Well. Chavez tried to give everyone in Venezuela free everything. He ‘Nationalized’ nearly every industry in the country to pay for it, and he instituted price controls on industries and goods that he did not simply confiscate, demanding that prices on various items remain at a certain level. Once the people who produced those items realized that they could make no money at that price point, they quit working. After all, who is going to keep working when you can’t make money selling your labor at the government set price?
Inevitably, this causes shortages and the price controls eventually have to be eased. With inflation approaching 25% even WITH price controls, his economy is in big trouble. To control expenses, he has decided to devalue the currency. This is how that works: He has revalued the Bolivar to equal 4.3 to the dollar for oil. For each dollar of oil he sells, he gets 4.6 Bolivars.
The Bolivar for non-oil products is still set at 2.6 to the dollar. Therefore, he hopes to contain inflation by this split exchange rate, and by putting price controls on products. Violators of these price controls will have their business ‘nationalized,’ and given to their employees.
One of the problems with this is that there is no discernible difference between oil and non-oil Bolivars. So, a person could sell oil Bolivars at 4.3, and buy food at 2.6, making a 165% return on their money. Many people who are in a position to do this will. What this will do is make inflation worse. Turning to the printing press to make more money, so you can hand it out to citizens in a vote and popularity buying scheme will not work.
The US is now $12.3 trillion in debt. Our GNP is $14 trillion, making our debt to GDP ration a whopping 88%. Venezuela, with a GDP of $127.8 billion, and a national debt of $15.8 billion, looks thrifty in comparison with their debt being 12.3% of GDP.
We as a nation will never pay that money back. Tell that to our government, to the Republican AND Democratic parties. Comparing this to Germany in the post WWI era:
The German postwar inflation and hyper-inflation of the 1920s had two fundamental causes: a low savings rate, and bad monetary and fiscal policy. One consequence of World War I was an erosion of incomes, and a dramatically reduced savings rate. But at the same time, at least for a while, Germans were able to sustain their living standard, and run large trade deficits.
They had this luxury because investors from around the globe bought German assets: currency, securities, real estate. British and American investors were gambling on a German recovery. Only in the summer of 1922, did foreigners begin to realize that Germany was unlikely to be able to pay all its debts.
The second driving force of the inflation was the policy of the German government and the German central bank. Both were sensitive to political considerations. Both worried that rising unemployment might destabilize the precarious political order. So they were willing to do anything in fiscal and monetary policy to counteract economic slowdown. The government ran large budget deficits as it tried to keep up employment in the state-owned railroad and postal systems, and also to generate more purchasing power. It kept on looking for new ways to administer repeated fiscal stimuli.
Equally significant, the president of the central bank, an elderly Prussian bureaucrat called Rudolf Havenstein, boasted about his success in getting new printing plants, printing plate manufacturers, and paper factories to meet the enormous demand for new money. He found more and more ingenious ways of stimulating bank lending to large businesses on ever more dubious securities. And he kept on saying that keeping the money presses rolling was a patriotic duty. Of course, today we don’t need printing presses. Now we create dollars using computers. A billion dollars is just a few keystrokes away.
There was, in short, what would now be called a “Havenstein put” — in which the central bank would keep its interest rate at levels sufficiently low so that German business could continue to expand. Sound like the Fed 0% prime rate?
Inflation skyrocketed, the German people suffered. Businesses, unable to keep up with the inflation, went under. Unemployment increased tenfold in five years. This set the stage for the National Socialists to step in.
There are obvious similarities between the conditions in post WWI Germany and the present day United States. Are we setting the stage for a dictatorship here? Only time will tell.