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!

22 Responses to “Reader question, interesting comparisons on the US and Venezuela’s money printing”

  1. Me imagino que la deuda de EEUU es en trillones de ellos… y Billones de nosotros… Lo digo porque en el post te refieres a la deuda y GDP de US en 12 y 14 billones, y creo que es en Trillions…

  2. m_astera Says:

    “the US produces most of what it needs”

    Can you provide backup for that statement? Most manufacturing has left the US, as has production of materials such as steel and aluminum. The US does grow a large but falling percentage of its own food, but most of its manufactured goods are imported. That’s what all the numbers I see tell me.

    I don’t think a single TV has been made in the US since the early 1970s. Even simple hand and power tools are almost 100% imported. Appliances almost 100% imported. Import auto sales dominate.

    I realize this is a blog about Venezuela, but you are making the comparisons to the US. How do you see the US as producing most of what it needs?

  3. GeronL Says:

    He probably means food.

    You know what we need higher taxes and harsher regulations, that’ll attract more business and investments. //sarcasm

  4. m_astera Says:

    Miguel, I have to disagree with you on a couple of points. Some few computers and electronic devices are assembled in the US, almost entirely from imported components. Appliances may be exported by US based companies, but they are not “made in the USA” they are made in Mexico etc.

    The factories and manufacturing plants, the steel and rubber and aluminum plants are almost all gone. In many cases even the machinery was sent to China. This has been ongoing since the maquiladora boom of the 1970s and greatly accelerated over the last 20 years.

    The only way the US could again produce its own manufactured goods would be to start over, from scratch, building factories. The old ones have been stripped and abandoned.

    Real unemployment in the US today is around 20% and rising monthly. Real national debt, including unfunded mandates such as Social Security, Medicare, and federal retirement plans is at least 60 trillion US$. That was before the recent bank bailouts, and does not include unfunded State and local retirement plans.

  5. Robert Says:

    m_astera can you back up that 20% figure?

  6. Mike E. Says:

    As Miguel said, the key here is that the US has the CAPABILITY, which of course includes knowledge / technology base / education systems / people etc., to do all those things, incl., if push came to shove, to be completely autarchic (yes, incl. energy). Likely not a pleasant environment for a while if benchmarked by today’s living standard, but completely surmountable. “Splendid Isolation”, although not exactly in its historic context, comes to mind.

    Let’s remember how quickly Germany was back and fully industrialized after WWII and doing it in spite of some punishing restrictions by the allies. The fact that the old factories were destroyed and new latest technology ones were built turned out to be a blessing and a tremendous advantage for decades afterwards. Why was Germany able to do it? See first sentence above (and granted, the Marshall Plan was the catalyst).

    Now let’s look at Venezuela and see how it fits into this scenario. I guess there is nothing much to say, because it doesn’t.

  7. Megaescualidus Says:

    m_astera, the US is a net exporter of grain & feed, oilseeds, cotton, and animal products (this is a quick fact that can easily be verified from quite a few sources, such as the US Foreign Agricultural Service, The same cannot be said from Venezuela, which is a net exporter of, primarily, oil, an industry that (prior to 2002, and from round numbers I heard then) may have directly employed ~ 50,000 workers (this would be a good example of a very focused, non-diversified economy). Ahhh, I was just forgetting. Venezuela is also a net exporter of young, educated people, a tendency that only gained steam since 1999.

  8. ow Says:

    The U.S. is the largest manufacturing country, by value added, by far:

    Even if you look at it in per capita terms the U.S. is 13th which isn’t bad.

    Manufacturing as a percentage of GDP and of employment has declined, but only some of that is bad, not all of it. Factories are consistently made more and more efficient so employment there is streamlined much faster than in the service sector. And after a country reaches a certain stage of development the service sector grows faster than manufacturing because people already have things like cars and appliances and start wanting to consume more of things like healthcare, vacations, etc.

    U.S. manufacturing has no problems that can’t be solved by a weaker dollar and thank god we might finally be getting it.

    Conversely, the Venezuelan government has made many mistakes but the worst and most damaging by far is the radically overvalued currency. Venezuela has zero percent chance of developing any other sectors of its economy while the Bolivar remains so overvalued.

    The second worst problem is the lack of investment. It isn’t even so bad that they have taken on debt. THe problem is they have no productive investments to show as the fruit of that debt. Some countries that have successfuly developed, such as South Korea, had no choice but to go into debt because they had nothing like oil to sell. But they used the money they borrowed wisely and invested it rather than using to support binge consumption.

