Sunday, December 23, 2007

Three Countries "Fight" Inflation

"But on Jan. 1, the Venezuelan government will start phasing out the bolivar and phasing in a new currency with a muscular name: the strong bolivar. The freshly minted bank notes and coins are designed to boost consumer confidence and bring down the 20 percent annual inflation rate. ... But massive government spending has pushed up the inflation rate. Meanwhile, Chavez's move to nationalize some utilities and parts of the oil industry has sparked capital flight, causing the bolivar to fall even further against the dollar. The switch to the strong bolivar 'will close a cycle of instability that Venezuela has suffered from the past 25 years and generate positive expectations', Finance Minister Rodrigo Cabezas told the Caracas daily El National. But the currency makeover won't make much difference unless the policy is combined with other measures to cut inflation, such as a slowdown in government spending, said Domingo Maza Zavala, a former director of Venezeula's Central Bank. ... Oscar Trejo, co-owner of a Caracas construction company, called the strong bolivar 'a way of cheating the people into thinking that inflation is down and the value of their money is up'," Houston Chronicle, 23 December.

"The central bank of [Zimbabwe] unveiled new currency notes Thursday with denominations as high as 750,000 dollars as the government tries to ease chronic shortages of cash in a hyperinflationary economy. ... President Robert Mugabe, 83, who has ruled Zimbabwe for 27 years, blames the crisis on Western sanctions", Houston Chronicle, 21 December.

"Over the past five years, Turkey's government has pushed through changes that have increased growth to 7% a year and brought inflation down to the single digits. The changes involved cuts in government spending, an overhaul of the banking sector, strengthening the independence of the central bank and selling state-owned companies. ... Guven Sak, a former member of the monetary-policy committee at Turkey's central bank [said] 'Turkey ... will have to transform its institutional structure, demanding change from various parts of society, which may be more difficult to manage.' The first priority is to cut spending on the country's social security system, Economics Minister Mehmet Simsek said", WSJ, 24 December.

What "suffered from for the past 25 years"? Is inflation a disease, like polio, or a conscious government policy, as My Weekly Reader taught in the late 1950s? Eliot Janeway once wrote, "War is bearish on money". Any war: Iraq, drugs, you name it. This story reminds me of Germany, 1922-23. If interested read Bresciani-Turroni, Constantino's, The Economics of Inflation, 1937, to understand what's driving Venezuela's inflation today. The external value of a currency usually falls faster than its internal value. Why anyone would listen to a Finance Minister about a currency's value, even our own Hank Paulson (HP), is beyond me. Lopping three zeros off the bolivar does nothing. Cutting government spending will. I wonder if Oscar Trejo wants a new job. As Helicopter Ben's (HB) replacement.

Mugabe blames outsiders for the problems he created. Turkey apparently recognizes what it must do to curb inflation. Now if HB and HP understood this, the US might make some progress in this regard.

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