Original art by @modográfico

As Venezuela settles into the first hyperinflation worldwide in the last decade, I’d like to share some broad thoughts on this subject. To be clear, I am not a Venezuela expert; my research stems from analysis of historical episodes of hyperinflation. Nonetheless, I am contributing this to ensure there can be no confusion arising from my body of research showing that, in normal macro-economic circumstances, rapid money supply growth does not cause inflation.  

Hyperinflation is a very specific economic malady, with defining characteristics beyond simple inflation. In 2012, Steve Hanke and Nicholas Krus of Johns Hopkins compiled a table of all 56 identifiable instances of hyperinflation to that point, including what they consider the first such instance, France in 1796. In their compilation, they used a strict definition of hyperinflation: a price-level increase of at least 50% per month.

A preponderance of these instances occurred in countries in and just after World War I and World War II, countries in South America in the 1980s, and, especially, the countries of Eastern Europe and the former Soviet Union in the early 1990s as they were transitioning to market economies.

Two prevalent factors across these occurrences were the collapse in productive capacity (through war, commodity price collapse or other factors), and an overdependence on imports.

But the defining factor was the inability or severely diminished ability to borrow or sell debt to any third party, especially foreign banks or investors, coupled with very large and recurring government budget deficits, usually on the order of 10% to 20% or in some cases, much more.

Given this large, recurring deficit, and the inability to obtain funding through a third party, a country will resort to one of two things. The first is to sell debt to its own central bank, which that central bank pays for by giving it fiat currency or by making a fiat credit to the government’s account that can be used to make payments. Both are in effect the creation or “printing” of new money. The second is simply printing new, currency that is unbacked by such things as gold, reserves, or debt.

With the proper antidote, hyperinflation can be stopped in a very short period of time, often just days or weeks.

When a country resorts to this strategy, the value of its currency plummets in relation to external currencies such as the dollar. When this happens, the people and institutions that hold its currency scramble to try and sell the currency in exchange for gold of some more stable external currency before the value of that currency tumbles further. This mass selling only weakens the currency further, creating a rapid downward spiral in the value of the currency. Prices can literally increase exponentially. In Germany in the early 1920s prices increased by ten to the power of fifteen.

A large portion of the inflation comes not just from the large increase in currency but from the fact that, with a depreciated currency, the price of imported goods skyrockets. (Imports are often a significant factor in regular inflation as well).

The experience of these 56 countries has shown one other very important thing. With the proper antidote, hyperinflation can be stopped in a very short period of time, often just days or weeks.

The proper antidote is to stop the deficit spending. Jeffrey Sachs, in his book The End of Poverty, reports that Bolivia’s hyperinflation of 1985 was stopped in weeks by the following strategy. The following is an excerpt from that book:

We looked for a package of fiscal measures that could quickly wean the government away from its dependence on Central Bank financing of the deficit. We soon realized in discussions with our Bolivian colleagues and in looking through the books that the budgetary key lay in the price of oil. Government revenues depended heavily on taxes on hydrocarbons, mainly paid by the state petroleum company, YFPB. The YFPB set the price of oil and gasoline (in pesos). Generally, the oil price was changed every few months, so the price of oil fell sharply in comparison with other prices and in terms of the U.S. dollar during the period in which the peso price was held constant. The low price of oil was, in turn, destroying the budget. … Since the government budget depends on oil taxes, the tax base had collapsed. … Whole truckloads of gasoline were being smuggled over the border to Peru. …

We calculated that if the price of gasoline (and other fuels) was raised around tenfold, back to the world price of around $0.28 per liter, this increase itself would close most of the budget deficit. A package of other measures on the spending and revenue side could close the rest. …

The program was initiated on August twenty-ninth, starting with a sharp rise in oil prices. … The sudden end to the budget deficit led to an immediate stabilization of the exchange rate. … Within a week, the hyperinflation was over. …

Additional steps were required to consolidate the victory over hyperinflation, especially the restructuring of its foreign debt.

