So you have it backwards. This almost entirely due to poor economic policies by the Venezuela, not something "external".

While the fall in oil prices has exacerbated the problem the core issue is the policy of plugging a huge budget deficit by printing Bolivars. This almost directly causes the huge local inflation and rapidly falling exchange rate as measured in the black market (i.e. the "true exchange rate). Combine this with strict currency controls (i.e. "fake" government set exchange rates that are not available to most people) you get shortages since Venezuela must import many essentials. [EDIT: And, as pointed out below, price controls are a key cause of the shortages.)

This situation while somewhat complex is a textbook example of these issues.

There are also other countries with multiple currencies. Like Zimbabwe that uses the USD and SAR as well as some others.

> but how does that turn into no one being able to buy milk (or other essentials)?

The problem is that these countries come with price controls for basic food. The food can be available on black market. The problem, it's much more expensive to produce than the current price tag on the controlled government market.

So there are two possibilities:

1. The industry goes bankrupt because of the laws. And I witnessed this first hand. I saw people and farmer throw away milk on the street. It makes no economical sense to produce at all.

2. Sell it on the Black market, or smuggle it outside of the country. This will depend on how strong is the local government on controlling borders and commerce.

Simply because 'most things' that are sold in Venezuela are either imported - or depend on imports.

The Bolivar is crashing against all currencies, not just the USD - so anything: parts, fuel, TV's, entertainment - it all has to be imported, and it all got expensive.

'Internal inflation' can happen when there are more Bolivars floating around than before - even without outside currency markets to validate the price.

Ex: if there are 1 Trillion Bolivars in existence, and the government simply prints '1 Trillion' more and dumps them on the market. Guess what happens to prices? They will basically double every where.

So your shoes that cost 100 Bolivars, now cost 200.

It's becoming clearer, but I'm still confused.

They can print money to fulfil those obligations, effectively giving public sector staff a pay cut, pensioners a reduction in the value of their pension, etc.

Not really.

By 'printing money' they are simply 'taking value away from those already holding Bolivars'.

Printing money is just devaluing the Bolivars already in circulation - so you can think of it as a 'tax on cash'.

You can print paper, but you can't 'print' economic value and production.

Printing money to pay gov. employees is basically a 100% sign to everyone in the world that 'this economy is destroyed' - and that they should shut down all operations, cut their loses, get all their money out and exit in every way.

So it's a pretty bad signal.

You can run a tightly managed economy successfully but it's hard. Very hard. Completely free markets are cruel but corrupt tightly managed economies are moreso. It also becomes difficult to determine the difference between a completely free economy and a corrupt managed economy because without regulation the former tends to concentrate power until it becomes effectively or actually the latter.

Sometimes the only thing for a collapsing economy to do _is_ print money. It's what a failing state will do to prevent itself from becoming a failed state. It's not sustainable but it's like falling off a mountain, you have to do _something_ and devaluing your currency to keep your economy somewhat functional can be the "right" thing to do for a while.

No, this is upside down.

Printing money to pay debts, salaries - is what a 'failing state' will do to absolutely guarantee they will fail.

Central banks don't print money - they trade bonds or other assets in exchange for currency, and they do so at a rate to allow monetary expansion as the economy grows.

Cynically, you could say 'government issues debt, which is bought by central bank in exchange for $' which is very much like printing money, but it's not quite.

And 'gold' ... the amount of gold is so small it doesn't really affect anything.

A 'failing state' needs to restore confidence in it's institutions in order to get out of the hole, the last thing it can do is print money willy nilly.

The anti-populist measure would be to cap/cut government salaries, 'de facto' default on bonds - this is obviously a bad signal, but not as bad as printing money. A 'quiet default' i.e. signalling that 'there is no way we can repay so you'd better negotiate with us' is the pragmatic thing to do.

So if you no longer have the paper trail of things being bought and sold, who keeps track/makes public the amount of currency in circulation in this case?

If simply printing more money is a bad signal, why not just keep it secret?

There's a paper trail. It's just that when the Fed buys something the money is pulled from thin air. When the debt is paid back the principal returns to thin air, the profit goes to the US Treasury.

Not all government debt is purchased by the treasury though – it only does that in special circumstances to moderate the financial system. Most of is is purchased domestically and much of that by other pieces of government.

And you can't keep it secret. It's like supply and demand. More money means prices naturally raise because more people have more money to spend and will be willing to pay a higher price.

Because government debt first has to be bought by someone on the open market, for some market-based price.

Only then can they go to the central bank.

The Central Bank does not buy from the Government.

But there's a systematic problem there I would admit.

It can be a useful technique to tax wealth and provide liquidity. (i.e. "Quantitative easing")

But in any event: the US Fed, even their QE policies - are managed fairly intelligently. They're done in a manner that keeps the faith in the USD.

The USD because it's such a broad currency, gives a lot of opportunity for the Fed to do some crazy things.

Venezuela has a lot less 'wiggle room' - that said - small countries that act responsibly will do fine.

Sweden, Denmark etc..

Never mind that by paying their bills with freshly printed money they make all existing money cheaper.

