The political effects of hyperinflation, the mirror in which Venezuela should look

The noted American economist Paul Anthony Samuelson (1915-2009), 1970 Nobel Prize for Economics, wrote a concept worth having ever present, Samuelson said that "The economic cycle presents to democratic nations a challenge, almost an ultimatum: either get control depressions and inflations extreme better than they did until World War II, or the political structure of society will be in danger." And he added that "the political strength of a democracy is closely linked to effective maintenance and strongly stable quality of life and high levels of employment, to the point that it would be safe to say that the multiplication of dictatorships and the resulting world War II were due in large part to the inability of the world to address adequately the economic problem." (1)

Samuelson was very clear that the Great Depression with unemployment sequel was what caused the political radicalization of Europe and the United States itself in the first decades of the twentieth century and so, after the war, published in its books the above warnings, to help political leaders avoid future repetition of such unfortunate occurrences.

The origins of inflation in recent years

The thirty-year period between 1945 and 1975, was called the Age of Keynes, a stage characterized by employment growth, production and economic recovery of countries devastated by World War II. But from 1975, due to currency manipulation in some countries, especially Germany, the world economy went into a period of uncertainty and the phenomenon of inflation and unemployment began to show signs of recurrence. Contributing to this, the decision of OPEC  in 1973, to suspend the supply of oil to the United States and the countries that had supported Israel during the Yom Kippur War (October 1973), fact known as the Arab oil embargo, which caused a violent increase in oil prices and triggered the recession in the West.

The increase in oil prices created a new global financial reality, which gave oil countries extraordinary resources that had never before enjoyed. That immense wealth that came from the major industrialized countries, especially, as big oil buyers, returned to these countries in the form of deposits in their banks, as oil countries put that money in international banking. It is then when it begins to take shape the debt crisis in developing countries, which would become visible in the eighties, as banks sought ways to place the new amount of money among the developing countries. The developing countries were forced to contract loans as not having to pay the new prices of energy and the new prices of finished products bought in industrialized nations; this is the origin of the debt.

The facts stated above in the first instance affect the nations of Latin America, especially Argentina, Bolivia, Brazil and Peru, countries that experienced hyperinflation processes in the eighties and nineties of the 20^th century. A common element to the process of hyperinflation in these countries was the external debt crisis; there came a time when they could not pay their commitments and forced it to devalue their currencies, a fact that, in my opinion, was the main cause of hyperinflation in these countries, not excluding, of course, other structural elements.

Solution

The common solution to the problem of hyperinflation in each of the above countries was the establishment of a currency peg. That was the key decision of the economic program adopted by the Minister Domingo Cavallo, in Argentina, in 1991. Similar measures were taken by Bolivia, which had the highest rate of hyperinflation of the continent in the eighties and corrected by adopting a fixed exchange rate and fiscal reforms. Peru followed a similar path, like Brazil and managed to reverse the process of hyperinflation.

Venezuela should consider the experience of other Latin American countries

Venezuela, which is on the brink of hyperinflation, should consider the experience of the Latin American countries that have already gone through that process and design a control program hyperinflation. The concept of the stabilization program, unfortunately, is largely discredited, but may be created a formula to respond to the urgent need to prevent hyperinflation progress and this necessarily involves the creation of a new currency with fixed exchange at par the dollar, that I have called the bolivar gold. The cumulative devaluation in Venezuela is more than 800 000 percent when you consider the price of the market that you cannot say. When a country reaches that level of devaluation has no alternative but to generate the confidence needed to restore the balance of the economy and this requires tying to the international currency of payment, which is the dollar.

(1)    Paul Anthony Samuelson, Curso de Economía Moderna, páginas 3 y 420, Aguilar, Madrid, 1975, citado por Pablo Rafael González en Una Idea Concreta para Combatir la Desocupación, la Doble Jornada y la Media Jornada, página 8, Book Surge Publishing, 2006, North Carolina, USA.