Toilet paper shortage is always and everywhere a monetary phenomenon

This is from Sky News:

Venezuelans have been hit by a chronic toilet paper shortage, leading to empty supermarket shelves and long queues to snap up the remaining rolls…When new stocks arrive at supermarkets customers have been rushing in to fill their trollies.

It started with a food shortage and now it is the lack of toilet paper that is the latest economic problem in Venezuela. It is pretty clear that Venezuela’s chronic shortages of essential goods are a result of the combination of excessively easy monetary policy and price controls.

If monetary policy is excessive easy you obviously get high and rising inflation. There is only on way of stopping excessive inflation and that is by slowing the money printing press. Instead the Venezuelan government continues to fight inflation with draconian price controls.

The toilet paper shortage is just the latest round of news that confirms the absolutely failed policies of the socialist Venezuelan government, but as usual the government is unwilling to accept any responsibility for the social ills it is causing. Instead the Venezuelan government blames the media:

Commerce minister Alejandro Fleming said “excessive demand” for the tissue had built up due to a “media campaign that has been generated to disrupt the country.”

He said monthly consumption of toilet paper was normally 125 million rolls, but current demand “leads us to think that 40 million more are required”.

“We will bring in 50 million to show those groups that they won’t make us bow down,” he said.

Anybody who have studied economics for 3 minutes of course knows that Fleming’s explanation of the toilet paper shortage is outrageously wrong, but I guess that the Minister himself is unlikely to have problems getting toilet paper supplies himself as the Venezuelan government is massively corrupted and Ministers certainly do not seem to suffer from the social ills that average Venezuelan have to struggle with.

Radical fiscal and monetary reforms are needed 

I have earlier argued that at the core of Venezuela’s economic policies is the fact that the central bank basically has been ordered to finance excessive public spending by letting the printing presses run overtime. There is only one way of stopping the inflation pressures and that is by stopping this monetary funding of public expenditures and then to implement radical monetary reform.

This is reform that I earlier have suggested:

Market Monetarists generally speaking favour nominal GDP targeting or what we also could call nominal demand targeting. For large economies like the US that generally implies targeting the level of NGDP. However, for a commodity exporting economy like Venezuela we can achieve nominal stability by stabilizing the price of the main export good – in the case of Venezuela that is the price of oil measured in Venezuelan bolivar. The reason for this is that aggregate demand in the economy is highly correlated with export revenues and hence with the price of oil.

I have therefore at numerous occasions suggested that commodity exporting countries implement what I have called an Export Price Norm (EPN) and what Jeff Frankel has called a Peg-the Export-Price (PEP) policy.

The idea with EPN is basically that the central bank should peg the country’s currency to the price of the main export good. In the case of Venezuela that obviously would be the price of oil. However, it is not given that an one-to-one relationship between the bolivar and the oil price will ensure nominal stability.

My suggestion is therefore that the bolivar should be pegged to basket of 75% US dollars and 25% oil price. That in my view would view would ensure a considerable degree of nominal stability in Venezuela. So in periods of stable oil prices the Venezuelan bolivar would be more or less “fixed” against the US dollar and that likely would lead to nominal GDP growth in Venezuela that would be slightly higher than in the US (due to catching up effects in Venezuelan productivity), but in periods of rising oil prices the bolivar would strengthen against the dollar, but keep nominal GDP growth fairly stable.

Maybe the toilet paper shortage could convince the new Venezuelan president Maduro to end the Hugo Chavez’s fail policies and implement radical fiscal and monetary reforms – otherwise Venezuela might turn into the smelliest country in the world.

HT Rasmus Ole Hansen

PS This is my blog post #600.

Leave a comment


  1. I agree Lars, as long as inflation is a monetary phenomenon, something on which only Keynesians would not agree. However, precisely, as any monetary phenomenon, it is a politically induced process, it depends of a government policy decision, including the Parliament contribution when converts any government administrative decision into law.
    At the end, that process it is not endogenous, even though, once it is embodied into the system, the only way to get a rid of it is imposing supply side induced policies, that is, as you propose, eliminate these controls. So we have –before its happens- to survive a large general price increases in order to get back the economy to normal arbitrage conditions.
    By the way, a change of government would not consider at once taking these price adjustments, including dollar price in bolivars; everybody here is thinking that there are a lot of political costs in doing so. I am not sure about it, but fourteen years of “socialistic” culture does some collateral damages.
    Shortage in Venezuela comes from -first of all- from political decisions which weakened property rights and took away the market forces to decide what to supply and what to demand, just the very simple, and the basics on any rational economic system. Price controls -and control exchange- are the main policy instrument for it, as the government political economic objective was to change the basics of the distributive rationality of a market economy. So, what is happening in Venezuela where shortages it is not an economic policy event, or even an isolated happening, but one coming from the rules of government political economy stance, a unintended consequence.
    As you know, Venezuela has been diverted by some “socialistic bolivarian revolution” to a kind of mercantilist-socialistic mess, where the main institutions, market and property rights were deprived and demolished. Market arbitrage is fiercely intervened by government policies, the intervention exists in laws and decrees, all of them supported by constitution, where education, health, housing, nearly every human need is considered a constitutional right.
    Shortages, could be generated by perverted monetary policy serving government expenditure expansion and price control simultaneously, but, before it’s happens, we are obliged to consider that the basics of a market economy are not enforced, government intervention of market forces, it is not a surprise, or policy, these are the new rules.
    So, it is the political economy and not the economic policy, even though we can observe that monetary liquidity grows at the tempo of government deficit grow, by government policies, where economics, theory and laws and common sense are not considered, since they are capitalistic ways of “managing the economy”, that is the shape of political oration in here, for the time being.

  2. …and every “flood” starts with a trickle! Tight money and “holding the line” with inflation targeting can create empty shelves too, although they may not be as noticeable: some big box stores in less traveled areas and especially the smaller towns in the U.S. where it becomes harder to find some everyday goods. Do special interests with their less productive goods (non tradable) crowd out tradable productive goods?

    • Thanks Becky, but I disagree. Deflationary policies will not lead to empty shelves. The problem with over tight monetary policy is not a lack of goods, but a lack of money. As a consequence there will not be a lack of goods, but in fact an excess supply of goods (unemployment),

      But of course both problems reflect monetary disequilibrium and sticky prices (or regulated prices) and both are undesirable.

  3. Benjamin Cole

     /  May 21, 2013

    Nice blogging.

    I have to add, for a more-open economy such as the USA, the Fed would have to print a lot of money for a long, long time to bring about much inflation…..

    • Thanks Benjamin,

      However, I disagree. I in fact thing that the US could easily get that kind of inflation – even by printing less money than today. How? Well, it is all about the Chuck Norris effect. IF the fed announced that the new role model was the Venezuelan central bank and that it would undertake exactly the same kind of policy and it would aggressive step up money printing every month until the US had lets say 30% inflation then I am pretty sure we would hit 30% within minutes. It is all about commitment to a nominal target. Would it be an good idea? Nope obviously not – it would be an horrible idea.

      I have argued earlier that the adjustment to a new nominal target mostly will happen through an adjustment of the money demand if the target is credible. See here:

  1. Toilet Paper Shortage is Always and Everywhere a Monetary Phenomenon | 2 Chops 2 the Throat
  2. Best of the Web: 13-05-22, nr 772 | Best in Economics
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