We did a little more digging into Venezuela after we heard about the gold reserve repatriation.  Apparently, in the past week, Venezuela introduced price controls on 18 consumer goods.  The price controls include household products like soap, detergent, and toothpaste.  They were introduced to help curb inflation in the country.  According to Bloomberg, inflation in Venezuela is now the highest among the economies they track, which was at 26.9% in October.

If this continues, then Venezuela could very well be labelled hyperinflationary (if it isn’t already).  According to International Financial Reporting Standards, hyperinflation is defined as a cumulative inflation rate over three years that approaches, or is exceeding, 100%.  According to our calculations, the compound annual equivalent is an inflation rate of 26%.

According to the head of the price control agency, “The law of supply and demand is a lie[…]These are not arbitrary measures. They are necessary”  [and no, that was not a quote from an article in The Onion].  Suffice it to say, we are skeptical.

The laws of supply and demand have not heretofore been successfully repealed by countries who have tried.  Even in Venezuela, the price caps have already sparked panic buying.

We have seen this movie before, and we know how it ends.  Robert Mugabe initiated a land redistribution program that proved disastrous for the country.  With decreasing agricultural yields, efforts to the hide the effects of poor economic fundamentals by printing money failed.  Zimbabwe’s currency depreciated and Zimbabwe infamously became the world’s most hyperinflationary economy.

Even though (or because?) Venezuela’s government gets revenue from oil, it has been running perennial budget deficits during its march towards socialism.  According to one economist (op. cit.), Venezuela increased fiscal spending this year by 22% in real terms.  If Venezuela does not get its house in order, then their economic situation going forward will be bleak.  As Zimbabwe showed with tragic consequences, you can’t repeal the laws of supply and demand.

Featured Photo Credit: flickr/ZeroOne