Inflation Is Among The Costs Of Venezuela's War On The Private Sector

Let’s start with a typical bogus explanation for inflation troubles — one that is often trotted out by governments dealing with war induced inflation — shifting the blame. True to form, the Chavistas have claimed that the enemies of the state were engaged in a conspiracy to undermine the bolivar by flooding Venezuela with counterfeit bolivar notes.

Indeed, a similar claim was made during Yugoslavia’s civil war. In October 1999, Minister for Information Goran Matic claimed that I was in charge of shipping huge quantities of counterfeit Yugoslav dinars into Milosevic’s Serbia, in an attempt to cause the dinar to collapse and inflation to soar. At the time, I was operating as an adviser to President Milo Djukanovic — who had become an arch foe of Milosevic —and was also State Counselor to the Republic of Montenegro. While the Matic fairy tale captured headlines in the Balkans for a few days, it was too far-fetched to result in anything but fleeting amusement for the chattering classes. And, I might add, the story was completely false.

In the case of Venezuela, Maduro’s explanation for Venezuela’s inflation problems is as phony as a counterfeit bolivar. Nevertheless, during wars, it is a standard refrain.

So, what about the real causes of inflation during times of war? During a war, government expenditures typically must increase, or at least remain the same. After all, the army must be fed, war materiel must be purchased, civil servants must be paid, subsidies for basic food and fuel items must continue, and so on… While government expenditures remain robust during war, the sources of government finance become problematic. The tax system and government administration begin to break down, and tax revenues dry up. Bond financing is nowhere to be found, since investors don’t want to invest in a country that is in a state of war.

Often, combatants, including the central government, pass the begging bowl, seeking foreign aid to fill the fiscal gap. In the case of Venezuela, Russia, China, and other allies of Venezuela,  are an obvious source of finance, but others are not so obvious.

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