So the antidote formula is this:

  1. Close the budget deficit through whatever means required: tax reform, debt restructuring, expense reduction, or even, as in Bolivia, a technical adjustment of commodity prices.
  2. Discontinue printing new money through either means described above. In some cases, this has been achieved by the issuance of a second currency where the commitment not to print additional currency is more credible.
  3. Or make a commitment to do #1 and 2 above that is believed by the market and the citizenry, and then followed up appropriately.

Interestingly, as noted by Thomas Sargent of the Minneapolis Fed in his 1981 paper “The Ends of Four Big Inflations’,” the money supply often rises rapidly in the months and years after hyperinflation. This lends support to the idea that inflation is not simply a function of an expanding money supply, but also or instead a function of other factors.

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Richard Vague is managing partner of Gabriel Investments, chair of The Governor’s Woods Foundation, and author of The Next Economic Disaster, a book on the global economy, as well as a number of articles on economic theory. He was co-founder and CEO of Energy Plus, and also co-founder and CEO of two consumer banks, First USA and Juniper Financial.


  1. The proper antidote is to stop the deficit spending. Jeffrey Sachs, in his book The End of Poverty, reports that Bolivia’s hyperinflation of 1985 was stopped in weeks by the following strategy. The following is an excerpt from that book..

    Another example is Argentina. Argentina had about 15 years of 100% and greater (maybe 90% in 1980) annual inflation through the democratically elected Peron government, the military junta, and the democratically elected Alfonsin government. The economy finally collapsed in 1989-90. While President Menem characterized the solution to hyperinflation and the ensuing economic collapse as surgery without anesthesia, the solution turned out to be relatively painless. Deficit-producing government owned enterprises, such as Aerolineas Argentinas and the railroads were sold off.

    No more budget deficit, no more hyperinflation.

    The example of Bolivia also suggests that increasing gasoline prices to world levels would help in Venezuela.

      • “Increasing gas prices would bring down the government.”

        I am curious: Is this because people want free gas for their personal use more than ending this nightmare? Or because there is a whole industry of gasoline smuggling that employs thousands (maybe tens of thousands)? Maybe some of each?

        Will it matter that gas is free when there is not any gas? I see more frequent articles about severe gas shortages in the states that border Colombia, because is all going to smugglers, to the point where the local Venezuelans are forced to pay at the Colombian price or go without.

        And, as VE oil production continues to decrease, who gets cut-off first: the free-gas program, or sales that generate $ or are owed for past debts? Can they cut-off China and still give themselves free gas? What would the PRC do in that case?

        • “I am curious: Is this because people want free gas for their personal use more than ending this nightmare? Or because there is a whole industry of gasoline smuggling that employs thousands (maybe tens of thousands)? Maybe some of each?”

          Raising gasoline prices in the past has caused rioting, but today, there are so few vehicles on the road I don’t know that anyone would notice.

          It’s been a long time since I personally bought a 55 gallon drum of diesel because I don’t leave the house much and it’s safer to just pay someone to take the risk and deliver it to me. But the last time I did (and I know if prices have increased, they haven’t increased much since), I paid 11 bolivares at the pump for the 55 gallons.

          That was not a typo. Eleven (11) bolivares is what I paid for 55 gallons of diesel. Think about that. DolarToday had the exchange rate at 255,000 to 1.

          I guess at a minimum now the drum must cost at least 50 bs since that’s now the smallest note still in circulation.

          • You can be a big shot – give the attendant a 100 and let them “keep the change! …”

            According to the internet, retail price in Columbia is about 2300 peso = $.83 per liter.

            So, if the price of gas is allowed to reach parity with Colombia – which would out the gas smuggling industry out of business, gas would be about 211,000 bs. per liter at today’s DT exchange rate. So, you could fill up for about 10 million bs = 110 kilos of 100 b notes.

        • In any country, a big shock to the gas price is an unpopular measure that can end up with big protests. Gas price rise means public transportation rise, food rise, everything that depends on transport (that is, everything, rise)

          The problem in Venezuela is the mythology of “oil is ours”. Which is 100% true, but never fully developed beyond stupid populism. That is, if the oil is a resource of the nation to be used for the benefit of all Venezuelans, it doesnt follow the best use for that is to give gas away like it is air.

          But try to explain that to people that 1) earn a Venezuelan wage 2) have been told “we are rich, we have oil” for generations now.

