Late last year, Bloomberg reported that Venezuelan currency had been so devalued that Venezuelans had taken to weighing money instead of counting. Now, in an apparent show of socialist compassion, the Venezuelan government has announced its fifth minimum wage hike in the last year. The 50% increase means that Venezuelans will have a heavier wheelbarrow of cash they can exchange for needed goods.
Venezuela’s hyperinflation is the highest in the world. The International Monetary Fund estimates the rate of inflation at around 1,600%, though there is no way to know for sure: the government has neglected to release official data.
Ostensibly, the minimum wage increase is intended to help the people deal with the skyrocketing costs resulting from the inflation, but President Maduro and company should go back to Economics 101.
Once upon a time, the almost-reasonable Keynesian monetary theory said that expanding the amount of money in circulation would increase the demand for goods and services and thus stimulating the economy.
Then Milton Friedman destroyed the theory in the 1960s in his seminal work ‘The Role of Monetary Policy.’ He explained that the benefits of demand-side stimulation are only temporary, ultimately resulting in inflation once prices adjust to the fact that the additional money does not represent any new wealth. Often, the backlash wipes out the initial gains or even leaves the situation worse than before the expansionary policy was embarked upon. The evidence of this in the United States was the hyperinflation that occurred in the decade following Friedman’s warning.
Venezuela appears to be attempting to disprove Keynesianism in its own way through reductio ad absurdum. A fifth hike in the minimum wage is a laughable attempt to deal with inflation many times the rate of the wage increase. It hasn’t worked before and economic logic says it won’t now.
Though Maduro prefers to blame “political foes and hostile businessmen” for the economic problems, according to the BBC — the latter of whom just love when no one has the wealth to buy anything — there are hints that the Venezuelan government is recognizing some of the extreme measures it will have to take to ease the crisis.
Again from Bloomberg:
A few weeks ago, however, the government quietly asked five currency companies to submit bids for bigger bills — 500, 1000, 5000, 10,000 , and perhaps a 20,000-bolivar note, according to someone with direct knowledge of the order.
The request is for the bills to be ready in time for Christmas bonuses. Normally such an order takes four to six months and so far no tender has been awarded. To minimize time and cost, the government is considering swapping only the color, not the design, of existing bills, and adding zeros, the person said. The Central Bank said it had no comment.
Re-denominating is only part of the solution. The Venezuelan government must cease its attempt to drown the country in cash and instead move toward policies that create real wealth.
An end to the pursuit of socialistic dreams is the only way to escape the economic nightmare.