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Background:

In late 2013, Venezuela's inflation rates increased even higher, to 54.3%, As of January 2014, the official exchange rate is 1 USD to 6.3 VEF while the black market exchange rate is over ten times higher since the actual value of the bolívar is overvalued for Venezuelan businesses.

The last report of shortages in Venezuela showed that 22.4% of necessary goods are not in stock The nation has erupted in protests and opposition leaders have been put in prison as the nation struggles to address its economic problems.

My question is regarding the original cause of the inflation: Venezuela has had runaway inflation since the economy rebounded following the oil glut in the 1980's. According to Wikipedia:

As the economy contracted in the 1980s, inflation levels (consumer price inflation) fell, remaining between 6 and 12% from 1982 to 1986.[32] In the late 80s and early 90s inflation rose to around 30 - 40% annually, with a 1989 peak of 84%.[32] The mid-1990s saw annual rates of 50-60% (1993 to 1997) with an exceptional peak in 1996 at 99.88%.[32] Subsequently inflation has remained in a range of around 15% to 30%

The inflation rate before this was obviously too high, if it "fell to 6-12%". Why was it too high? What about the policies of the late 1980's caused the government to lose control of the inflation rate. (In 1994, there was a banking crises and half the banks in the country went bankrupt.)

UPDATE: Possible answer? I found this Wikipedia page on Chronic Inflation, which was once known as "Latin Inflation." Chronic Inflation is decades long periods of high inflation caused by paper currencies. After time higher inflation becomes an expectation and is very difficult to dislodge, as well it creates other negative effects to the economy that can worsen inflation. Before WWII, paper currencies were only used by nations experiencing wars, so this effect was not understood. Those currencies would collapse under hyperinflation, but that is not always the effect.

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One cause of inflation is money supply growing faster than the rate of economic growth.

In other words, they print more money (Bolivares Fuertes or BsF) than what they receive by selling oil (Dollars).

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This site has more information, unfortunately is only in spanish.

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    I don't think this is a very good answer. you really just defined what inflation is, you didn't identify its cause in this case. – Avi Mar 11 '14 at 4:49
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    @Avi Maybe the right question is why the government in Venezuela expends way more money than they receive. – rraallvv Mar 11 '14 at 6:08
  • I believe that was the question, and it certainly is now. – Avi Mar 11 '14 at 10:29
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    @rraallvv Venezuela has Dutch Disease-lots of hot oil money, little diversification, so it imports too much. It has been paying debts steadily since 1990 though and its external debt is less than 20% of GDP. The cause of the spike of inflation seems to be the currency peg breaking and capital flight due to it. They like the protectionism the peg is providing so the government is unwilling to get rid of it. Chavez wanted to back the currency with gold. That is legitimate alternative. I think this is very interesting... – Razie Mah Mar 11 '14 at 18:59
  • @RazieMah Trying to repatriate gold is somewhat suspicious, for the president of one of the most corrupt countries in the world, there is no real benefit for the local economy by doing it, and has no effect in the global economy either. What they need to do is to reduce the government spending. – rraallvv Mar 11 '14 at 19:30
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In Venezuela there was inadequate incentive to increase production of valued goods and services under government policies. Any fixed investment that could increase production was at risk. Even if an asset is not expropriated (far from a sure thing), it can still be targeted by officials in other ways.

Even investment in productive skills is discouraged if you think salaries or contracts get awarded to cronies or some group that you are not a part of. If you are part of a favored group, why bother working hard.

Another is that sound management is political loyalty, not commercial ability or government administrative ability.

Another is perhaps an over-reliance upon government imposed non-commercial goals for business enterprises.

A dismal ranking for rule of law, so, obviously problems for productive businesses and productive workers.

If there are problems producing goods and services, it will take ever larger quantities of money to trade for those goods and services, and that is literally what inflation is.

Now that the price of oil is much lower than it was, it does of course make sense to produce less of it, so again it is less production. On the other hand if you double the production of something that just had it's price cut in half, in an attempt to keep revenue steady, you're assuming that the consumption of resources and time used in that production isn't going to create inflation elsewhere in the economy. Bad assumption.

And of course, as rraallvv said, the country is issuing too much currency probably because they have social spending goals that are important to the leadership.

Bottom line: Inadequate production while issuing too much currency. Edit To be clear, I do not want to suggest that most of the increase in the price level, that is, inflation, is due to inadequate production, although my answer does mostly focus on those things. I accept that most of the inflation might be due to the issuance of currency faster than the economy is growing. However, even when that is true, most of the lowering of living standards is due to inadequate production.

  • @Icarian What economic warfare do you mean? – H2ONaCl Sep 22 '18 at 16:53
  • The US imposed sanctions in Venzuela. – Icarian Sep 23 '18 at 13:27
  • There was high inflation before Trump's sanctions, sanctions on individual Venezuelan people are not the same as sanctions on the Venezuelan economy so it may be left out of discussion about the economy, sanctions on Venezuelan government finance appear to be on long term finance and it is not apparent what effect it has beyond the marginal. – H2ONaCl Dec 16 '18 at 20:42
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There are multiple factors for hyperinflation you observe in Venezuela today the same I had a chance to experience as a child in Eastern Europe.

  1. As others pointed out - the rate of printing money, and by printing money I do not mean issuing bonds, but basically increasing the amount of base money to the economy. It doesn't need to be physical cash, but virtual money issued by central bank without any backing value.

  2. Hyperinflation is a bit of self-fulfilling prophecy. As the value of the currency goes down in unmaintainable pace, it makes it uneconomical to hold that currency in your hands. You are urged to either spend it or exchange for other currency. Usually the causes of hyperinflation are not got rid of unless a significant change in the way economy/monetary policy is executed.

