Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
Is Crude Oil Firmly on the Upswing Now? - 20th Feb 20
What Can Stop the Stocks Bull – Or At Least, Make It Pause? - 20th Feb 20
Trump and Economic News That Drive Gold, Not Just Coronavirus - 20th Feb 20
Coronavirus COVID19 UK Infection Prevention, Boosting Immune Systems, Birmingham, Sheffield - 20th Feb 20
Silver’s Valuable Insights Into the Upcoming PMs Rally - 20th Feb 20
Coronavirus Coming Storm Act Now to Protect Yourselves and Family to Survive COVID-19 Pandemic - 19th Feb 20
Future Silver Prices Will Shock People, and They’ll Kick Themselves for Not Buying Under $20… - 19th Feb 20
What Alexis Kennedy Learned from Launching Cultist Simulator - 19th Feb 20
Stock Market Potential Short-term top - 18th Feb 20
Coronavirus Fourth Turning - No One Gets Out Of Here Alive! - 18th Feb 20
The Stocks Hit Worst From the Coronavirus - 18th Feb 20
Tips on Pest Control: How to Prevent Pests and Rodents - 18th Feb 20
Buying a Custom Built Gaming PC From Overclockers.co.uk - 1. Delivery and Unboxing - 17th Feb 20
BAIDU (BIDU) Illustrates Why You Should NOT Invest in Chinese Stocks - 17th Feb 20
Financial Markets News Report: February 17, 2020 - February 21, 2020 - 17th Feb 20
NVIDIA (NVDA) GPU King For AI Mega-trend Tech Stocks Investing 2020 - 17th Feb 20
Stock Market Bubble - No One Gets Out Of Here Alive! - 17th Feb 20
British Pound GBP Trend Forecast 2020 - 16th Feb 20
SAMSUNG AI Mega-trend Tech Stocks Investing 2020 - 16th Feb 20
Ignore the Polls, the Markets Have Already Told You Who Wins in 2020 - 16th Feb 20
UK Coronavirus COVID-19 Pandemic WARNING! Sheffield, Manchester, Birmingham Outbreaks Probable - 16th Feb 20
iShares Nasdaq Biotechnology ETF IBB AI Mega-trend Tech Stocks Investing 2020 - 15th Feb 20
Gold Stocks Still Stalled - 15th Feb 20
Is The Technology Stocks Sector Setting Up For A Crash? - 15th Feb 20
UK Calm Before Corona Virus Storm - Infections Forecast into End March 2020 - 15th Feb 20
The Growing Weaponization of Space - 14th Feb 20
Will the 2020s Be Good or Bad for the Gold Market? - 14th Feb 20
Predictive Modeling Suggests Gold Price Will Break Above $1650 Within 15~30 Days - 14th Feb 20
UK Coronavirus COVID-19 Infections and Deaths Trend Forecast 2020 - 14th Feb 20
Coronavirus, Powell and Gold - 14th Feb 20
How the Corona Virus is Affecting Global Stock Markets - 14th Feb 20
British Pound GBP Trend and Elliott Wave Analysis - 13th Feb 20
Owning and Driving a Land Rover Discovery Sport in 2020 - 2 YEAR Review - 13th Feb 20
Shipping Rates Plunge, Commodities and Stocks May Follow - 13th Feb 20
Powell says Fed will aggressively use QE to fight next recession - 13th Feb 20
PALLADIUM - THIS Is What a Run on the Bank for Precious Metals Looks Like… - 13th Feb 20
Bitcoin: "Is it too late to get in?" Get Answers Now - 13th Feb 20
China Coronavirus Infections Soar by 1/3rd to 60,000, Deaths Jump to 1,367 - 13th Feb 20
Crude Oil Price Action – Like a Coiled Spring Already? - 13th Feb 20
China Under Reporting Coronavirus COVID-19 Infections, Africa and South America Hidden Outbreaks - 12th Feb 20
Will USD X Decline About to Trigger Precious Metals Rally - 12th Feb 20
Copper Market is a Coiled Spring - 12th Feb 20
Dow Theory Stock Market Warning from the Utilities Index - 12th Feb 20
How to Get Virgin Media Engineers to FIX Hub 3.0 Problems and NOT BS Customers - 12th Feb 20
China Under Reporting Coronavirus COVID-19 Infections by 66% Due to Capacity Constraints - 12th Feb 20
Is Coronavirus the Black Swan That Takes Gold To-Da-Moon? - 12th Feb 20
Stock Market 2020 – A Close Look At What To Expect - 12th Feb 20
IBM AI Mega-trend Tech Stocks Investing 2020 - 11th Feb 20
The US Dollar’s Subtle Message for Gold - 11th Feb 20
What All To Do Before Opening A Bank Account For Your Business - 11th Feb 20
How and When to Enter Day Trades & Swing Trade For Maximum Gains - 11th Feb 20
The Great Stock Market Dichotomy - 11th Feb 20
Stock Market Sector Rotation Should Peak Within 60+ Days – Part II - 11th Feb 20
CoronaVirus Pandemic Stocks Bear Market Risk 2020? - Video - 11th Feb 20

Market Oracle FREE Newsletter

Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Inflation, Shortages, and Social Democracy in Venezuela

Economics / Inflation Nov 29, 2013 - 06:42 AM GMT

By: Matt_McCaffrey

Economics

The economic turmoil in Venezuela has received increasing international media attention over the past few months. In September, the toilet paper shortage (which followed food shortages and electricity blackouts) resulted in the “temporary occupation” of the Paper Manufacturing Company, as armed troops were sent to ensure the “fair distribution” of available stocks. Similar action occurred a few days ago against electronics stores: President Nicolás Maduro accused electronics vendors of price-gouging, and jailed them with the warning that “this is just the start of what I’m going to do to protect the Venezuelan people.”


