IMF predicts inflation of 1600% for Venezuela in 2017
It’s impressive the number of things that Venezuela is doing wrong to its own economy. Or perhaps we should say the Bolivarian socialists and the other incompetents surrounding President Nicolas Maduro. The International Monetary Fund is currently predicting a 1,600 % inflation rate for the country next year. This is a rate more usually connected with an actual fighting war or the immediate aftermath of one – the only other times we’ve seen these sorts of rates have been when economic policy is being driven by dribbling incompetents. But then that might be the explanation of course.
No, this isn’t being caused by the oil price collapse. Sure, that’s not going to have great effects upon the economy of a major oil exporter but none of the other countries which have been going through the same pain are suffering in this manner. It’s policy, not happenstance, which is making this happen:
While most advanced economies struggle to lift inflation, none would want Venezuela‘s situation: Consumer-price inflation is forecast to hit 480% this year and top 1,640% in 2017, according to the International Monetary Fund.
A shortage of medical supplies means infants and other sick patients are dying of treatable illnesses. Soldiers guard empty grocery store shelves. Inflation is so bad, the government has had to order bolivars by the planeload.
This is being caused by the authorities ordering those bolivars by the planeload. As Milton Friedman insisted inflation is always and everywhere a monetary phenomenon. Increase the money supply faster than the economy (or production of goods, your choice) is growing and you will get inflation. Increase the money supply yet faster and you get yet more inflation. That’s it.
Obviously, governments have to be able to pay for the things that governments need to do. But if you just start printing the banknotes to do so then you cause inflation.
This can go on for some time but come to an end it will. We might recall that in Zimbabwe this went on until, I think, the 100 trillion dollar bill. Which was worth so little in real money that it wasn’t enough to purchase the ink to make the next run of banknotes. Venezuela’s already pushing up against that sort of limit. I did ask, a few weeks ago, De La Rue the bank note printer, how much it cost to print a 100 bolivar bill. They were coy and would not answer directly (hey, printing banknotes is a secret business!) but they did point me to a public source which indicates that the cost of printing a 100 bolivar bill is more than 100 bolivars. And Venezuela doesn’t have the printing capacity to make its own bills either so it must pay world companies world prices.
The thing is though what happens towards the end isn’t really inflation, nor even hyperinflation. It’s the hypervelocity of money (thank you Frances Coppolla for that phrase). It gets to the point that people realise that their money is losing value just as they walk down the street. So they use it to buy something, anything at all, immediately. In the money equation MV = PQ inflation is normally taken to be an increase in P driven by an increase in M. But that tipping point, at least this is a useful if not wholly accurate way of thinking about it, is when the increase in P is being driven by V increasing at an exponential rate.
And the truth is that once that starts happening then the currency is toast. Matters, the economy, can be stabilised but the most successful example of this being done was Wiemar Germany and they did it by bringing a new currency strictly limited in issuance. Other places which have suffered this all also killed off the old currency.
the Zimbabwe trillion dollar bill might get a fresh airing..
“It gets to the point that people realise that their money is losing value just as they walk down the street. So they use it to buy something, anything at all, immediately.”