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Tuesday, 25 May 2010

Venezuela should abandon their home-grown currency board and re-instate fractional reserve banking.

In my opinion Venezuelans should work towards a normal mixed economy with fractional reserve banking.


At the moment Venezuela´s monetary system is closest to a currency board. By expeting to “back” Bs by $s you made your own currency board.

In 95% + of the world economy countries use fractional reserve banking to create money out of thin air in their economy. This money out of nothing or fiat money is backed by all the underlying value systems in the economy as exemplified but not limited to sound governance, sound economic policies, sound monetary policies, sound economic policies, sound education, sound legal system, sound education, etc, etc.

Venezuelans should strive to get back to that.

In a perfect mixed economy with fractional reserve banking, the correct level of money supply (created out of thin air, but, back by a perfect government, etc, etc, etc, ) would be indicated by very low inflation – below 2% per annum.

A certain level of foreign exchange reserves would only be required as one element of a sound economy: not specifically to “back” each VEF.

The net profits of a company like PdVSA would then be almost 100% available for enhanced economic development – not to “back” each and every VEF.

Venezuelans should strive to get back to that. Surely there must be bankers, business people, academics, etc in Venezuela who know this and who would strive to lead the country back to that?