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How Venezuela Has Been Affected by Inflation

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Venezuela is not the best place to do business. Inflation is so high that menu costs—ordinarily insignificant—would be high. The government has cut ties with the IMF, and does not want to switch to a more stable currency to prevent further inflation, like what Zimbabwe did when it switched to the US dollar. But what might cause inflation to be more rampant?

Because inflation is how much the growth of money supply outstrips the growth of GDP, assuming velocity is constant (the quantity theory of money), Venezuela must be printing more money than its economy is growing. The government, short on cash due to poor market prices of its main source of tax revenue—oil—is probably printing a lot of money in the form of seigniorage. However, because of the same low oil prices, Venezuela’s economy suffers from lower net exports, and lower economic output in general. So, to keep up Venezuela’s subsidy state, the government simply prints more money, not realizing that the same inflation that is caused by overdoing seigniorage is causing the very goods they are trying to subsidize to be in shortage, with people rushing to buy groceries before their money becomes worthless, and the country probably finds difficulty importing with such a constantly-inflating currency. In short, the government is printing much more money than its economy is growing by, and under hyperinflation, with velocity positive, inflation actually grows more than the growth in money supply.

This model is actually one that I could almost completely agree with; Venezuela’s inflation is caused by its own government’s incompetence, and pride, in economic affairs. The large amount of government subsidies it offers needs a strong tax revenue. However, when its tax revenue decreases due to a shrinking economy, instead of gradually weaning the economy to a more free-market system, it simply keeps printing money, not realizing that printing money, as numerous countries have shown before, is not exactly the recipe to success.

By cutting ties with potential benefactors such as the IMF, Venezuela is forced to rely on a few sources of credit. And in this world where the law of the jungle still seemingly reigns, those few creditors could convert financial leverage into political control; Venezuela’s gradual dependence on its creditor countries is its own fault, a relic of its government’s decisions. The true victims are the Venezuelan people, enduring an economy in hyperinflation.

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