      • “Increasing gas prices would bring down the government. Which says a lot.”

        It would bring down one mafia that the regime supports, the gasoline smuggling, the people will simply have to suck it, as they did when the gas prices were increased a couple of years ago more than 13.000 times and no one protested about it.

        Gasoline rise = government-ousting protests is an absurd myth that should have been abandoned by now.

    • The price increases are 100% caused by a powerful website, Dolar Today, which “exercises a monopoly in the fixing of the price of currencies,” and which is a “relentless dictatorship” against the economy of the country because it directly impacts the prices of the products and triggers inflation, at least this is the case according to Jesús Faría, former Minister of Foreign Trade (“It is necessary to go to a total decriminalization of the exchange issue” https://www.aporrea.org/economia/n320326.html)

      The thermometer is responsible for the fever.

      Alas, if only this sinister website can be defeated ….

      • Of course, he is correct. Human nature being what it is, the Regime proves this daily, no one would ever take the ridiculously high profits possible from arbitrage because of “saintly” economic polices of chavismo.

      • I’ve always wondered, if anyone in the government actually believed that Dolartoday.com is responsible for the problems in Venezuela, why don’t they just start Bolivartoday.com to take down the evil empire?

        • LV, I don’t know if anyone in the top ranks actually thinks this, but it is their story, and they’re sticking to it.

          Most Aporrea posters also recite it like religion. How to defeat Dolar Today! The war of cruelty and repression unleashed by Donald Trump on the Venezuelan people. Whatever. But, some will still find Maduro responsible for not being able to defeat a website in 5 years, especially since the ANC and the law of the 50 prices and so on. It sounds like it comes right out of a Harry Potter book.

          Others know it it is BS, and will say as much, but these are a small minority.

          At some point last fall, Maduro announces they will start selling oil in different currencies such as the Yuan or and Rupee. One of the Apporeans posts and article wondering how they would defeat Rupee Today? (That was brilliant and from his own team.) Would be like someone on Democracy Today making a snarky comment about how Russian bots made him order the wrong lunch by influencing his Facebook feed.

    • Right on!

      As well all that smuggling going to Aruba, Bonaire and Curaçao!

      Except you could smuggle enough stuff to those 3 islands to cover every inch of their soil, and it would still only account for 5% of VZ’s problems.

      • On the front page of the biggest Dutch newspaper last week an article about Curaçao having no import and or mining of gold though they do export for about $500 million per year. Now the Dutch want to know where this gold came from, funny people those Makambas!

  2. So,” …in normal economic circumstances, rapid money supply growth does not cause inflation.?” I’m sure Milton Friedman would disagree, unless, maybe, just maybe, the key word is “hyperinflation”. And, rapid monetary growth, assuming anything near normal velocity, to finance large budget deficits, especially with no outside financing (thank God the major world countries can still increase their national debt/GDP forever, with no eventual adverse economic consequences, right?) also causes inflation.

  3. Richard Vague – Good article. Are there any measures of hyperinflation based on an acceleration of inflation? For example, inflation which increases from 20% to 30% to 50%. If there is a steady increase of 50% a month, then obviously the amounts needed for exchange of the same goods escalate by more than the same fixed currency amount each month, but the percentage increase is the same 50%. It strikes me as unlikely that a 50% increase would remain at 50%, and more likely that it would increase from period to period. Is there some measure, such as a second derivative, that is used or recognized? I ran into some mathematical challenges trying to work out an equation that could be used to estimate actual inflation for the next time period, in a situation in which the rate of inflation is not a set percentage, but is actually accelerating.

    I tried Googling “accelerating inflation” and came up with nothing other than non-quantitative references to and examples of hyperinflation.

    • Inflation can accelerate extremely rapidly and that is the most concerning thing about Venezuela now. Maduro must change economic course dramatically; otherwise, the country will follow the path of Zimbabwe a decade ago. The following are inflation numbers for Zimbabwe:

      2005 585.84%
      2006 1,281.11%
      2007 66,212.3%
      2008 Jul. 231,150,888.87%
      2008 Mid-Nov. 79,600,000,000%

      It got up to almost 80bn per cent. My goodness. I fear that the govt now has as little control over the economy as it does over violence on the streets, or as little willpower to try deal with the problem.