  9. ow Says:

    BTW as far as the inflation issue goes here is what I understand of it:

    Inflation isn’t just driven by the money supply – it is also driven by the “velocity” of money. The velocity is how often the money changes hands or is spent – i.e. how many times in a month does a given twenty dollar bill get used as payment.

    The more the money supply increases the more inflation you may have. The more the velocity of money increases (ie, the money that exists circulates more rapidly) the more inflation you may have.

    If both increase then inflation can be a real problem. But if one goes up while the other goes down they you might not have inflation.

    In the U.S. the money supply has gone way up but its velocity has gone way DOWN. That is because consumers are spending less and saving more and because much of the financial rescue money wound up just being held on to by banks to help their balance sheets and it is not being lent out – hence its velocity is zero. And that is the explanation for why the US doesn’t have much inflation despite the money supply radically increasing.

    Supposedly the whole trick to the U.S. getting out of this without bad inflation is the money supply being brought back down at the same time that people start to spend more, ie when the velocity of money starts to increase.

    In Venezuela on the other hand I believe the increased money has gone to people as direct payments which they spend, and to banks which make more loans, and so Venezuela has an increased money supply and the velocity of that money is high.

  10. m_astera Says:

    Robert- is a good place to get realistic figures on things like unemployment, inflation, and M3 money supply. The newsletter is by subscription, but there is plenty of free info at the site. Here’s the latest:

    “September Unemployment Rates: U.3 = 9.8%, U.6 = 17.0%, SGS = 21.4%”

    California is quite a bit higher than that already.

    And you all, I am NOT defending the fat boy or any Venz gov’t economic policies. I’m fully aware what a mess it is, and that presently the politicos are borrowing money to steal because they have looted everything else. However I spend a lot of time reading non-mainstream economic and financial sites in the US, and have lots of friends and family there. It is bad and getting worse fast. There simply are no good paying jobs available and none on the horizon.

    Germany did not recover from WWII in 1946, nor by 1950. In the meantime a whole lot of people suffered, and many starved to death. I grew up in Germany in the 1950s and people were very poor.

    If the US had something like oil to sell, it might be better off during the collapse I see coming. The poor in Venezuela will just go back to eating one arepa per day instead of three. Americans for the most part have no experience of hunger. Let’s hope they show that “capability” when it is needed.

  11. Orlando A. Chiossone Says:

    Miguel –

    I beleive you left out a very important detail……..The nominal cost of recently issued debt by the US is almost 0%……in real terms is probably negative…….What is the real cost of money for the Venezuelean Govt? or better yet…..what has been the cost of money for Venezuela over the last 10 years? Not cheap at all……….look at Brazil, Peru and Colombia and compare!!!!!!!

    This is not going to end pretty for Ven…!!!!!

  12. m_astera Says:

    ow wrote:

    “after a country reaches a certain stage of development the service sector grows faster than manufacturing because people already have things like cars and appliances and start wanting to consume more of things like healthcare, vacations, etc.”

    Can you give me an example of a good-sized country that has switched from producing a product to providing services, and been successful at that long term?

    What you write about factories being streamlined does not add to either job creation or high paying jobs. In the US it has led to robots doing the jobs that people used to do, the workers out of a job, and few making enough money to buy the products being produced.

    Services are fluff. People have to have the money to pay for them and if there are no good paying jobs, they won’t have money for services. An economy does not run on waiting on each other in restaurants, selling vacations to each other, or doing each other’s laundry.

    Megaescualidus wrote: “the US is a net exporter of grain & feed, oilseeds, cotton, and animal products”.

    Here are some recent US economy figures from wikipedia:

    GDP by sector: agriculture (0.9%), industry (20.6%), services (78.5%)

    As you can see, at 0.9% of GDP the fact that the US is a net exporter of grain etc. doesn’t mean much. Farming, forestry and fishing together employ only 0.6% of the US labor force.

    A few weeks ago there were around 100 job openings at an appliance factory in Ohio. 90,000 people applied for those jobs, which paid $23k per year. The federal poverty guidelines for 2009 list $22,000 as the poverty level for a family of four.

    What would it take to make the US a manufacturing powerhouse again? US workers willing to work for less than Chinese workers, and a market for the goods.

  13. HalfEmpty Says:

    Read carefully what m_astera writes for it is the truth. Avoid the US and don’t be taken in by our cheap propoganda. And for pete’s sake don’t get trapped into moving here or/and becoming a citizen, it’s hell on earth. Soon we’ll be fighting over the last slice of bacon and commence to killing each other with handguns while pounding our bibles and listening to Phaux News on our iPODs (imported from the yellow peril). Doomed! We’re Doomed!

    Or not.

