Archive for October 29th, 2009

Reader question, interesting comparisons on the US and Venezuela’s money printing

October 29, 2009


A reader asked the following in the comments, which led to an answer and then to this post:

What is your take on the US printing money to finance the debt and new politically driven hand-out type projects like never before (maybe WWII exception)? Do you see the possibility for a Weimar or Zimbabwe type hyperinflation in the US or is the overall debt expressed as a % of GDP manageable?
I realize that Venezuela’s only meaningful collateral is oil and the country therefore is extremely vulnerable unless oil prices will be on a sustained upward trend.
The US on the other hand has, at least still for now, a wealth generating economic system second to none and with it an arsenal of weapons at it’s disposal to break the inflationary spiral.

It is a very good question, because I do worry about all of the money printing in the US and what is long term impact will be. So, here is my looong answer (short one is in the comments of that post):

First of all, there is a very basic difference: In the US, authorities are very worried about all of the money printed in the last two years, while in Venezuela all of the money printing gimmicks do not seem to concern the Minister of Finance, the Minister of Planning or the President of the Venezuelan Central Bank. They all say that inflation here is “structural”, without realizing that they have created the perverse inflationary structure.

Ask yourself a simple question: If in 2001 inflation was at 11%, what “structure” took it to take it to the current 27%? Who did it?

Well, it was the Chavez Government and the “structure” is simply the uncontrolled growth in monetary liquidity (M2) in the absence of higher productivity and/or higher international reserves. (Milton Fridman said it succinctly: Inflation is a monetary phenomenon)

Back to the question.

In the US there was a financial crisis. This required emergency measures by the US Government of issuing debt and “printing money”. M2, which measures how much money is out there in an economy,  increased in the US in the last two years from US$ 7.2 trillion to US$ 8.3 trillion during the crisis, that is a 15.2% increase in the last two years. It also is about 7.8% of GDP.

This is unprecedented and a source of concern. By creating such a huge amount of new money, there will be inflation down the line, even if today the concern is avoiding deflation. When the US economy recovers, this will certainly generate inflation, but as I said above, the good part is that the authorities know about it and are willing to do something (hopefully!)

Well, in Venezuela, according to Chief Economist Chavez, we have yet to feel the economic crisis (not true, but let’s believe him for a minute).The same measure, M2, the amount of money out there in the Venezuelan economy has gone up by 83% from US$ 62 billion to US$ 113 billion. This is 16.8% of the Venezuelan GDP. Thus, the increase in M2 in Venezuela is FOUR times that of the use and the percentage increase as a fraction of GDP is more than Twice as much. Not good, no? And I am worried about both countries!

Except that Venezuela’s GDP is measured at Bs. 2.15 per US$ because the Government pegs the official rate at that value. In reality (hard currency) GDP is much lower, thus the increase as a fraction of GDP is even much bigger than it appears at first sight.

Thus, if you are worried about money printing in the US, in Venezuela we are running the presses full time! And Chavez says there is no crisis.

In terms of debt, US debt is running at around US$ 12 trillion versus a US$ 14 trillion GDP or 85% of GDP: In Venezuela debt is running at around US$ 90 billion and GDP is at 200 billion, so it looks “better”. However, GDP is measured at Bs. 2.15 per US$ and over half of the debt is denominated in US$, so the comparison is not correct as if the Government devalued to say Bs. 4.3 per $, then GDP would be halved. In fact, the “weighted average” of the economy is clearly above Bs. 3.5 if not Bs. 4 per dollar.

And therein lies a huge difference. If the US Government “devalues” its currency, things become more expensive for Americans if imported, but the US produces most of what it needs. By allowing the dollar to slide, the US exports more and becomes more competitive.

In Venezuela, this is not the case. If the Government devalues, the dollar denominated debt does not change in price, it gets more expensive! Moreover, Venezuela is not very competitive and imports too much, thus, devaluing its debt is not as effective as in the US and will be felt more by Venezuelans.

But even worse, US debt has increased by US$ 1.2 trillion during the last year to help the crisis. That is exactly an increase of 10%. Well, Venezuela’s debt has increased this year in Bolivars by 43% (From Bs.30 billion to Bs. 43 billion) and in foreign currency by US$ 11.5 billion or 30.7% in US$ and counting…. (There is a difference in that I am not taking into account the Chinese fund on all of this)

Thus, the changes in debt in crisis laden USA are about a quarter of those here. Thus, if there is going to be inflation in the US, imagine what will happen here.

But even worse, the Chavez Government keeps coming up with creative ways of funding its wild spending, such as the now direct financing of PDVSA and soon to come CVG (see previous post).

So, if you are worried about the US, you should be absolutely scared about our prospects. Money Printing in Venezuela has reached unprecedented levels. The ratio of M2 to reserves is at 4, an unprecedented value which says the “equilibrium” exchange rate is at Bs. 8 per US$.

Yes, I do worry, I live here!