In a free unhampered market economy based on a sound monetary system–this is to say a market-chosen monetary system with a free banking industry and no central planning institution that is manipulating interest rates and determining the size of the money supply–the gains and losses of shares prices in the stock market will simply be a reflection of entrepreneurial profits achieved in the past, plus embedded expectations of profits likely to be achieved in the future.
Under the assumption that such a free market money system would be largely non-inflationary, this mixture of “historical record” and expectations would primarily be expressed by the relative prices of shares. The bulk of the returns achieved by investors would come from dividend payments, as a general inflation of “the market” would be nigh impossible, Zero Hedge reported.
And yet, although the stock market as a whole would barely appreciate in price in nominal terms, the gains achieved in real terms as well as real economic growth, would be far stronger than they are under the current, centrally planned system of constant inflation. Moreover, economic progress would be far more equitable as well, as the reverse redistribution of wealth caused by inflationary policy wouldn’t exist.
This is why a rising stock market tells us absolutely nothing about the state of the underlying economy in the present inflationary system. In fact, we once again have a real life example providing ample empirical confirmation of this assertion.
Venezuela’s economy is in free-fall. Its desperate socialist government, in an attempt to satisfy the masses of voters who have voted for it in order to receive handouts, is resorting to ever more repressive economic policy and money printing on a truly gargantuan scale to at least keep up the appearance that bread and circuses will continue. It has long lost the last shred of credibility, as shortages of basic goods have become the major hallmark of the country’s economy.
Currency System Implodes
However, amid capital controls and a collapse of Venezuela’s currency on the black market, the country’s stock market is soaring.
Since the beginning of 2015, the Caracas stock market is up by more than 300%–note that this index was trading at a mere 6 points in 2002 and currently stands at nearly 15,000 points. This is what is indicative of a crack-up boom–as the currency system implodes, a flight into real assets is underway and titles to capital are soaring in value when measured in terms of the currency that is about to cease functioning as a medium of exchange.
This is happening in spite of the fact that most of the businesses behind the stocks listed on the exchange, are in fact consuming their capital and are no longer making any real profits.
Several Exchange Rates
With oil prices are under great pressure, the government of Venezuela can no longer finance its program. The government has nationalized countless companies and replaced their managers with cronies of the ruling party. What remains of the market economy is there is no way for the government to obtain the revenue it needs to keep its socialist system funded.
Consequently, the only source of revenue for the government is the printing press of its central bank, which it is abusing quite liberally. There are several fixed exchange rates for the Venezuelan bolivar, which have long ceased to make even the faintest shred of sense.
The reality is better reflected by black market exchange rates. Dolartoday.com keeps data on the black market in US dollars in the border town of Cucuta. In recent months, the bolivar has been in free-fall.
Venezuela’s official inflation data lacks credibility, but even so they are giving an idea of how quickly the currency is depreciating internally as well.
Fiat Money
Venezuela’s hyperinflation is reaching its final stages. It is probably already far too late for the government to stop the complete collapse of its currency.
The bolivar is in the process of transforming from a medium of exchange to tinder for wood-stoves. Venezuelans who had the presence of mind to convert their savings into gold or foreign currency in good time are likely to survive the conflagration intact.
Those who bought stocks on the Caracas stock exchange seem to have successfully side-stepped the effects of the devaluation as well, but they need a plan for the post-inflation adjustment crisis, which will bankrupt a great many companies very quickly.
Also, the government can simply close the market down at any time if it doesn’t like what is happening there, so there is the ever-present danger of even more government interference as well.
It is quite fascinating to see that in spite of numerous examples throughout history, governments never seem to learn. They all believe they can somehow overrule economic laws by diktat.
This is not only true of Venezuela’s government, but of practically every government in today’s world. Central planning of money has been adopted everywhere. Venezuela merely shows us what the end game for every fiat money system looks like.
At some point the state is overwhelmed by the promises it has made to its citizens. When it can no longer pay by means of confiscating private wealth, the printing press is always the last resort. Recently one actually gets the impression that it is often the first, rather than the last resort.
