Hyperinflation: Theoretical and Political Enigmas


By: Pasqualina Curcio  [1]

“In wars, who sells weapons?”

Enigmas Eduardo Galeano Upside down. School world upside down. 1998


1.-Phillip Cagan is the monetarist who is credited with the definition of hyperinflation. In a scientific paper, published in 1956, – by the way – in the magazine edited by Milton Friedman [2], he established that it is the one that occurs when prices vary more than 50% per month. The aim of this work was to demonstrate, through the development of mathematical and statistical models, that the cause of hyperinflations is the increase in the amount of money. He studied 7 countries that recorded hyperinflation during the I and II world wars: Australia (October 1921 – August 1922), Germany (August 1922 – November 1923), Greece (November 1943 – November 1944), Hungary (March 1923 – February 1924 and August 1945 – July 1946), Poland (January 1923 – January 1924) and Russia (December 1921 – January 1924). He concluded that his model had limitations to explain how variations in the amount of money caused hyperinflation in 4 of the 7 countries studied. Reason why he had to refer the explanations of hyperinflation to the theories that emphasize the causes in external factors, among them the depreciation of the currency insofar as this is a good reference for the internal prices of the economies. Will there be neoliberal and monetarist economists, sorry for the redundancy, read the work of Cagan published by Milton Friedman? Why do they insist on affirming that the cause of hyperinflation in Venezuela is the increase in the amount of money and they do not know the “depreciation” of the bolivar, although manipulated, as the main cause? A great enigma is to know the intention behind so much insistence?

2.-In 1972, Wallace Neil and Thomas Sargent [3], also followers of the quantitative theory of money, showed, like Cagan, that in hyperinflationary phenomena, the price increase precedes the creation of money, that is, first Prices increase and then, as a consequence, the amount of money increases. They also showed that although a feedback effect is generated in which the creation of money also affects prices, it does so with less influence. In other words, they concluded that the original cause of hyperinflation is not the increase in the amount of money. Neoliberal economists who insist that the cause of hyperinflation in Venezuela is the expansion of inorganic money, and who to date have not. If you put a single number to support their speech, have you read the works of Neil and Sargent?
3.-When Phillip Cagan, in 1956, failed to demonstrate that the hyperinflations recorded during the First and Second World Wars were caused by monetary expansion, he chose to refer to the work done by Bresciani-Turroni [4] and Frank Graham [5], who in 1937 and 1930, respectively, studied hyperinflation in the Weimar Republic. These authors concluded that the cause of hyperinflation in the Germany of 1923 was not the amount of money, but the inexplicable and disproportionate depreciation of the German mark. In his scientific work, Bresciani-Turroni quotes Karl Helfferich, who was the Secretary of the Treasury of the German Empire between 1915 and 1916. He said in 1923: “Contrary to the widely accepted conception, it was the depreciation of the Mark the beginning of this chain of cause and effect: the increase in the prices of all imported goods was caused by the depreciation of the Mark; then followed the general increase in domestic prices and wages; the greater need of money in circulation on the part of the public and the State, greater demands to the Reichsbank on the part of the private businesses and the State and the increase of the paper money. “[6] Besides and with respect to that inexplicable depreciation of the Mark, Brescianni-Turroni said: “… the depreciation of the Mark was the effect of a conspiracy organized by the reactionary and nationalist parties, which sought to disrupt German finances, discredit the republican regime and undermine its (still insecure) bases, in order to restore the old regime on the ruins of the young Republic “[7]. Could it be that orthodox economists have not reviewed Weimar statistics?
4.-Lionel Robbins himself, economist and professor at The London School of Economics, recognized for having given the contemporary definition of “economy”, prefaced the Bresciani-Turroni book, wrote: “The depreciation of the Mark from 1914 to 1923 is one of the exceptional episodes of the twentieth century. Not only by its magnitude, but also by its effects. It occupies an important place on our horizon. It was the most colossal of its kind in history. It destroyed the welfare of the most solid elements of German society: it left behind a moral and economic imbalance, land suitable for the disasters that have followed Hitler as the adopted son of inflation. “ Will the right-wing economists be aware that the attack on the currency is a weapon of imperialism and that among its objectives is the moral deterioration of the peoples and paving the way to justify fascist regimes? Will they be aware of the risk?

5.-Economists who tirelessly repeat that hyperinflation in Venezuela is the responsibility of the government for expanding the amount of money will have reviewed what Domingo Cavallo wrote, Minister of Economy of Carlos Menen, creator of the convertibility box in Argentina, also neoliberal and redundantly monetarist? Cavallo wrote in 2011: “The existence of a parallel market with a strong gap in relation to the official market promotes the acceleration of inflation, because many prices start to be set according to the evolution of the parallel market and not based on the price paid by importers in the official market.” Monetary policy, if it tries to straighten itself to a certain inflation target, becomes more restrictive, because to reach that inflation goal they must first achieve to control the gap in the parallel market of the dollar.” [8] .