      • Thanks for the data. It’s so unreal, isn’t it? There must be students from college to doctoral candidates writing papers and theses on “Economics In Reverse”, but all of this stuff is so outer-limits of sanity it strains even the imagination. I may grab some high school math tutor this coming summer to brush up on my calculus and work out an equation for accelerating inflation. I don’t think an economist would want to go there – fear of imaginary numbers and such.

  4. Based on this article the conditions in Venezuela is textbook perfect for hyperinflation.

    1) A loss of productive capacity
    2) Collapse of the tax base
    3) Unsustainable subsidy
    4) Inability to borrow money
    5) Financing of fiscal deficit through money creation.

    • It’s irrelevant.

      If it wasn’t smuggled into VZ, how much would the country earn selling it domestically anyway? What’s the difference between losing the money below costs if it’s sold in VZ, or sold in Colombia? It’s the same.

      I never understood this issue.

      • Venezuela is inow incapable of producing all the countrys gasoline demand , so it must import gasoline components from abroad (mostly from the US ) paying high USD prices to sattisfy local demand at prices which are in effect almost negligible , to the extent venezuelan gasoline is smuggled to colombia venezuela is spending scarce resources in subsidizing colombian consumers of gasoline or enriching the smugglers . this adds to the govts burden of financing its policies and operations …..!! so yes smuggling venezuelan gasoline to colombia hurts venezuelas interests.

  5. I’m not clear about what point the author is trying to make in this article. The chicken and the egg are easily differentiable here.

    Governments can add moderate amounts to the M2 money supply without causing inflation, providing that such addition more or less tracks the growth in the country’s economy or it is offset by recessionary pressures in the country’s economy – sure.

    However, whenever a government boosts M2 to excess – for whatever reason – it has the effect of devaluing the currency which, at the very least, has an inflationary impact on imports. How big the overall impact is turns out to be a function of the country’s trade balance and trading profile, and whether there are other competing recessionary pressures in the economy.

    The fact that all hyperinflation studies show the presence of a large fiscal deficit does not mean that a large fiscal deficit leads to hyperinflation. If this were true, then a large number of western economies would be exhibiting hyperinflation right now. Equally, if a government closes its fiscal deficit but carries on boosting M2 at an alarming rate, then hyperinflation will continue.

    So the reality is that an increase in M2 on steroids will cause inflation on steroids. Always. The presence of a fiscal deficit does not of itself cause inflation.

    So the recipe and cure for hyperinflation becomes:- When a government has a committed structural fiscal deficit and no access to debt finance, it is forced to finance by boosting M2. Boosting M2 then causes inflation or potentially hyperinflation. Inflation can only be brought under control by stopping the boosting of M2. This can only be done by either refinancing the deficit (with a credible plan to repay the loan) or balancing the fiscal books by cutting government expenditure or boosting revenues.

    So this gets to the same point as the author, but with a slightly different nuance on causality. Economists have known for decades that it was essential to increase the domestic price of gasoline, while improving targeted benefits to the poor to compensate. In the 1990’s gas prices were often described as a “subsidy to the rich” – with good reason. CAP tried it, and we all know what happened to him. Chavez had a window of opportunity in 2006 and 2007 dictated by politics and economics. This window was already closed by 2010. If Maduro were to try it today, it could be the straw on the camel’s back…

  6. To get things in perspective what our inflation be now if the regime :
    1. had reduced the gasoline subsidies so that Pdvsa costs of producing it had been covered Iincluding the 30% royalty on the value of the local crude used to produce it )
    2. had Pdvsa sell all its export production at market prices without privileging prices or payment conditions of oil sold to cuba and other allies.
    3. had properly paid for the upkeep of Pdvsa s refinery and field installations and managed the resources used in that upkeep rationally and without waste or corrutpion .
    4. Abstained from spending money wastefully on big splashy unproductive but pretigious projects and plans at a cost that made it neccesary for the country to indebt itself for huge amounts that now it cant pay.
    5. Had abstained from persecuting local producers of goods by expropriating them or imposing unrealistic price controls that made them lose money or go broke. thus reducing local capacity to produce the countrys needs and raise dependence on imports .
    6. Had allowed a more flexible open system of currency exchange transactions where the price of the USD maintained some reasonable resemblence to the true value of the Bs .

