Printing Money Goes Haywire in Venezuela

Flooding the country with cash seemed like a good idea, Now, it’s courting disaster.

Venezuela seems to be hovering on the edge of tipping into hyperinflation. Or perhaps it has already fallen into the abyss. Given the paucity of official data — the none-too-believable official figures were last published in February — it’s a little hard to tell. The best guess we have at the value of a Venezuelan bolivar comes from the Colombian village of Cucuta, where people go to buy currency so they can smuggle subsidized fuel and other price-controlled goods out of Venezuela. As The Economist notes: “Transactions are few; the dollar rate is calculated indirectly, from the value of the Colombian peso. The result is erratic, but more realistic than the three official rates.”

Using those rates, economist Steve Hanke recently told Bloomberg that annual cost-of-living increases are running at about 722 percent. To put that in some perspective, it means that a $400 monthly grocery bill would climb to $2,888 in a year. That may not approach the legendary status of Hungary’s postwar inflation, which reached 41.9 quadrillion percent in a single month, but it’s devastating for savers, or for people like pensioners whose incomes consist of fixed payments. It’s also pretty bad for the economy.

It’s a bit of a mystery why this is happening. No, right, don’t tell me: The government is printing too much money! Indeed. As Milton Friedman famously said, “Inflation is always and everywhere a monetary phenomenon.” When too much money is chasing too few goods, prices rise. And the most common source of “too much money” is government printing presses.

But I’m not asking for the mechanism; I’m asking for the reason. Why is the Venezuelan government resorting to the printing press?

I know you’ve got an answer to that, too. Seigniorage! That’s the fancy name for the profit a government makes by printing bills and minting coins. If you can buy more goods and services with the cash you made than it cost you to make it, you have essentially collected a stealthy sort of tax on the people who take the money from you and give you valuable stuff in exchange.

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Source: Printing Money Goes Haywire in Venezuela – Bloomberg View