6.-Any “Economics” textbook, even the most basic one, shows that inflation, according to its causes, is classified as 1) inflation of demand and 2) inflation of costs. Theoretically and according to these texts, whenever inflation is cost, the result in the economy is an increase in prices accompanied by a fall in gross domestic product, that is, it implies a stagflation. Costs, on the other hand, increase, among other reasons because they increase the prices of imported goods, in turn due to the depreciation of the currency, even though its value has been manipulated. This type of inflation causes what is known as a supply shock. While demand inflation leads to an increase in prices accompanied by an increase in gross domestic product. It occurs when the demand increases due, for example, to the increase in the amount of money. If inflation were demand, in turn caused by the expansion of the amount of money, as some economists of the right say, we would be, theoretically before an increase in the size of our economy. It is not the case. It is the case that in Venezuela, hyperinflation is accompanied by the fall of gross domestic product, we are in stagflation, therefore, inflation is cost based, not demand based, we are in the presence of a supply shock caused by the manipulation of the exchange rate that, because of the rational and adaptive expectations of economic agents, makes imported goods more expensive, affects production costs and the prices of all goods and services of the economy. Could it be that these economists, who with some enigmatic intention, insist that hyperinflation in Venezuela is caused by the amount of money, did not attend the class in which the types of inflation were explained according to their causes; nor did they read chapter 13 on “Inflation: causes and solutions” in the basic economics book of Samuelson and Nordhaus? Maybe they were lucky that it was not an exam question.

7.-Another great enigma arises when trying to understand how monetarists will be solving the theoretical contradiction they incur when they say that the cause of hyperinflation is the issue of money? His thesis assumes that the largest amount of “inorganic” money arrives in different ways to the pockets of all Venezuelans and therefore, having a lot of money we increase the demand for goods and services, but since there is a limited supply, the markets, that according to them, they work efficiently because they have an invisible hand, they resolve the issue by raising prices. Any Venezuelan is demanding more goods now than the year 2013? It is the case that the demand for goods and services has not increased, on the contrary, it has decreased. Then the theoretical sequence that the monetarists repeat so much to explain why prices increase in Venezuela, in practice is not fulfilled. Will they be aware of its theoretical and empirical contradiction?

8.-Why do they insist that the fault of hyperinflation is the government that prints money “not backed”, if on the contrary, the amount of money with respect to the size of the economy has decreased 91% since 2014? Today, the amount of money with respect to the gross domestic product is 6%, in 2014 it was 66%. If they have not attended the class on monetization index or money supply, we refresh them, which measures the amount of money circulating in the economy with respect to the size of that economy. To the extent that the monetization index is higher it means that, in relative terms, there is more money circulating. The current index of 6% means that the amount of bolivars that is circulating is relatively low for the size of the economy measured by GDP (an indicator that, incidentally, has been published in OPEC reports). We refer to the data shown in the following graph. It is the case that as of 2014, the amount of money that circulates in the economy in relative terms has decreased, however, prices continue to climb. Is it a story about inorganic money? With what intention?


9.-The biggest puzzle is where are the calculations, the mathematical and econometric models that allow them to support the neoliberal and deeply monetarist economists that the cause of hyperinflation in Venezuela is the expansion of monetary liquidity, beyond a simple repetitive discourse lacking in scientific research. We have given ourselves to the task, not only of demonstrating theoretically and empirically that the cause is not monetary, but also we have demonstrated and sustained with econometric models that the original and determining cause is the attack to the bolivar through the political manipulation of the value of the exchange rate.

10.-Without going so far in time and space, within our own borders, we want to recommend to the neoliberals and monetarists the reading of the work “Monetization of Expenditure. Fiscal and Inflation in an Oil Economy with Flexible Change “written by Irene Niculescu and Ángel Puente, published in 1996. The authors concluded:” The results obtained with respect to the exchange rate allow to reject the validity in the Venezuelan case of a theory of inflation as a purely monetary phenomenon. The assumption of the incidence of the exchange rate on costs is confirmed and how the increases of these are incorporated in the prices. When analyzing the evolution of inflation, it can be observed that the greatest explanatory power is found in the variation of the exchange rate. The variation of the monetary base, on the other hand, shows a negative and insignificant relationship with that of prices. In this regard, the important interdependence between the exchange rate and the price level should be highlighted, such as the weak relation of prices with respect to the monetary base in the short term. “[9] (the highlight is ours). We are seized by the enigma of the limited capacity for research and study by those who only repeat what they hear.
11.-As for the value of the bolivar, which as we have been demonstrating, its manipulation is the cause of hyperinflation, what explanation will the neoliberal economists have about the variation of 558,035,614% since 2013? We have not seen calculations that allow them to sustain such “depreciation”. Could it be that they do not find how to include the political variable “attack on the currency” in neoclassical economic theories and why they avoid talking about dolartoday?


