Venezuela’s Maduro Flunks His Economic Literacy Test | 9/28/2017 | Staff
cute16 (Posted by) Level 3
During my testimony in April, 2017 before the U.S. House of Representatives Committee on Foreign Affairs, I stressed that, to establish stability and turn Venezuela’s economy around, runaway inflation must be stopped in its tracks. After all, stability might not be everything, but everything is nothing without stability.

Since then, Venezuela’s inflation has skyrocketed to new levels, approaching hyperinflation. To grasp the magnitude of Venezuela’s inflation problem, take a look at the chart below. It shows the annual inflation rates (yr/yr) for chicken. Venezuela’s current chicken-price inflation is running at a whopping 771% annual rate. Notice, the surge in the chicken price inflation rate mirrors the spike in the overall implied annual inflation rate for Venezuela.

Ways - Venezuela - Inflation - Conditions - Reforms

There are only two sure-fire ways to kill Venezuela’s inflation and establish the stable conditions that are necessary to carry out much-needed economic reforms. One way would be to dump the bolivar and officially dollarize the economy, an option I covered in a Forbes piece in August, “Stop Venezuela’s Economic Death Spiral – Dollarize, Now.”

A second method would be to adopt a currency board system. In such a system, the bolivar would become a clone of a reliable anchor currency, such as the U.S. dollar.

Currency - Board - Currency - Board - Issues

Just what is a currency board? An orthodox currency board issues notes and coins convertible on demand into a foreign anchor currency at a fixed rate of exchange. It holds low-risk, interest-bearing bonds denominated in the anchor currency as reserves. The reserve levels (both floors and ceilings) are set by law and are equal to 100%, or slightly more, of its monetary liabilities. A currency board generates profits from the difference between the interest it earns on its reserve assets and the expense of maintaining its liabilities.

A currency board’s operations are passive and automatic. The sole function of a currency board is...
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