an excellent piece from The Devil's Excrement
Venezuelan Inflation: Structural or Self-Generated?
The Devil's Excrement
March 24, 2011
We were told by Minister of Planning and Finance Giordani, who has been in this Government over ten of the last twelve years, that Venezuela's inflation problem was "structural" and in the never changing strategy of blaming the "previous" Government for everything, he accused the IVth. Republic of this problem. I guess twelve years is not enough in his mind to solve this problem, ignoring the fact that in those twelve years, the most insidious influence on inflation, that of the world, almost magically vanished, with most countries not only having single digit CPI's, but many in the low single digits.
As a famous true and real economist said, inflation is simply a monetary phenomenon. Such a simple concept that is so poorly understood in inflationary and populism-ruled countries like ours. You see, if this were not true, Governments could just spend and make everyone rich. Life would be as simple as Chavez and Giordani want it to be.
But money does not imply wealth. Money is how we exchange things. We went from barter to money, to create a neutral way of transacting. In the beginning of commerce, you had one good and exchanged it for another or for a service. Too many mangoes on the trees and nobody wanted to give you anything for a mango, too much supply. By the end of mango season, you could probably get a lot for it, not enough supply and probably some demand.
But I digress…
If the Government "creates" too much money, without the underlying productivity or supply of goods and services increasing, the money will lose value, there will be inflation and it will be worth less. So, that is what Central bBank's are supposed to do, try to fine tune the amount of money to balance it out with the supply of goods and services.
Thus, if you want to see why there is inflation, you have to look first at monetary liquidity, the so called M2, which measures all of the money available out in an economy. This number is supposed to be made public weekly by the Venezuelan Central Bank under "Agregados Monetarios" here. Lately, there is some delay to have this number published, but more ominously we no longer see its components, it has been over a year since we can see what is increasing faster in all the parts of M2. I will not bore you with the technicalities.
When you look at M2 since Hugo Chavez became President, the picture is quite scary at first and at second sight, as seen in the plot below:
