Inflation and hyperinflation

What are inflation and hyperinflation?

Latin America has historically been affected by high levels of inflation. This economic imbalance means a loss of currency power, which leads to an increase in the price of consumer goods and a depreciation of wages. When the monthly inflation rate exceeds 50%, we have a case of extreme inflation, which occurs when there is a rapid increase in the amount of money in circulation that is not matched by an equal increase in the amount of goods and services in the economy. In many cases, inflation is caused by the government's impression of money in order to address fiscal deficits, and consumers' reaction is to immediately invest their earnings.

Venezuela: hyperinflation and dollarization

Faced with a hyperinflationary scenario, the measure of value of consumer goods is translated into a stable foreign currency, generally the dollar, thus initiating, little by little, the process of "spontaneous dollarization" of the local currency, and the most relevant case of the moment is Venezuela.

This is an economy that was affected by the ups and downs of the price of oil, the only industry of this country, added to the erroneous economic policies promoted by its government, which led to a drop in the Gross Domestic Product of around 80% in 2013. With high inflation rates and sustained devaluation of the exchange rate, the population resorts to the use of the dollar as a means of payment. Until 2018, these operations were restricted and legally punished, but forced by the circumstances, the government had to change its decision and allow the use of the dollar, facilitating the access to this currency. Now the Venezuelan economy is sustained by a bimonetary scheme. The bolivar is the legal currency, but savings are made in dollars, and the novelty is that companies and individuals will be able to use these dollars for purchases of goods and services with common payment methods such as credit cards or digital wallets.

The role of "Reserve" in Venezuela

Hyperinflation in Venezuela brought as a consequence the dollarization of the economy, turning the financial system into a bimonetary system. Faced with the insufficient measures taken by the Venezuelan government, and the challenge of how to protect the few income in a system that prohibits transactions in foreign currency, digital platforms become a way out. Reserve was one of them, it was the solution for people to exchange their bolivars for dollars deposited in digital accounts, and they could extract them from those platforms to exchange them again for bolivars or some foreign currencies. In this way, the user had the facility to charge in bolivars, make the change to dollars to save without fearing a pronounced devaluation and at the time of needing to spend their savings, change them back to bolivars. This service was interrupted from August 3, 2023, when Reserve decided to suspend the loading and withdrawals on the platform with Argentine pesos, Colombian pesos, Peruvian soles, Venezuelan bolivars and US dollars. This decision means that the virtual wallet ceased to be useful for most Venezuelan users, who can now rely on Birdi, the virtual platform that facilitates the management of collections and invoicing in different currencies or cryptocurrencies.

The case of Argentina

Argentina is a country that is no stranger to inflationary processes of its currency; it has been experiencing inflation above 25% for more than a decade, which accelerated in 2019 as a result of a strong devaluation, and the first controls on the sale of retail dollars. As a result of these restrictions and taxes on foreign currency purchase transactions by individual savers or tourists, the exchange rate gap in the retail market is originated, which is the difference between the dollar's quotation in banks and exchange houses with the blue.

This gap between the official dollar and the blue dollar remains at high levels, and that is what makes it difficult for digital nomads how to charge and how much to calculate the value of their work with respect to a foreign currency. Collecting money from abroad through the traditional banking system implies a fixed cost, in taxes and fees, of around 45% of what is invoiced, while another part is lost according to the exchange rate that can be accessed. But there are more agile options, with the purpose of simplifying the process of payments and access to international money, and it is through virtual platforms like Birdi, that facilitates the management of collections and invoicing abroad and allows payments in cryptocurrencies.