Average Venezuelan can now buy less for their wage, but at least they've got some wage and it is stable or even grows number-wise. That's what makes this trap so dangerous.

What you pointed out - i.e. 'those holding property' - they don't 'benefit' - so much as their assets are in something that can't depreciate so quickly as currency.

If government prints massive bolivars - well - their houses go up by that amount proportionally. So they are somewhat 'insulated' from the inflation problems.

Now - because 'money printing' is a 100% signal of economic collapse, no 'asset' is going to save you at the end of the day, because as everything falls apart ... nobody has any money for anything, or rather, they have wads of worthless paper that nobody else wants ...

The govt is definitely destroying the economy, but just like in war economies, some people would benefit while a lot more will suffer. In here, the people suffering are people that depend on a wage.

I have stopped complaining about it because there is no real political leadership anywhere willing to do what is necessary to fix it, so the party will keep going on until they cannot pay their international obligations and the whole thing will start falling under its own weight.

What is slowly happening here is that this is morphing into another Cuba, where you will see the vast majority of the population earning these miserable wages, but they survive because of government subsidized food and services.

The worst part is that here the supply of such food is highly irregular so you see massive lines when people find out corn flour or whatever other product arrives at a store. But of course, if you have the means, you just buy whatever you want at market prices in certain stores and just avoid the whole thing. Prices that people living with a wage cannot afford.

So the real tragedy is this boiling frog effect. In 1989, there were massive riots because fuel prices increased, but now people are losing the will to fight for their rights, helped by lack of clear planning and leadership on the opposition. So I would say most people are just thinking of migrating somewhere else, Argentina and Chile especially, and frankly, I cannot blame them.

Many of the early backers of the Nazi regime were people who were able to get control of valuable industrial property and manufacturing equipment during the Weimar hyperinflation. Iirc, it's detailed in Albert Speer's book.

Inflation reduces the value of things priced in the currency, so the 'mortgage' is a financial product and so is worthless.

But try this: who is going to lend money to anyone to buy a home when the mortgage will be worthless in a few months?

Nobody!

The financial/credit system collapses so there are no real long term gains really.

You become 'more wealthy than your peers'. But in reality, it's crap for everyone. You become 'much less wealthy relative to everyone outside the country'.

Depends on what one values :)

Not true, the price will go up to track currency devaluation unless the price was pegged via contract or legislation. Even bread will see its price go up many times in day

The solution to Venezuela's problem is to produce more goods, either for internal use or to trade/export those goods, so that other goods can be imported.

* You can print money, but you can't print value. *

The value of the goods in Venezueala are priced in Bolivars. Bolivars have a fixed quantity.

If you 2x the number of Bolivars by 'printing money', then all those goods go up 'as measured by Bolivars' by 2x.

This normalization happens very - very rapidly.

Why? Because everyone is watching what happens.

The moment the Government prints X Bolivars, banks, currency traders, exporters, businesses basically 'mark down' the value of the currency, or 'mark up' the value of their products by that amount.

Many small businesses won't have the sophistication to do this, but the effects of the 'big banks and companies' doing this will make it pretty fast.

The only time you can safely print money is if there is more economic activity - and the expansion of the economy requires more currency. If you 'print money' at the same rate the economy expands, you can actually hold prices roughly stable.

As for widgets:

Anything produced internally - services, some agriculture - Venezuelans do this by simply 'doing it' - like all other nations on planet earth. Organize themselves intelligently.

As far as 'needed imports' - yes - once a currency crashes this is really bad. It's like losing your drivers license when you need it to get to work. No driving = no income = everything else gets bad.

In the short run, it will be hard, they have to basically live at a lower standard of living and restructure.

Once they are stable, and outside entities 'trust them' then they can get good credit, they people will accept Bolivars as payment etc. etc..

Also - they have to produce something of value.

Think: what is a Bolivar worth to someone outside Venezueala? Absolutely nothing. Really - it's only worth something if ultimately they can buy something from Venezueal.

So - a currency held by someone outside the market is really like an IOU to that country. An American holding Bolivars basically has an IOU from the Venezuealan economy - that can be exchanged for 'something' later, but Venezuealans have to be able to produce something that the American would want. Like Oil, berries, coffee, or some service or manufactured good.

The problem in Venezueala is not economic - it's political. They have old-style populist 'crony socialism', in which the government takes over everything, they don't know how to run anything, everything is run into the ground, and to boot - it's super corrupt: government officials are looting the treasury by all sorts of means.

The underlying populism of South American brand of socialism is much different that Eastern Europe or Asia. The issue is that there is a small minority of 'white people' descended from Europeans who are educated, wordly, somewhat competent - who own and run everything - and then large numbers of indigenous people who are illiterate aboriginals - at least in Europe the peasants had skills and formed an economic base. In South America, they are barely out of the Amazon jungle in many cases.

Now this is a very, very crude generalization - there is a lot of 'in between' and obviously tons of aboriginals who are totally up to modern standards.

But by enlarge, it's kind of ethnic war. The metzo Aboriginals have the voting power - they put blow-hard army goons and bus drivers in charge, their elite peers are just as corrupt as the 'capitalist class' and this is what you get.