  3. Lack of trust that the economical situation will get better in the future. You could expect lower inflation if suddenly there was a power change in Venezuela and new leader/govt promising proper reforms. This is not happening, both Maduro, govt and large population in Venezuela believe Socialism will help them.

  4. The investment environment in Venezuela makes it insane for foreign investments to kick in as huge amount of sectors of the economy has been nationalised with some of Venezuelan branches of foreign companies seized.

Unemployment is really high in Venezuela and with hyperinflation it does not make sense to go to work (socialist policies made everyone poor and dependent on handouts) which then cripples the infrastructure.

I remember similar path was in Eastern European countries (post Soviet) in which you could work and have some money which was loosing money in crazy pace and additionally you were not able to buy anything for that money because of shortages of goods. They introduced special "cards" to limit the demand for shortage goods, e.g. 2 chocolate bars per family per month, etc.

Fortunately for us, there were sensible people in the government to make a set of hard moves that stopped that. I don't see that happening in Venezuela soon.

  • Can you explain in more detail why #4 causes inflation? – lazarusL Oct 19 '18 at 19:23
  • @lazarusL investment in productive activities increases the output of goods and services. If you do not make investments then over time the obsolescence or degradation will cause the output to decrease. If there is lower output the prices for the scarce goods and services will rise. – H2ONaCl Oct 20 '18 at 23:36
  • @H2ONaCl I see. Thanks! I see this as scarcity, which I distinguish from inflation, but I see how you and Jacek are using the word inflation slightly differently. – lazarusL Oct 22 '18 at 14:35
  • @lazarusL even without obsolescence and degradation you need to invest to increase output if the population is growing. Of course people are leaving Venezuela now but in normal times you need investment. – H2ONaCl Oct 23 '18 at 18:03
  • @H2ONaCl I totally agree. I just would just classify that high prices from scarcity, not inflation. – lazarusL Oct 23 '18 at 18:07
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In a nutshell, it's because of relentless government intervention in the economy. It always is.

For example, if money printing first debases the currency enough that there's high inflation and people are having trouble affording things (because their salaries haven't increased correspondingly), then a crazy socialist president sets price controls, and suddenly it's uneconomical to produce stuff anymore, which results in shortages..

Then obviously the same socialist loonie decides that more intervention is "needed" to "fix" problems caused by intervention, and things get that much worse.

This vicious cycle repeats until people see that everything has turned to shit, there's no point in trying to be productive, and there's no future for ordinary folks in the country, etc. That results in a a collapse of faith in the currency, and there's your hyperinflation.

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    While I agree that Maduro is crazy and intervention is bad, they don't cause inflation. Inflation can be caused by many things, but mostly printing money. If Chavez/Madura had intervened with price controls but not printed money, they would only have shortages but no inflation. (The only inflation would be limited to black market goods that could not be purchased via official sources.) – Chloe May 9 '16 at 5:27
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    Isn't the first line proven wrong by the superinflation in Venezuela in the 1990s, when government intervention in the economy was comparatively low ? – Evargalo Sep 10 '18 at 14:16
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    Your answer is not wrong Kikka, just needs to be refined a bit. If you edit it, perhaps leave out the profanity and unpack a bit more why a political class would debauch its currency. – Daniel Nov 6 '18 at 22:11
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My own position is that hyper-inflation which is what ended up happening in Venezuela is first and foremost a political phenomenon. It results out of specific political policies and choices. So the origins of the inflation began there.

In other words, hyperinflation is a political process, not a financial process which proceeds with some sort of inevitability once a tipping point has been reached.

Although you also hear about when the dollar will fall off the cliff or that kind of talk, its inaccurate. Destroying a currency is not like falling off a cliff, where gravity takes hold all the way to its demise.

Destroying a currency is deliberate and requires a lot of manhandling and pushing up the steep incline and eventually shoving it off the cliff.

At any point up to the final shove into oblivion, the political winds could change and the policy pressure that is destroying the currency would cease.

Currencies are destroyed as an unintended consequence of saving the status quo from losing power. Rather than risk a decline in power, an upheaval in the fiefdom, elites in the status quo choose to debauch the currency as a short-cut to their unsustainable financial woes.

We have a great example with what is going on in Venezuela right now.

If you look at the Maduro and former Chavez government, since its inception. They have been holding on to power with both hands and both feet at all costs.

But lets imagine an example here in the States. Let's say tomorrow the Federal government says that all Social Security recipients who were receiving 2,000 a month will now receive 200 dollars a month. Rather than risk the firestorm that would ignite and get rid of some very powerful people, the government chooses to debauch the currency so that the 2,000 dollars will soon only provide 200 dollars in purchasing power. The government has de facto reduced the payment by 90% via destruction of its currency. But due to the stealth of this process, the citizenry are blind to the erosion.

If you take 10% of their money away every year via debauching the currency, then in nine years they have lost 90%, no fuss no muss, and the status quo stays intact.

If the populace goes on for several decades like this, no worries, but if it starts to lose trust in the currency, thats how hyperinflation starts to set in. Again, its a political act, not a financial one and its not an inevitable conclusion of anything, it can be stopped in its tracks.

No real model to measure when its going to happen, it all depends on the politics of the day and there is no inevitability, it can start to go in that direction and then be stopped in its tracks, because its a political phenomenon not a financial one. Unfortunately, the Chavez/Maduro administration have been extremely successful in thwarting anyone who could have put a stop to the policies that lead to the inflation and subsequent hyperinflation of the currency.

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