3 Tips for Inflation Survival You Can Learn From Currency Devaluation in Venezuela
When I visited Venezuela in May 2009, it cost about $24 to buy a burger, according to the official exchange rate, versus a more reasonable $8 or so at the black market rate. The bolivar currency was already wildly out of whack at the time, and it’s no surprise to anyone familiar with the country to see the recent correction take place. In order to gain more perspective on the matter, I spoke with a friend who has spent many years in Venezuela working for a large multinational American company.
First off, what happened? This past Friday, President Hugo Chavez devalued the bolivar between 17 and 50 percent depending on the type of merchandise, with importers of food and health goods retaining the most favorable rate and energy the least. Inflation, which according to Forbes was already at about 25 percent in 2009, has skyrocketed as a result. Over the weekend, worried Venezuelans rushed in droves to stores, stocking up on electronics and other merchandise before retailers hike consumer prices, sometimes doubling them.
It’s a problem that Chavez is taking seriously. As described by The Associated Press:
“Authorities began inspecting retailers a day after President Hugo Chavez threatened to temporarily close or take over businesses that raise prices as a result of the devaluation he announced Friday. Chavez said he is determined to curb inflation — even if it means deploying the military to prevent price hikes.
“Venezuelans crowded into stores selling electronics and appliances for a third straight day, trying to buy items before retailers begin markups. Lines formed outside some stores in Caracas.
“One shopper, 26-year-old Jonathan Heybert, walked out with a flat-screen TV, saying: ‘Just imagine how much this television is going to cost later.'”
Jonathan sounds like a bright young man. The TV is basically half off at the time he’s purchased it. Unlike Americans, Venezuelans know what it’s like to live with rampant inflation, and because of the financial savvy forced upon the citizenry, it’s useful to look at how Venezuelans prepared for their day of currency reckoning. Here are three tips we can take away from their experience:
Tip #1 — Stock up on necessities when you can because another shortage is likely on its way soon
How is it that Chavez has become such a seasoned veteran at dealing with price hikes? Of course imports become more expensive when the bolivar weakens. However, even with domestically produced goods, such as certain foods, prices must be constantly raised to match the always increasing costs to produce. At those times, when the costs of production exceed the price producers can charge, the producers stop producing. Before you know it, the grocery store shelves are empty. Over the last four years, Venezuela has seen major shortages of rice, beans, sugar, milk, meats, and other foods. In inflationary times, Venezuelans get while the getting’s good.
Tip #2 — Spend your income as soon as possible and immediately diversify the remainder into noninflationary currency
Venezuelans tend to spend the bulk of each paycheck as they receive it, beginning first with the necessities and bills. Once those are covered, they quickly exchange any remainder on the black market for dollars or euros and transfer those converted funds to bank accounts they have previously opened abroad. The Venezuelans that have not prepared in this fashion, and that have stored their savings in bolivars, have seen their net worth halved. Americans concerned about inflation can also consider saving in foreign currencies, precious metals, and other assets.
Tip #3 — Learn how to manage currency exchange rates daily and how to buy and sell dollars like any other financial asset
Post-devaluation Venezuelans don’t know exactly how the new black market exchange rate will fluctuate. The government has indicated that it will target a black market rate that is to not to exceed 60 percent of the official rate, but for the citizens, there’s only one way to be sure. They have an informal, but reliable system of tracking the oxymoronic-sounding “official” black market exchange rate. Every day, they consult the website Dolar Paralelo (literal translation: parallel dollar) for an update. When inflation rages out of control, you can’t turn to the government for reliable measures…you learn to find more honest sources elsewhere.
These are three of the main tools Venezuelans use to get by in a highly inflationary economy. And, as long as the specter of extreme inflation is alive in the US, these techniques could also be useful for Americans to keep in mind.