  14. Douglas Novo Says:

    M_astera and HalfEmpty are way off in daring to compare the current Amercan situation with the the circus in Venezuela. They should really go to another blog. The US may have many current problems, (not more than it had in the seventies and early eighties when I went to college and people were panicking because of the loss of the manufacturing sector to the Japanese and the Germans). The fact is that for all its current problems: mounting debt, unemployment, etc. The US has shown historically a resilience that any country, (industrialized or not), would envy. The US has a very flexible workforce and relatively low administrative labor costs which makes for very low unemployment when the economy is hot and high unemployment in a recession. The individuals suffer but industries have a spring and bounce that other industrialized countries only dream about. The US has the brains, the economic resources, (incredibly a significant portion of them from abroad), the cultural homogeneity and the willpower to do just about anything it wants if the right circumstances come along. It showed that in WWI, in WWII, in the space race, the computer age, etc. What the US designs and contracts out to build out of the US can rather easily be brought back again if the circumstances warrant it. In manufacturing its the design process and the intellectual property that matters. What would all those Chinese factories do if those lucrative outsourcing contracts disappear?. The US is also today very integrated with Canada and Mexico and that integration could easily grow to provide the right mix of raw materials and cheap labor while effectively isolating itself from the rest of the world. What other country or economic/political integration movement can boast that. Certainly not the EU, (although they could be the closest).
    Back to Venezuela. Only oil and a few other choice raw materials, no educated manpower, (what it had it has lost in the last generation and its potential is diminishing by the day), no manufacturing base. The only thing Venezuela has is a bloated service sector where truly everybody is waiting tables and selling vacations to the few corrupt and politically lucky that corner the country’s resources, (with a a very small professional and technocratic minority that for now have the right jobs but also getting smaller very fast). The only hope Venezuela has of getting out of its hole is to gain political stability and pray for high commodity prices forever. A situation which certainly is untenable in the long run and if we factor in the current political mess; impossible. In a few years Libya will sound like a paradise….

  15. m_astera Says:

    Douglas Novo thinks I should go to another blog. Why is that, Douglas?

    Is this blog reserved for those who bash Venezuela while promoting the US, and anyone with a critical opinion about the great and wondrous US of A is not welcome to post here?

    The last time the US economy was looking (almost) this shaky was the late 1980s. That’s when the “rust belt’ was happening, and imports were largely replacing US manufactures. The software revolution pulled the US’s chestnuts out of the fire that time, lasting until the late 1990s when the dot-com bubble burst. A new bubble was then created in real estate, which topped out in 2007. Since then, there have been efforts to blow another bubble on Wall Street, but at P/E ratios of 150:1 only fools are throwing money there.

    Without good paying jobs, workers cannot be the consumers that have been the driving force of the US economy, yet you are seemingly promoting “cheap labor” as a good thing? Good for whom?

    Just where do you propose that the next big creative development that will save the US economy will come from? Serious question, I’d like to hear some ideas.

    I am very aware of Venezuela’s problems. Are they worse than those of the US? No, only different. You apparently are not aware of the sheer amount of untapped mineral resources in Venezuela. Some oil has been exploited, but iron, aluminum, phosphate, gold and many others remain largely untouched. Venezuela also has a huge untapped potential for agriculture; the US is already using all of its farmland, at least the parts that haven’t been paved over for malls, roads, and suburban housing tracts.

    A change of government and the opening of opportunities would bring many educated expatriots back home to Venezuela, I think, and they would return with valuable experience of how the rest of the world works. In the meantime, Venezuela’s resources remain untapped, rather like money in the bank.

    Time will tell.

  16. Roberto Says:

    Don’t forget, m_astera, we have Coltan too!

    Seriously, though, it is unwise to study the economy of the US as if it were one huge economy. It is better to study it as a union of various smaller economies. My take is that right now, certain areas of the US are definitely showing an improvement . Washington DC, North Dakota, and other areas have come thorugh relatively unscathed compared to say, Florida or California.

    One thing that does worry me about the US is the loss of manufacturing. I may be old fashioned, but service jobs suck compared to manufacturing in terms of what is given in to the economy. Bringing back jobs in the manufacturing sector, once their gone, is a very hard proposition indeed.

  17. m_astera Says:

    Hi Roberto

    Yup, Venezuela has coltan. If we are to believe the source, but it’s probably true. Venz has huge resources of all kinds of things; I work in agriculture, soil fertility and chemistry. From that viewpoint, Venezuela’s most valuable resource is phosphate, the rarest of the main fertility minerals N, P, and K. Nitrogen is easy enough, the air is ~80% N. K, Potassium, is also a very common element, 2.4% of the earth’s crust. P, Phosphorus, is rare, only 0.12% of the earth’s crust. Most of the soil in Venezuela is phosphate deficient, but the country has huge phosphate resources that could make the phosphate deficient areas highly fertile. It just needs to be spread around.

