Not so long ago, I wrote a post titled “A Hyperinflation Investment Horizon“. It was the second in a series of posts on the Venezuela Hyperinflation. Basically, my point was: as a hyperinflation builds momentum, it creates classes of speculators who have a deeply vested interest in the hyperinflation continuing.

The Venezuela Hyperinflation Cheat Sheet

Here’s what you need to know about Venezuela:

  1. Some people have access to foreign currency via the official banking system (at 10 Bolivars to the US dollar);
  2. Most people only have access to foreign currency via the parallel market (at 18,470 Bolivars to the US dollar – at today’s dolartoday.com rate).
  3. If you have access to the official banking system, you can:
    1. Take 10 bolivars, and buy a US dollar on the official market;
    2. Sell that US dollar for 18,470 Bolivars on the parallel market;
    3. Take those 18,470 Bolivars back to the official market, and buy $1,847.
  4. And that’s only the first iteration. In round 2:
    1. Take the $1,847, and sell it for 34 million bolivars.
    2. Take those 34 million Bolivars back to the official market and buy $3.4 million.

Does that sound crazy? Starting with the real value equivalent of a rounding error, you can make yourself a millionaire in two transactions?

That’s hyperinflationary economics for you.

And let’s be clear: if you are one of the politically-connected people who gets to exploit this difference, you do not want hyperinflation to end.

Instead, you perpetuate it. You do things like being quite careful about who you allow to access the official market. Specifically, you grant access in exchange for political support.

“The Collapse of Venezuela, explained” Video

A week after I wrote that post, Vox released a youtube clip which is worth watching:

Here’s a not-especially surprising thing: Victor Maduro handed access to the official-parallel market arbitrage to the Venezuelan army.

In effect, even if Victor Maduro was leader both before and after this ‘gift’, it was essentially a coup. Because before, Venezuela had an army. Afterwards, Venezuela found itself occupied by a military force with a vested interest in suppressing anti-Maduro protest.

And paying themselves with a direct line to the Central Bank.

Madness.

Rolling Alpha posts opinions on finance, economics, and sometimes things that are only loosely related. Follow me on Twitter @RollingAlpha, and on Facebook at www.facebook.com/rollingalpha. Also, check out the RA podcast on iTunes: The Story of Money.