EclectEcon

A number of bloggers have written about the effects of price controls in Venezuela, including Phil Miller, Brian Ferguson, and Lynne Kiesling among others, all pointing out that price controls, in an attempt to put the lid on inflation, have created massive shortages.

Interestingly, I have not yet come across any blog postings that mention the rapid rate of growth of the money supply in Venezuela, and yet we all know that "Inflation is always and everywhere a monetary phenomenon [Milton Friedman]."

According to The Economist data, the Venezuelan money supply increased from 2,652 to 4,228 currency units over the past year. Given such a high rate of growth of the money supply, what surprises me is that nominal interest rates and the rate of inflation are not a lot higher. That makes me very suspicious that measured inflation is not picking up the rapid growth in prices in the underground and black markets.

In other words, the Chavez price controls are probably having some effect in keeping the lid on measured prices. But the resulting shortages are undoubtedly driving many markets underground, where, I'd venture, prices have been sky-rocketing.

The problem, of course, has been that Venezuela has a massive trade surplus because of the high price of oil and its huge oil exports, but the central bank has refused to sterilize the currency inflows, letting the money supply increase instead. And that's almost surely because Chavez has wanted to use those currency inflows for his give-away programmes.

For more thoughts along these lines, see The Emirates Economist and the comments there.