    It would require a change in the Venezuelan attitude towards agriculture before this could happen. Perhaps when there is no money to pay for imported food something will change. At the present time I believe the phosphate is only being mined for export.

    You mention that DC and North Dakota are still fine. I think we can discount DC, as it is a tax-based parasite, but North Dakota is interesting. It’s the only US state with a state bank, as opposed to a private bank. The North Dakota state bank has been around for about 100 years. Interest from loans goes to the state, which offsets the need for taxes. North Dakota’s economy is also overwhelmingly agricultural, and interestingly the soil in ND is naturally rich in phosphate.

    In conversation with a friend the other day he said “If I ran Venezuela, I would begin mining gold, and change the Bolivar to a 100% gold-backed currency, the only one in the world. Many people worldwide would value that and want to invest in Venezuela.” Quite an idea.

  18. m_astera Says:

    Interesting coincidence. I posted the comment above, went to my email, and found a link to this:

    “The sole state to actually gain jobs is an unlikely candidate for the distinction: North Dakota. North Dakota is also one of only two states expected to meet their budgets in 2010. (The other is Montana.) North Dakota is a sparsely populated state of less than 700,000 people, largely located in cold and isolated farming communities. Yet, since 2000, the state’s GNP has grown 56 percent, personal income has grown 43 percent and wages have grown 34 percent. The state not only has no funding problems, but this year it has a budget surplus of $1.3 billion, the largest it has ever had.

    Why is North Dakota doing so well, when other states are suffering the ravages of a deepening credit crisis? Its secret may be that it has its own credit machine. North Dakota is the only state in the Union to own its own bank. The Bank of North Dakota (BND) was established by the state legislature in 1919, specifically to free farmers and small businessmen from the clutches of out-of-state bankers and railroad men. The bank’s stated mission is to deliver sound financial services that promote agriculture, commerce and industry in North Dakota. ”

  19. Roberto Says:

    Well thanks for making the place I live into a “tax-based parasite”! I guess that means I’m a bacterium! J/K.

    I think that a lot of the reason DC was spared has a lot to do with government contracting, whether defense or not, rather than tax collection.

    It’s interesting to note that we have so much phosphate, and so little fertilizer going locally. I guess we could state that The Revolution will Not be Fertilized!

    Back in the day we supplied Pequiven with the bags for several of their fertilizer products. We were told then that the only fertilizer exported was done so AFTER satisfying local demand. We were not their sole source, but based on the amounts of bags printed with “for export” versus no indication, I would say that they were mostly truthful about this.

    Your acquaintance’s idea of converting the Bolivar to the gold standard is interesting, except I have a question:

    Since the gold supply is not infinite, what happens when it runs out?

  20. m_astera Says:

    Hola Roberto-

    The money that pays the government contracts comes from where? Taxes.

    I have yet to hear of a government that produces anything anyone wants to buy. Governments get their money by taking it away from those who do produce things of value, under threat of force, i.e. confiscation or imprisonment if the taxes are not paid. Or, as in Venezuela’s case, the means of production are confiscated by the government under the pretense that the revenues will be used to benefit “the people”. How much actually gets to “the people” after passing through government is anyone’s guess, but it’s safe to assume not much.

    In your question about gold, I assume you mean when Venezuela’s gold supply runs out? With a strong economy and production base, exports could be traded for gold. That’s one answer. Another is that a gold-backed currency might be more valuable, it would buy more as gold became more scarce. It’s an interesting question, but the US dollar was backed by gold from 1789 until 1972. When the US went off the gold standard is when inflation took off.

    Truly I don’t see endless economic growth on a finite planet as being desirable or wise. If Venezuela could feed itself and produce most of what it needed most of the people would be prosperous and content.

  21. Roberto Says:

    Point taken, M.

    Unfortunately, we need a boatload of work to get to the point where we are exporting more than raw materials.

  22. m_astera Says:

    Indeed, Roberto.

    But there is hope. A change in government, one that comes about through collapse due to sheer incompetence and corruption, will open the doors for many thousands of expat Venezuelans to return, bringing with them the skills and knowledge they have gathered from the far corners of the world.

    Venezuela is not a small island like Cuba, where the slaves can be kept captive by not allowing them boats. Nor does it have the USSR or an oil-rich sugar daddy to pay the bills. Perhaps most importantly, Hugo is not Castro.

    I believe there is reason for hope, good reason.

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