should be sufficient reason for Venezuela to consider applying the same measure that allowed it to stop and extirpate forever the spectrum of the central bank and the expansion of inorganic money.

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