The only 'alternative' is basically the 'white ruling class crony capitalism' which really wasn't super good for social progress. They under-invested in education and services etc. and so they lose power.

It's a really, really difficult situation in so many ways.

Civilization takes a long time to build, and can be destroyed quickly.

In fact, one of the major leaders of the opposition is a mestizo who graduated from Harvard. Totally agree the current govt is a bunch of assholes, in fact, make Chavez look like a terrific ruler, but as far as the race stuff, no, this is not Africa.

Whiter = more power/status. Maybe not so much in Venezuela as in other places, but a better comparison would be Brazil or possibly Mexico.

Africa - it's black/white - not a lot of brown.

Mexico I think is 40% aboriginal 40% mixed to varying degrees and 10% white, and that's how the money/power is divided.

"Imported inflation" listed as "2." under "Causes of Cost Push Inflation".

http://www.economicshelp.org/blog/2006/economics/cost-push-i...

However, it misses the other side-effect of imported inflation, namely the effect of substitution. If good or service A is imported but priced in a relatively appreciating currency, and service B is non-imported and priced in the local currency, the price of B drops, driving demand upwards. If B is also exported, the export markets seeing a relative drop in the value of the currency B is priced in will also buy more of B, further driving demand upwards.

Consequently, imports become more expensive even without a drop in demand. Exportable items (or even just substitutes for imports) become more expensive in response to increased demand.

A bit more here:

http://www.economicshelp.org/blog/1491/economics/imports-and...

http://www.tradingeconomics.com/venezuela/money-supply-m0

And then the banking system multiplies it by f(reserve requirement) modulo any capital requirements:

http://www.tradingeconomics.com/venezuela/money-supply-m3

From the ratio of M0 to M3, most of the expansion is from M0, so the Basel capital controls are actually slowing down a runway hyperinflation - to some extent at least. Seems to start in 2012, so I would guess that they started money printing to cover civil service salaries when the oil price dropped, and haven't looked back.

They have vast amounts of accessible light crude oil but due to their currency they're struggling to purchase/maintain the machinery in order to efficiently extract/refine and monetise it.

Talk about a vicious cycle.

Venezuela can't pay for its banknotes: http://www.bloomberg.com/news/articles/2016-04-27/venezuela-...

If I'm a guy with a cow and a gallon of milk is worth 1 boliviar today, but $0.80 tomorrow, I don't want your boliviar. I want a dollar, silver, 10 boliviars, or some bacon.

Sure. There are many fundamental economic problems. But it is fear that drives hyperinflation. And this is why it is hard to fix. Because even if you fix the fundamentals the fear will still create hyper-inflation.

The currency stuff is just a symptom of genuine lack of supply of goods/wealth.

The topic of inflation seems to be particularly of interest to conspiracy theorists who all claim to know exactly why it happens, who is to blame and how to fix it (it often sounds like "Government blah blah blah gold standard"...). The truth is there are some strong, well-researched but ultimately incomplete explanations regarding inflation, but really nobody knows.

So here is my understanding of the best current guesses about the topic:

Ignoring the specific example of Venezuela for a second. At a basic theory level: Inflation in country A does not depend on external currencies nor does it matter how much country A imports or exports or if they trade at all.

Imagine a closed off country with no international currency exchange and no external trade. For some reason, it doesn't matter why really, citizens there expect prices for things to go up (maybe it's an island running out of space so landlords raise rents or maybe the government is increasing taxes or maybe everyone on the island is just really lazy wanting to sit on the island's beaches all day thus it is taking increasingly more $ to get anyone to get up and do anything one might need help with)...

The citizens expectation of future higher prices leads those in the economy who sell a product or service and who can charge more for it to do so immediately (as they prepare for future higher expenses they will soon face). Specifically, the producers of inelastic goods like farmers who grow food or oil companies will do better in this scenario than regular employees who suffer more as they can't get an increase in salary so easily. But really everyone starts to struggle.

Depending on how high prices are increasing, citizens may start soon switching to bartering and looking to store value in other ways other than their currency (like gold coins or magic the gathering card collecting, etc). Barter is not always possible and most landlords won't accept rent payment in the form of your magic card collection, not directly anyway. Where money is still used and accepted, people will try to get rid of any money they receive as soon as possible (as it's increasingly less valuable putting it in a savings account is bad). So people try to get their money into anything but a savings account and buy as quickly as possible something they need immediately or something that is a store of value. This is inflation and potentially hyperinflation without any international currency exchange or trade.

Now, where a country is able to engage in trade with other countries (for good and services or sell each other debt), this will influence the economy and inflation there. And depending too much on imports one can't be sure they can afford is very bad. But external currencies doesn't cause inflation, rather currency exchanges become a mirror to reflect a country's relative credit-worthiness and growth prospects, as well as any inconveniences connected to the fact people don't want or need another country's currency so where someone does accept foreign currency they must be compensated for the process, time and risk of getting payment in a form they do want.

The closed off simple economy thought experiment is quite useful and established, here is wiki link to the most basic version, one dude on island aka the Robinson Crusoe economy https://en.wikipedia.org/wiki/Robinson_Crusoe_economy