The Venezuela Money Printing Machine is Running at Full Speed

December 19, 2011

I had not looked at monetary liquidity M2 in a few months. This number measures the amount of money in the economy, including bank deposits.

I checked it yesterday and it had reached again US$ 100 billion at the official rate of exchange, in fact, to be precise, it is at US$ 102.3 billion after reaching US$ 100 billion on December 2nd, according to the Venezuelan Central Bank.

And yes, and I say it reached that number again, for the second time in the country’s history. You see, a year ago it had reached US$ 100 billion (US$ 113 billion to be precise), but then the Government through the magic of devaluation from Bs. 2.6 to Bs. 4.3, instantly pushed it down to US$ 68 billion on January 1st.

Thus, since the first of the year monetary liquidity has increased by 49%, or 57% since one year ago.

That’s a lot of new money out there. A lot of printing. That’s why inflation is so pesky, if rather than blame speculators and the oligarchs, the Government allowed M2 to rise more slowly, then inflation would ease.

It may sound like a chicken and egg problem, what comes first? The printing of money or the inflation? Well, I can assure you that if the rate of increase of M2 is double that of inflation like it is today (inflation is around 27%), inflation is surely going to go up. More so when the amount of goods available for sale has not increased much, certainly no more than low digits, while the amount of money has gone up dramatically.

It is simply too much new money chasing the same amount of goods.

And the amount of goods can not be increased via imports much. Imports this year are running more or less at the same pace as last year and right now, the ability of the Venezuelan Central Bank (or CADIVI) to give more money is quite limited. You see, a year ago when M2 was also US$ 100 billion, international reserves were about US$ 30.2 billion, of which gold was about US$ 16 billion. That is, “liquid” reserves (reserves-gold), with some caveats, was about US$ 14.2 billion. That is about six months of imports via CADIVI.

Today, reserves are down to US$ 27.7 billion, of which gold is about US$ 21 billion, that is a much smaller cushion of US$ 6.7 billion in liquid reserves and now the gold is harder to sell or pledge, because it is here. It would have to be shipped abroad first. Thus, the liquid part of reserves is slightly more than one quarter. A little more than three months, that’s all.

The worst part, is that the Government is very unlikely to devalue in 2012, because a devaluation would give inflation a push and you know who wants to be President forever. Thus, as the Government spends ahead of the 2012 election, to give people a felling of well being, M2 will increase more and more, making the idea of removing exchange controls more difficult. A year ago, there were Bs. 9.8 for each dollar in international reserves, today there are Bs. 15.9 for each dollar at the Venezuelan Central Bank (including the gold, of course). In a year, any attempt to remove exchange controls would require a bigger devaluation and more foreign currency to be able to defend a floating rate.

Barclays estimates that inflation in 2013 will reach 36%. The Government will pull all of the stops, decrees, bills and threats in order to slow down price increases. Unfortunately, this is a very difficult game as inflation accelerates, as the private sector may decide not to sell or make goods at a large loss. Then scarcity will increase and politically and scarcity seems to carry more weight with voters than inflation.

And no matter who wins the election, there will have to be a very significant adjustment to the rate of exchange in 2013. And thus, more inflation. The mirage of lower inflation moves further into the future, while the Government ignores the fact that it is the main driver behind it.

22 Responses to “The Venezuela Money Printing Machine is Running at Full Speed”

  1. Ken Price Says:

    Government accounting: 2+2=8

    Hugo’s hoping the “great unwashed” won’t understand “inflation”, and simply focus on their heavier pay-packets.

  2. Andres F Says:

    I don’t think inflation is important enough for Chavez, especially considering elections are coming up.

    “scarcity seems to carry more weight with voters than inflation”- only with a very small percentage of the population, the rest doesn’t even understand it.

  3. HalfEmpty Says:

    now the gold is harder to sell or pledge, because it is here.

    Where? It actually arrived, if so I’m surprised it wasn’t televised.

  4. jau Says:

    Next government should move to la orchila, park an american destroyer there for protection and eliminate the Bolivares, the central bank, the military, the chaveses… Kick out the cubans, odebrecht, the libians, the chinesse, petrocaribe and all the other sanguijuelas.

    Hopefully we do not start WWIII and are able to move forward with some dignity.

    That was a excerpt of my letter to Santa…

    Ho ho ho feliz navidad!!!

    • CharlesC Says:

      I’ll sign that letter, also.
      Chavez never seems to care for the truth.
      Example, has Chavez learned anything about
      Economics in the past years. No. He keeps repeating
      the same blunders, even larger…

  5. ECG Says:

    In 2009 the government transferred $12000 million out of reserves (excess reserves they called it). Does anyone know where that money went and if there is anything left over?

    If that money is still around (a big if, i know) that may have an impact on the numbers in the post.

  6. steven Says:

    Technical curiosity: The picture you chose to accompany the entry is of dollar bills being printed. Are there no photographs showing bolivars in the same condition?

  7. moctavio Says:

    They are printed in La Casa de La Moneda in Maracay

    http://200.74.197.135/c3/casamoneda.asp

  8. GWEH Says:

    Chavez’s Rebuttal to Obama

    By the way, Señor Obama has been out there attacking me.

    Well, that doesn’t surprise us at all.

    It’s the voice of Imperialism.

    Obama, mind your own business, brother.

    Look after your own country; look at the mess you’ve made of it, buddy.

    Stick to governing your own country.

    Now you’re going around trying to get votes by attacking Venezuela.

    Don’t be so irresponsible, brother.

    Obama the phony.

    You’re a phony. Hm!

    Leave us alone; we’re free. Don’t you know?

    And we’ll never ever be any colony of yours, or of hers.

  9. GWEH Says:

    en la casa blanca estaban orgullosos de la entrevista…

  10. GWEH Says:

    http://www.dailymotion.com/video/xn48ci_chavez-tilda-a-obama-de-farsante_news

    Parts 1 and 2 of Chávez’s rebuttal to President Obama.

    By the way, Señor Obama has been out there attacking me.

    Well, that doesn’t surprise us at all.

    It’s the voice of Imperialism.

    Obama, mind your own business, brother.

    Look after your own country; look at the mess you’ve made of it, buddy.

    Stick to governing your own country.

    Now you’re going around trying to get votes by attacking Venezuela.

    Don’t be so irresponsible, brother.

    Obama the phony.

    You’re a phony. Hmm!

    Leave us alone; we’re free. Don’t you know?

    And we’ll never again be a colony of yours, or of hers…

    [LONG PAUSE AND APPLAUSE FROM HIS ENTIRE CABINET ET AL.]

    To tell you the truth, Obama, you know, pathetic is what you are.

    You’re pathetic.

    Go ask the black communities of your country what you are to them:

    the biggest frustration in I don’t know how many years

    Obama, go ask the poor people of your country and you’ll see what you are:

    a great frustration.

    Go ask many of Africa’s people, who may have believed in you because of the color of your skin color— because your father was from over there — from Africa.

    You’re of African descent, but all those people are ashamed of you.

    Then, leave us in peace, Obama.

    Leave us alone, leave us alone.

    Go find your votes over there, but do right by your people. Eh! That’s what you should be doing.

  11. island canuck Says:

    Due to the increases in the liquidity the Banco Central is considering issuing a new bill of BsF.500.

    This will be our biggest denomination & will have a black market value of about US$60. (for the moment)

    http://informecifras.com/?p=180651

  12. CharlesC Says:

    Chavez killing the messenger, ignoring the message.
    Keep moving people, nothing new here…


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