When policy makers mess around with the price mechanism it nearly always have negative consequences – things certainly gets no better when they do that to “solve” problems created by a failed monetary policy. New York Times has a story that confirms this once again.

The story is about increasing food shortage in Venezuela. It is an all too familiar story. The Venezuelan central bank certainly is proving that there is not such a thing as a liquidity trap – it is clearly capable of creating inflation by printing money. However, the authoritarian-socialist Venezuelan government refuses to accept the monetary causes of high and increasing Venezuelan inflation and instead of putting measures in place to curb money supply growth has implemented draconian price controls. Any normally educated economist would tell you that when you introduce a price-cap in a certain market the result will always be same –shortages. This unfortunately has also been the case in Venezuela. Here is from the NYT article:

Some residents arrange their calendars around the once-a-week deliveries made to government-subsidized stores like this one, lining up before dawn to buy a single frozen chicken before the stock runs out. Or a couple of bags of flour. Or a bottle of cooking oil. The shortages affect both the poor and the well-off, in surprising ways. A supermarket in the upscale La Castellana neighborhood recently had plenty of chicken and cheese — even quail eggs — but not a single roll of toilet paper. Only a few bags of coffee remained on a bottom shelf. Asked where a shopper could get milk on a day when that, too, was out of stock, a manager said with sarcasm, “At Chávez’s house.”

Chávez of course refers to Venezuela’s socialist president Hugo Chávez.

Monetary disequilibrium causes food shortage in Venezuela and ‘job shortage’ in the US and Europe

When more money is printed than is demanded then you get inflation. That is the case in Venezuela. The opposite is the case in the euro zone and the US – here demand for money is outpacing the supply of money and as a result you get deflationary pressures. Both are examples of monetary disequilibrium.

If prices and wages are fully flexible then monetary disequilibrium will not lead to disequilibrium in the labour and goods markets. There is so to speak be no “spill-over” from the market for money to other markets. However, price and wage rigidities create such a spill-over. In the case of Venezuela government regulated prices create such rigidities and as a result you get food shortages. Said, in another way – Food shortage is always and everywhere a monetary phenomenon (that’s of course not correct, but you get the point…).

In the case of the euro zone and the US it is not price caps, which are causing the macroeconomic problems, but rather downward rigidities in wages and prices – some of which undoubtedly also are a consequence of government regulation.

Obviously any government regulation, which reduces price flexibility and hampers the market mechanism is problematic and as such should be done away with. However, some rigidities obviously are also facts of nature that would exist even in my dream world of a completely unhampered free market.

Interestingly enough any Internet Austrian who heard the story of Venezuelan food shortages would as I immediately respond: “Stop printing all that money and then you would not ‘need’ price controls”. Unfortunately it is much harder to convince the same Austrians (and many policy makers) that the “job shortage” in Europe and the US is also primarily a result of monetary disequilibrium.

Obviously both food shortage and job shortage is a result of the combination of monetary disequilibrium and price rigidities. However, if the monetary institutions reduce monetary disequilibrium then the problems with rigidities will be much smaller.

Hence, if the Venezuelan central bank stops printing more money than is demanded and the ECB on the other hand prints enough money to meet the demand for money then the problem of food shortage in Venezuela and the problem of job shortage in Europe will be solved and there would be no (perceived) “need” for fiscal stimulus in Europe and price caps in Venezuela.