    Quite cetain that in such case inflation now would be quite moderate as the need to print inorganic money would have become much reduced and capable of being controlled thru conventional measures as used by other countries.

    • The reasoning behind gas prices is the same for the DICOM.
      Market forces will always prevail. When you add corruption to government manipulation, it totals up to economic collapse.

    • BB – sure, of course, if these people were completely different people, things may be different.

      If the Queen had balls, she’d be King

  7. Bill, then they would not be chavismo, just another Narco-state. Surely with reasonably sane economic policies they would not be a step or two from becoming a failed state.

    • I am quite certain that if we had never been cursed with Chavez becoming the master of Venezuela and all the corruption and mismanagement that he introduced , Venezuela today , despite whatever flaws existed in the pre chavez period , would be in a situation a hundred times better than we are now . I think there no one in Venezuela that doubts the truth of this assertion , ask anyone ……things were far from perfect but what we have now is the very worst of all situations …….to say otherwise is to display a troll credentials in too obvious a way…..!! At least try not to make it too evident…!!

      • Did I misunderstand your question or did you misunderstand my response? How do conclude that I am trolling? I appreciate your thorough contributions and apologize if it was on my part.

  8. “Interestingly, as noted by Thomas Sargent of the Minneapolis Fed in his 1981 paper “The Ends of Four Big Inflations’,” the money supply often rises rapidly in the months and years after hyperinflation. This lends support to the idea that inflation is not simply a function of an expanding money supply, but also or instead a function of other factors.”

    The speed at which the current financial markets move, in the modern world, should show that papers from the Minneapolis fed from 1981 dont really have much bearing today.
    The only way to stop hyperinflation is by taking a weak countries ability to print money away.
    And thats the dolar.

  9. To stop hyperinflation the wholesale creation of money not earned must be stopped and confidence in the currency must return. Both are unlikely to happen with this regime.

    The regime has huge fiscal deficit due to reduction of oil production, unsustainable subsidies, having to import almost everything and massive corruption to name a few. It is unable to borrow new debt. How will it pay the civil servants and soldiers if it doesn’t print money?

    As long as this regime continues in power and keeps printing money confidence in the currency will not return. So hyperinflation will continue.

    This is the end game. Eventually the whole thing collapse because you can’t create money fast enough to beat the erosion in its value. Hyperinflation will achieve what street protests failed.

  10. This conversation brings to mind the old saw “If you laid all of the world’s economists end-to-end they wouldn’t reach a conclusion.”

    • I believe people should study the similarities we have here to Zimbabwe and the Zanu PF and their policies of corruption and expropriation and destruction of the Agro industry, which had once hailed Rhodesia as the bread basket of Africa.
      People should look at the period of 2000 to 2009 in Zimbabwe which is so similar in modus operandi and consequently fiscal results to Venezuela.
      I also believe strongly that the only way out for this country is to dolarize, by choice!! rather than in Zimbabwes case dolarize once your own currency has completely been destroyed.
      It may anyway be a pre requisite, if monies are to be granted from the IMF and World Bank.
      The writing is clearly on the wall for me.

  11. Interesting that the author mentioned the case of Bolivia but said nothing about countries that controlled inflation and hyperinflation through the Dollarization route.
    The adoption of the Dollar as legal tender has three virtues, one is that the Adoptee government can not longer “print” money out of thin air, second, that no precious time is wasted in building a currency reputation (results are literally overnight) and third there is no currency controls so this lower risk for foreign investors of losing access to their money.

    Macri in Argentina has implemented something similar to what Mr. Vague is suggesting yet 2 years later they still struggle with double digit inflation, ~ 25%. So nope thank you.

    BTW, It is extremely ironic how Maduro and Co can hire very experienced and skilled New York lawyers to defend their misdeeds, yet they can’t hire a half-competent economist to save the Economy and themselves !!!


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