Take physic, pomp

Venezuelan money supply may be signalling accelerated inflation

This one is slightly wonkier than usual because I’m missing out some theory explanations behind the facts offered (feel free to ask questions if something isn’t so clear). However it’s hardly Krugman-like and I’m not even worthy to polish the dude’s boots, so there’s the context.

Here’s a chart of Venezuela’s M2 money supply (the calculation that measures the amount of national currency in circulation) as registered over the past 12 months.

The move from around the 70 billion Bolivares Fuertes (VEF) level to the present VEF89.07Bn means that M2 has moved up by around than 30% in a year…that’s a big jump in any currency (that doesn’t have Mugabe ruling its destiny). It also comes as no surprise to econ-wonks to note the way the 30% in M2 growth neatly matches the 30% or so annual inflation rate Venezuela is currently running (making percentage-point assumptions in either direction, so no corrective mails necessary, thanks in advance).

But the thing that’s caught my eye is the final uptick move on the right-hand side of that chart. In the week ended Feb 27th, M2 moved up 1.68% (from U$87.6Bn to U$89.07Bn); not only is that a large move in just one week, but it’s also atypical for the ‘normal pattern’ (if such a thing exists) for Venezuela. Over the last three years, M2 has held steady in Venezuela for roughly the first six months of the year, only accelerating when other methods of mopping up excess liquidity have been used up, chief among those being dollar bond emissions (check this Feb ’09 post for further details). However, chances are that this year there will be no new dollar bonds coming from the Venezuelan government , mainly due to the lower oil price and ensuing lower revenues at PdVSA.

It remains to be seen whether the weekly uptick at end February is repeated throughout March, but it’s certainly one to watch. I for one would definitely not like to see M2 breach the U$90Bn level in the next couple of weeks. Add the fact that last week the Venezuelan government dropped its base interest rate from 13% to 11% and more upwards pressure on money supply is likely. The bottom line is that if the pattern is confirmed and M2 keeps rising quickly at this relatively early time of year, inflation in Venezuela is likely to accelerate even while world prices are dropping. That’s not good, people. Not good at all.

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