Tuesday, June 25, 2013

Venezuela on the Brink of Hyperinflation

It is too early to call Venezuela a truly hyperinflationary economy, but it looks to be on the brink. We can see early signs of all of the feedback pathways that make hyperinflation potentially so explosive. It is true that something could yet defuse the process. For example, a sharp increase in global oil prices could provide an unexpected increase in revenue for the budget. Alternatively, although it seems unlikely, the government of Nicolas Maduro could turn away from the populist policies of Hugo Chavez and impose stringent austerity measures. Doing so would be hard on the real economy, but it could bring inflation down.

It is more likely, however, that the Venezuelan government will continue its dysfunctional blend of free spending, socialist mismanagement, and administrative restrictions on foreign exchange and retail prices. If so, the near future could see the first real outbreak of hyperinflation in Latin America since the 1980s. As blogger Billy Mitchell once wrote in reference to hyperinflation in Zimbabwe, "Bad Governments will wreck any economy if they want to."