07/11/08

It's the other way around, Saúl

by Larry Email  417 words

So long as politicians in Venezuela are as ignorant as National Assembly's second vice-president, Saúl Ortega, the inflation problem (or for that matter, any important problem) will never be solved.

And so long as the media serves as mouthpieces of the daily mutterings of politicians, without critically examining the truthfulness of their words, the situation will continue as it is right now.

This comment is in response to a note by Cadena Global (in Spanish), with input from the Bolivarian News Agency, which start like this:

Despite the inflation phenomenon still being present, the National Government has not decreased public investments, particularly those related to social expenditures

Let's put aside today the fact that there's no such thing as "public investments". There's more public waste and less public waste, but not investment in the proper sense of the word.

The reader who has never learned what inflation is goes home with the idea that the cause-effect relation between public spending and inflation is just the opposite of the real one. From Saúl Ortega's statements one can conclude that inflation works in the opposite direction to the effect of public expenditures.

But in real life, the relation is just the other way around. Public spending most often than not creates inflation and so long as government spending is not reduced or eliminated altogether, inflation will continue to be a problem.

The reason is that as government spends more and more, eventually its outlays become larger than its income (the money government steals from the hapless citizens through taxes). The deficit then can be financed in three ways:

  • Through tax hikes (unpopular).
  • Borrowing money (unpopular and increasingly more difficult in the midst of the global credit crisis
  • Simply printing the money required (popular, since nobody knows how it works and everybody think they can benefit from money printing).

Clearly, the most expedite way to finance the "budget deficit" is resorting to money creation out of thin air by the central bank (the only entity with the legal power to create money).

And as I and others have explained countless times, money creation is the very definition of inflation. The more money the central bank creates, the more the prices of your daily groceries will increase. And the more the government spends, the more money will have to be created by the central bank. Now, do you see the relation?

So, it is the other way around, Saúl, precisely the other way around of what you say.

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It's the other way around, Saúl
11/13/15 @ 17:41:52 -0430 VET
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