You're missing the whole point of hyperinflation. The government is printing money to pay expenses, like salaries and military expenditures. If they adopted the dollar they'd lose the ability to do that.
Is that really the main cause of their inflation? It's trivial to fix that cause; for example give each governmental department a budget that increases 5% per month and not a penny more.
Yes, printing money is the root cause of the inflation.
But no, you can't just make a trivial fix like you said. Venezuela has a dysfunctional government that used to be propped up by oil exports back when oil used to be a highly-priced commodity. After the crash in oil prices, the sorce of income dried up and revealed huge flaws in the country's infrastructure and government inefficiency and corruption.
Printing no money is the default option. Dysfunction and corruption certainly make fixing everything extremely difficult, but you don't have to fix the government to stop the hyperinflation. If you cut off access to whatever printing press or computer is making the money, then there would not be hyperinflation.
It being an insufficient fix does not stop it from being trivial and performing its stated goal.
Right. I was just making a point that the money supply can be reigned in without much manpower.
The real idea is not to stop making money, it's to put a lid on the production speed. An armed guard that only allows 5% more production each month than the previous month.
This gives the government an enormous budget that never runs out, and at the same time money will continue to hold its value on a week-to-week basis.
Now tell me: Is this plan doomed because of some economic fact I'm unaware of, or is it doomed because of corruption and politicking?
It is doomed because Venezuela's budget is unbalanced. In the past, the budget only worked because there were large oil-export revenues from PDVSA, the state's oil company. Once that source of revenue collapsed they didn't have money anymore to spend as they did before. They should have cut the budget and fixed the many systemic imbalances in the Venezuelan government and economy but instead of that they insisted on keeping the status quo by printing money to cover the deficit and blaming the crisis on american imperialism.
I'm not trying to fix the country, I'm just suggesting a way to avoid hyperinflation. Everything that is already broken would stay broken, but without the additional burden of hyperinflation. Can the plan do that?
Unfortunately not. Things would not stay just as broken because if the Venezuelan government stopped printing money it would stop being able to pay its debts.
Unless they do substantial budget cuts (which were are so far assuming that they cannot or will not do) they would be forced to stop paying suppliers and public servants, which would result in even more chaos than there is right now.
Again, the plan is not to stop printing money. The plan is to say "okay, print X billion this month, then X * 1.05 the next month, etc." The purchasing power of each month's printing should be flat or rising if the main driver of inflation is the amount of money printed.
If you are still printing money and increasing the supply of money in the economy you will still have hyperinflation. Your plan is kind of assuming that every month they destroy all the existing money before printing more money, which is not something that you can do.
Hyper inflation is defined as over 50% per month. Venezuela is very likely to hit that next year. That level of inflation destroys cashflow, as money almost stops having value before you can spend it.
Printing this much money would cause less than 5% inflation per month. It would be unpleasant, but you could get a biweekly paycheck and spend it over the next few weeks without having all the value disappear. Supply chains would continue to operate without much trouble. It would be vastly superior to hyperinflation.
>The bills are increasing exponentially faster than 5% a month?
In absolute units of currency? Yes. When you print money like that every unit of currency is worth correspondingly less. It's exponential, which is how you get 480% inflation this year and a projected 1640% next year in Venezuela without a constant dollar increase in spending.
The only way out is a drastic reduction in services.
That projected amount is assuming they don't restrict how much they print, right?
I don't see how all of the following could be true at the same time: 1. The inflation is caused by the printing of more money. 2. Printing enough money to inflate the supply less than 5% per month. 3. Costs increasing more than 5% per month.
The problem is the government isn't putting that money to productive use in an economic sense, and is taking a larger and larger slice of the people's economic output because that output is shrinking.
If the government and the economy were both functioning properly there would be no reason to print money - the treasury would be receiving enough money through taxation. Governments don't go into wholesale printing unless that's not happening.
Though to be fair it seems every FR system does at least print around the edges, eventually.
Are there countries that peg their currencies to combinations of other countries' currencies, mutual-fund-style, so you're not dependent on one single country's economy and politics remaining stable? I'd imagine that pegging your currency to, say, a linear combination of the UN Security Council members' currencies, weighted to get you about equal purchasing power on each currency, would be a good way to hedge risk.
(Or is there a some economic reason this is a terrible idea?)
That's right. Pegging a currency does of course have its advantages and disadvantages - in China's case, it's worked out very well for their economy (and for some groups of people in China, though certainly not for everyone).
They'd still have to create a new currency that way. And you can't force a value on that one. Sure, it could have the value you want on paper, but just like the current one - it wouldn't match the usage in practice.
Adopting another currency makes sense if it's easy to do a lot of trade using it. The closer you are to other $ users then, the closer the real value, because you can easily trade outside of the local bubble.
(It could work of course (and did for some countries)... but you still need to have actual well working trade to make sure the currency has the value you expect)
The point of pegging your currency to a foreign currency is to rebuild trust in your currency by guaranteeing a fixed exchange rate.
But if you do that by pegging to multiple currencies that all have variable exchange rates, how do you handle the relative changes between them ?
The only way would to be adjust it almost daily. Which is the same thing as letting it float.
++ PS: I'm talking about a somehow hard peg here. Most countries tend to use targets and will try to maintain some levels of rate. But they do so by operation on the market rather a peg by fiat.