Earlier this month, in another attempt to ensure “happiness for all people,” Maduro began to hand out Christmas bonuses, in preparation for the coming elections in December. But political campaigning is not the only reason for the government’s open-handedness. The annual inflation rate in Venezuela has been rapidly rising in recent months, and has now reached a staggering 54 percent (not accounting for possible under-estimations). Although not yet officially in hyperinflation, monetary expansion is pushing Venezuela toward the brink.

In such an environment, paychecks need to be distributed quickly, before prices have time to rise; hence, early bonuses. This kind of policy is nothing new in economic history: Venezuela’s hyperinflationary episode is unfolding in much the same way Germany’s did nearly a century ago.

Consequently, Venezuela’s economic policy is proving to be another example of Ludwig von Mises’s argument that economic intervention, if left unchecked, leads to complete socialism. The ever-expanding price controls testify to the fact that governments always search for new scapegoats in the market instead of admitting the failure of their own policies, and that it is always easier to increase government control than reduce it.

Maduro clearly knows the ropes when it comes to anti-market propaganda; like his predecessor, Hugo Chávez, he has placed blame for soaring prices on speculators and the “parasitic bourgeoisie.” But no witch-hunt for “price-gougers” will stop the eventual collapse of the economy that will result from further monetary expansion combined with crippling price controls. Inevitably, as Mises argued, “once public opinion is convinced that the increase in the quantity of money will continue and never come to an end, and that consequently the prices of all commodities and services will not cease to rise, everybody becomes eager to buy as much as possible and to restrict his cash holding to a minimum.”

As we speak, Venezuelan shoppers are queuing outside seized stores trying to spend their rapidly depreciating currency, and the economy is marching steadily toward a dénouement when bolivars (Venezuela’s currency) will be useful for little more than kindling.

Venezuela has in fact been fueling the fire of economic disaster for quite some time. The socialist programs of Chávez’s administration squandered the country’s scarce capital in wasteful production. As chronic shortages set in, the government turned to price, capital, and foreign exchange controls to keep the economy afloat, each of which led to further chaos. Currently, Maduro’s administration is planning to extend the controls to all commodity prices, in yet another doomed effort to fix the country’s dire economic problems, but new controls will only make things worse. The only way to truly prevent soaring prices is to stop the printing press and give the reins of the economy over to the market by eliminating price controls. The nationalization of private businesses and establishment of total price controls will not cover up disastrous monetary policies, but only prolong and aggravate their effects. They merely add to ever-higher price increases and ever-lower supply of consumer goods and more capital consumption, further eroding the country’s economic foundation.

Venezuela’s dire straits might seem far removed from the problems faced by other nations, and it is easy to believe that hyperinflation is impossible “here.” Yet as Mises warned, the seeds of disaster are sown from the beginning of government intervention in the market, although “the first stage of the inflationary process may last for many years.” But the final stages of economic collapse occur far more quickly: as Peruvian-Spanish writer and political commentator Alvaro Vargas Llosa points out, “going from 60 percent [inflation] to 1,000 percent is a lot easier than going from 3 percent to 40 or 50 percent.” As disturbing as the thought is, the difference between the U.S. and other Western economies and Venezuela is merely one of degree, not of kind.

After all, Chávez carried out his Bolivarian Missions through a program of nationalization, subsidies, and affordable healthcare. This is a familiar refrain in Western economies.

Venezuela’s problems are more easily visible and have escalated more quickly because its capital stock has been largely depleted by an unbridled 15-year commitment to socialist economic policies. Other states such as the US still rely on large capital stocks accumulated in years of freer markets. Therefore, Western economies may not see their toilet paper disappear from supermarket shelves, yet, but rising prices and numerous bankruptcies indicate that the tendency is the same. This cements once again Mises’s idea that no country will find a stable “middle-of-the-road” economic policy. All movements lead toward one extreme: markets or socialism. Mixed economies are just pit-stops in between. The games all central banks play with the purchasing power of money may be more subtle, but they are ultimately just as harmful as conspicuous socialism.

Some have argued that the crisis in Venezuela will most likely “undercut Chavismo’s viability” as a political program. Yet the critical issue is not a political one, but the economic fact that Venezuela is frantically squandering its resources, consuming its capital, and impoverishing its people. If Maduro’s policies persist, and if after the seemingly inevitable collapse the legacy of chavistas loses its viability — “vaccinating” Venezuelans against a return to such destructive regimes — it will be the only good thing to come out of these tragic events.

Although the odds are against it, let us hope other countries learn something from this episode before they too approach the brink of economic disaster.

This article first appeared in the International Business Times.

Note: The views expressed in Daily Articles on Mises.org are not necessarily those of the Mises Institute.

Matt McCaffrey is a post-doc in Liberal and Integrative Studies at the University of Illinois, Springfield. He received his PhD in economics from the University of Angers. Send him mail.

See Matt McCaffrey’s article archives.

Carmen Dorobăț is a PhD candidate in economics at the University of Angers, and Instructor at the Bucharest Academy of Economic Studies. See Carmen Dorobat’s article archives.

© 2013 Copyright Matt McCaffrey All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules