Megan McArdle writes: Venezuela seems to be hovering on the edge of tipping into hyperinflation. Or perhaps it has already fallen into the abyss. 

Using those rates, economist Steve Hanke recently wrote that annual cost-of-living increases are running at about 722 percent. To put that in some perspective, it means that a $400 monthly grocery bill would climb to $2,888 in a year. That may not approach the legendary status of Hungary’s postwar inflation, which reached 41.9 quadrillion percent in a single month, but it’s devastating for savers, or for people like pensioners whose incomes consist of fixed payments. It’s also pretty bad for the economy.

Or is it Seigniorage! That’s the fancy name for the profit a government makes by printing bills and minting coins. If you can buy more goods and services with the cash you made than it cost you to make it, you have essentially collected a stealthy sort of tax on the people who take the money from you and give you valuable stuff in exchange.

In general, seigniorage revenue is trivial — indeed, it costs the U.S. government more to make nickels and pennies than the coins themselves are worth. But even with higher-value bills, the revenues pale in comparison to, say, the income tax. 

Governments can try to jack up the amount of seigniorage revenue by stealthily inflating the currency. Basically, they exploit an information asymmetry between them and the people they trade the money to: The government knows how much money there is, and its citizens don’t. So they’ll probably accept fewer units of currency than they would if they knew the government was going to print extra money and thus cause prices to rise again.

But this is a terrible way to make money, which is why governments normally don’t resort to this one clever trick for raising government spending without raising taxes. 

The core thing to understand about inflation as a policy tool is that in general, steady-state inflation doesn’t do you any good; what you need is accelerating inflation.

Once inflation starts to accelerate, it’s kind of hard to stop because people also start pricing the acceleration into their expectations. Hyperinflation has all sorts of bad knock-on effects: It hurts your capital base and makes people unwilling to plan for the future because they have no idea what their money will be worth. But the supreme irony is that after a certain point, the government actually starts losing money.

Part of the answer is that in the early days, inflating does make the government a little more money, and the point at which it starts to lose money is also the point at which the freight train is traveling 120 miles an hour. 

The larger answer is that this is the end game of Chavismo. For about a decade, some sectors of the left hoped that Hugo Chavez represented an alternative to the neoliberal consensus on economic policy. 

In real terms, the price of a barrel of oil is barely higher than it was in August 2000, but Venezuela is producing something like 700,000 fewer barrels each day. Policies that looked great on the way up — more revenue and more social spending — became disastrous on the way down as the population was hit with the double whammy of lower production and lower prices.

Now falling oil prices are crushing government revenues at exactly the time the country most needs money to help the people who are suffering great misery as the oil cash drains out of their economy. In the beginning, printing money may have looked like the best of a lot of bad options. By the time it became clear that the country was not fudging its way out of a temporary hole, but making a bad situation worse, it was committed to a course that is extremely painful to reverse.

Venezuela may be able to pull back from the edge, though it can only do so with great pain. Or it may end up in a hyperinflationary spiral, which will ultimately mean even greater pain. I don’t envy the decisions it will have to make. Or the millions of Venezuelan people who will have to live with them.