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Comment by girishso | Hacker News Reader

Can someone ELI5 why this hyperinflation happened?

Milton Friedman

> Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output... A steady rate of monetary growth at a moderate level can provide a framework under which a country can have little inflation and much growth. It will not produce perfect stability; it will not produce heaven on earth; but it can make an important contribution to a stable economic society.

Increasing the money supply by a great deal doesn't always lead to inflation, but nearly every case of extreme inflation coincided with a large increase in the money supply.

The government printed too much money, effectively making it worthless. It's like trying to get more pizza out of a pie by slicing it into more slices. This also increases transaction costs and destroys value. To give a silly example: imagine if you're running a store and the price of your goods changes every hour. You'd have to pay someone to constantly go around w/ a price change gun and update the prices in a continuous loop

I think the complication to this is that Venezuela probably didn't print that much more money, but their economy shrank and their failure was not printing less.

So it's more like you are slicing a pizza into 8 slices but each slice is now the size of a postage stamp.

inflation is never a monetary phenomenon, always an overspending problem, the supply of money only matters insofar as it is being spent on output -- if the gov't prints $trillion and buries it in the desert, the price of goods isn't going up

Hyperinflation as always coincided with a drop in production, rather than an increase of the money supply. Governments (and old economists) often seems to think that fludifying the economy is what it take for people to create again but never work, and the problem worsen.

MMT response to hyperinflation will be: tax more, Gvt borrow more, and guaranty more jobs (as job security is supposed to protect against inflation in MMT). I don't know if it will work, but i think its time we tried this instead of printing more money.

> Increasing the money supply by a great deal doesn't always lead to inflation, but nearly every case of extreme inflation coincided with a large increase in the money supply.

Increasing money supply though is an effect of another cause:

* https://clintballinger.wordpress.com/2021/01/12/the-myth-of-...

Amongst others, the above article cites Roche:

> In this paper I will argue why the common misconception that “inflation is always and everywhere a monetary phenomenon” cannot be used to explain most historical hyperinflations. I will argue that “money printing” is often the response to exogenous and unusual events and not the direct cause of the hyperinflation.

* https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1799102

Further, Friedman, as a Monetarist, assumed the velocity of money is/was constant, which is definitely the case:

* https://fred.stlouisfed.org/series/M2V

Keynesians generally say that V is not constant, and the evidence supports their view.

I don't think that stuff is very satisfying as an explanation, even though it sounds like the standard "common sense" explanation.

Why is inflation supposed to be such a problem, if stock splits aren't? Cutting a pizza into more slices doesn't make it bigger, but doesn't make it noticeably smaller either. Changing prices isn't that hard now we have computers, and most people don't keep their savings in cash, either electronic or paper.

I'm not saying inflation is not a problem, but I think the standard explanation has a lot of holes. One has to come up with a more subtle analysis.

And also, how come you quote Friedman as saying that money supply growth causes inflation and then you say no it doesn't, although it's correlated? Do you think that inflation causes the money supply to grow? Or is it a third "X factor"?

ELI5: The government is printing too much money, so it's not worth anything.

ELI10: Venezuela's economy shrank, then they played funny business with their exchange rate to pretend business was usual. But now almost nothing is for sale in Bolivars, so if the government wants to pay people (something like 40% of their GDP was government spending), they have to pay people more to chase fewer goods. Which makes people raise prices. Which makes the government have to pay more.

The USA is wrecking their economy to bring in their right-wing dictator/coup attempter/puppet. Generally the US works very hard to eliminate any sort of socialist government worldwide, particularly a democratically elected and supported one like Maduro's.

https://en.wikipedia.org/wiki/International_sanctions_during...

Were there sanctions against the Venezuelan government by the US? Absolutely yes.

But a big part of their problems are self-inflicted. When they nationalized several foreign-owned industries (beyond oil), that severely reduced confidence in doing business in the country. Most of the industries taken over were "western" (US, French, British), but they also took over steel mills owned by Argentinians, and homes owned by wealthy Venezuelans were turned into a government-run resort area.

Ford still has a vehicle assembly plant in Valencia [0], but production is spotty due to parts shortages. And I suspect that the currency exchange rates aren't helping matters.

[0] Disclaimer: My grandfather (a lifelong socialist and union man) helped open the plant in the early 1960s.

It’s because Venezuela has external debts, which must be repaid in an external currency. Printing money as a way of paying those debts is ill advised, because since the debts are in an external currency, they become harder and harder to pay. But Venezuela appears to be doing just that, probably out of desperation. They could just default, but they have refused to do so, perhaps because they are worried about even more sanctions or a possible coup.

Edit: they are in default on many of those debts, and that’s why the sanctions happened, which caused further damage. And we already tried to coup them. And now confidence in the currency has been lost, causing the death spiral to accelerate. Sorry, had my timeline wrong

Hum... The main use of government money (fresh printed or not) is internal spending. That's true basically everywhere.

That’s silly, their debt payments could be less than 50% of the total government budget and still cause problems.

Generally yes. But if you're a world reserve currency like the US Dollar or the Euro, then a lot of the bills are used outside your borders. In places like Cambodia, it can become an unofficial second national currency.

https://en.wikipedia.org/wiki/International_use_of_the_U.S._...

Even if this explanation is correct (fraught), the idea that the value of your currency is entirely out of your hands is really bad. There have been indebted countries with no trading partners being bombed on all sides that have managed to have a stable currency.

Where did I say currency value was entirely out of their hands?

Look, I’m not defending Chavez (he was the one who took out the loans) and I’m not defending money printing as a way to pay debts, but that’s what happened. They got huge loans from the IMF, and then when the price of oil tanked unexpectedly they tried to print their way out of it. Then they defaulted on most of those debts, and the USA slapped sanctions on them and tried to coup their government. None of that helped.

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