Venezuela – Fiat v Real Money

The financial collapse of Venezuela has been a long drawn out process.  Faced with plummeting GDP, massive unemployment, looming debt deadlines and hyperinflation the country continues to flounder under the weight of debt and insufficient cash to cover.

The latest issue was the debt repayment deadline on Friday for their state oil firm PDVSA of $842m, fresh after missing payments totalling $600m in just the last few weeks.  At the eleventh hour their President Maduro announced a ‘restructuring’ and blaming the ‘global financial dictatorship’ of the ‘US Empire’ conspiring against them.  From Bloomberg:

“I decree a refinancing and restructuring of all foreign debt and all Venezuelan payments,” Maduro said. “We’re going to a complete reformatting. To find an equilibrium, and to cover the necessities of the country, the investments of the country.”

Markets don’t care too much for such statements and the bonds plunged whilst default swaps surged to levels implying a 99% risk of default.

This year saw a record 800% inflation rate and just last month the IMF forecast that will increase to nearly 2350% next year, and that is not a typo.   Is it any wonder then that the nation has turned to Bitcoin so aggressively as an alternative currency as their fiat currency debases at such an eye watering rate.  Indeed it appeared the above announcement by Maduro fuelled the leg up taking Bitcoin to a record high US$7500 Friday night…

Monetary assets such as bitcoin, gold and silver, illustrate true monetary properties when governments print fiat currency at astronomical rates to ‘save’ the day.  A fundamental of money is ‘intrinsic value’, a property that can only truly be achieved through limited supply.  Whilst critics of bitcoin say it has no intrinsic value they seem to be missing the point when not referring to our fiat currency in the same assessment….  One has only 21m units ever, one can be printed ad infinitum.  And then of course we have the king of money, gold, 1-2g after mining and processing a tonne of rock, and getting harder.