5 ms·

I think the part I missed was why the solution to a crashing currency is to print more money. Let's say Venezuela cannot produce widgets, but they are necessary

by imh 10y ago

I think the part I missed was why the solution to a crashing currency is to print more money. Let's say Venezuela cannot produce widgets, but they are necessary to modern living. Venezuela's currency drops in half, so now widgets are twice as expensive to a Venezuelan. Given a fixed exchange rate, as the government of Venezuela I could just double the amount of money all my people/companies have and everything would be fixed, but wouldn't that just lower the exchange rate again? Is there some lag in the market during which they can spend the new money at the old rate? At any rate, it's the Venezuelans and their corporations who need money. How does printing more money fix the issue of that poor citizen/company who is reliant on widgets? It's becoming clearer, but I'm still confused.

guard-of-terra 10y ago
It will allow country to pay its bills (i.e. wages). 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.
- robryan 10y ago
  It also allows the government to pay off non indexed debt issued in Bolivars.
  - guard-of-terra 10y ago
    It actually allows everyone to pay off their debts very quickly. People who bought a large apartment with mortgage in bolivars around 2012 might even get from all this situation with large profit, I presume.
    - edblarney 10y ago
      Nobody benefits in the long run. Nobody. Everyone loses when money printing happens. 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 ...
      - aclsid 10y ago
        I currently live in Venezuela and I'm lucky enough to work both with my own local business and with income in foreign currency. People like me are having a field day here, mostly because inflation does not affect you directly when you just keep rising the price of your goods/services. And as for the foreign currency you earn, it means that very quickly I was able to purchase a car and a house and pay off debt in a way that not even in my wildest dreams I would have done it. 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.
        mafribe 10y ago
        How long do you think it will take before "the whole thing" collapses? And what will come after the collapse?
        aclsid 10y ago
        The problem is that there won't be any collapse per se. Maybe a default on government paying its international debt or something. 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.
foota 10y ago
Consider that each dollar they print physically goes to someone, who can then spend it. The money trickles through the economy in this way, so for a while the people that receive it can use it to buy more good than they otherwise would have been able to.
Symbiote 10y ago
The government has obligations in bolivars -- staff wages, pensions, payments to private businesses, and (in countries with trustworthy currencies) loan repayments etc. 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.
- edblarney 10y ago
  "They can print money to fulfil those obligations, " 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.
  - colechristensen 10y ago
    You're exaggerating a little. Everybody prints money. It's what central banks do, it's what gold mines do. It's not a bad thing, it's how economies are managed. (completely free markets are a bad thing and anyone that tells you they aren't either doesn't have understanding of economics or is an extremist or both) 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.
    - edblarney 10y ago
edblarney 10y ago
Listen - this is they key to understanding: * 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.
stale2002 10y ago
It doesn't fix the problem. It just enriches the people who are printing the money. 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.

by imh 10y ago

guard-of-terra 10y ago

It will allow country to pay its bills (i.e. wages). 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.

robryan 10y ago
It also allows the government to pay off non indexed debt issued in Bolivars.
- guard-of-terra 10y ago
  It actually allows everyone to pay off their debts very quickly. People who bought a large apartment with mortgage in bolivars around 2012 might even get from all this situation with large profit, I presume.
  - edblarney 10y ago
    Nobody benefits in the long run. Nobody. Everyone loses when money printing happens. 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 ...
    - aclsid 10y ago
      I currently live in Venezuela and I'm lucky enough to work both with my own local business and with income in foreign currency. People like me are having a field day here, mostly because inflation does not affect you directly when you just keep rising the price of your goods/services. And as for the foreign currency you earn, it means that very quickly I was able to purchase a car and a house and pay off debt in a way that not even in my wildest dreams I would have done it. 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.
      - mafribe 10y ago
        How long do you think it will take before "the whole thing" collapses? And what will come after the collapse?
        aclsid 10y ago
        The problem is that there won't be any collapse per se. Maybe a default on government paying its international debt or something. 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.

foota 10y ago

Consider that each dollar they print physically goes to someone, who can then spend it. The money trickles through the economy in this way, so for a while the people that receive it can use it to buy more good than they otherwise would have been able to.

Symbiote 10y ago

The government has obligations in bolivars -- staff wages, pensions, payments to private businesses, and (in countries with trustworthy currencies) loan repayments etc. 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.

edblarney 10y ago
"They can print money to fulfil those obligations, " 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.
- colechristensen 10y ago
  You're exaggerating a little. Everybody prints money. It's what central banks do, it's what gold mines do. It's not a bad thing, it's how economies are managed. (completely free markets are a bad thing and anyone that tells you they aren't either doesn't have understanding of economics or is an extremist or both) 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.
  - edblarney 10y ago

edblarney 10y ago

Listen - this is they key to understanding: * 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.

stale2002 10y ago

It doesn't fix the problem. It just enriches the people who are printing the money. 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.