Inflation Is Among The Costs Of Venezuela's War On The Private Sector
For example, when economic sanctions are imposed on a country like Venezuela, smuggling and other illegal activities run rampant. Misha Glenny, in his fascinating account of the Balkan wars in the 1990s — contained in McMafia: A Journey through the Global Criminal Underworld (Random House, 2008) — makes the following little understood point:
The arms embargo played a key role in establishing the smuggling channels to Croatia and Bosnia, and soon drugs were accompanying the guns along the same routes. But this was nothing compared with the Balkan-wide impact of the comprehensive UN economic sanctions imposed on the rump of Yugoslavia, comprising Serbia (including the troubled province of Kosovo, with a large Albanian population) and Montenegro… Criminals and businessmen throughout the region worked feverishly to create a dense web of friendships and networks to subvert the embargo. Virtually overnight, the vote at the UN Security Council ordering sanctions created a pan-Balkan mafia of immense power, reach, creativity, and venality.
The profits generated by sanctions busting and other nefarious activities were split between the state and the deep pockets of the mafia. So, the Milosevic war machine was financed, to some extent, by smuggling and other illegal activities. This, no doubt, is playing a role in Venezuela.
But, at the end of the day, as a war rages, these sources of funds fail to come close to the level of government expenditures. What to do? Well, the government simply orders its central bank to start the printing presses and fill the deficit gap. It is this surge in the supply of money that generates higher inflation rates.
Again, let’s look at Yugoslavia, whose civil war began in June 1991. During the 1991-98 period, the Yugoslav dinar was devalued 18 times, with a total of 22 zeros being lopped off that unit of account.
In 1991, facing a tremendous budget deficit, Milosevic ordered the central bank to crank up the printing presses. The resulting hyperinflation peaked in January 1994, with a monthly inflation rate of 313 million percent — the world’s third highest hyperinflation. By that time, the central bank was funding virtually all of the government’s expenditures by printing money.