12.-What method of calculation will monetarists be using to justify that the value of the currency today is 498.25 BsS / US $, if for this to happen 21 times the amount of bolivars currently circulating in the economy is required? We are referring to the implicit exchange rate, which the monetarists know very well. It is a methodology that is used to estimate the value of the currency, this means that all bolivars circulating in the economy are used to acquire all the international reserves that the country has. When performing the calculation, we find that for the exchange rate can be located in the value criminally reported web portals (498.25 BsS / US $) we should have 21 times more bolivars than currently circulating. The estimation of the value of the bolivar made by the economists of the right is an enigma. They have not said what, according to them, is the value of our currency. In case it is equivalent to the one of the web portals, it would be interesting to know the variables that they incorporate in their econometric models to obtain such results. In case your results show a value well below that published in social networks, the great enigma that arises is why do they hide it? Why do not you join the campaign against dolartoday?

13.-Much ado made the entrepreneurs and their spokesmen to free the foreign exchange market. They pressed with the argument that they had no place to trade their currencies and that for that reason they did not bring them. They ventured to say that the liberation would stop the attack on the bolivar because capital would enter. Now that he has been released, they say they do not have the currency, they say that the State must “inject” them. In this regard, there is not even room for comments. Will economists on the right have studied the case of Argentina today to be able to advise entrepreneurs? Will they know that Macri freed the foreign exchange market as soon as he assumed the presidency and that two years later, dolarblue, equivalent to the dolartoday, is the one that not only marks the prices of goods and services of the Argentine economy but also that of its currency? Will they be aware of the flight of capital in Argentina after the release of the foreign exchange market? Are you aware of the exorbitant amounts of indebtedness that the Argentine people must assume as a consequence of this flight?

14.-Consecomercio is suggesting wage increases. They have realized that Venezuelans have lost their purchasing power and will not be able to sell their merchandise. Has it occurred to you that this loss is due to the increase in prices? Why, instead of requesting wage adjustments, do they stop the escalation of prices? Why not join the campaign against dolartoday that is ultimately the weapon of economic warfare that have been used to distort massively and without discrimination to the entire economy and affect not only the salaried class, win little or much?
15.-To insist that the cause of hyperinflation is the expansion of money has, in essence, the intention to limit the capacity of the State, to tie it up in order to not be able to meet the goals of providing its services, to deteriorate its already diminished performance because of the budgetary insufficiency caused by the increase in prices. They seek with this speech to avoid the wage adjustments that are necessary to protect the salaried class in the face of the pulverization of their purchasing power caused by the attack on the currency. The strategy is to use the monetarist tale as a veil to cover the imperial weapon implied by the attack on currency and hyperinflation. Will neoliberal and redundantly monetarist economists know that in the face of such economic aggressions against the Venezuelan people and attempts at “theoretical” manipulation, we Venezuelans have what to defend ourselves with? Will they know that we Venezuelans not only have natural wealth and friendly countries, but with high levels of consciousness?

16.-The economic war against Venezuelans has been declared by Donald Trump and all the spokesmen of imperialism, both in the United States. UU as in Europe. There are those in Venezuela who continue to deny that it exists. The unpatriotic attitude of some will always be a great enigma.
[1] This is the long version of the article published in the newspaper Últimas Noticias on December 3, 2018.

[2] Cagan Phillip, “The Monetary Dynamics of Hyperinflation,” in Milton Friedman (editor), “Studies in the Quantity Theory of Money”, Chicago, University of Chicago Press (1956).

[3] Thomas J. Sargent and Neil Wallace, 1975. “” Rational “Expectations, the Optimal Monetary Instrument, and the Optimal Money Supply Rule.” Journal of Political Economy Vol. 83, No. 2 (Apr., 1975), pp. 241-254. Published by: The University of Chicago Press

[4] Bresciani-Turroni Constantino. 1931. The economics of inflation. A study of currency depreciation in post war Germany. Universitá Bocconi. First edition in English, 1937.

[5] Graham, Frank, 1930. Exchange, prices, and production in hyper-inflation: Germany, 1920-1923. Princeton University.

[6] Bresciani-Turroni Constantino. 1931. The economics of inflation. A study of currency depreciation in post war Germany. Universitá Bocconi. First edition in English, 1937.

[7] Bresciani-Turroni Constantino. 1931. The economics of inflation. A study of currency depreciation in post war Germany. Universitá Bocconi. First edition in English, 1937.

[8] Cavallo, Domingo. 2011. The black market of foreign currencies. Retrieved on 01-09-2018 at http://www.cavallo.com.ar/el-mercado-negro-de-las-monedas-extranjeras/

[9] Irene Layrisse de Niculescu and Alejandro Puente. “Monetization of Expenditure. Fiscal and Inflation in an Oil Economy with Flexible Exchange “. Social Science Journals FCES-Luz, Nueva Epoca, Vol. II, N ° 1, 1996, pp. 73-104.


Source URL: 15 y ultimo

Translated by JRE



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