Skip to comments.South America Goes Critical: Now Chavez Devalues Currency
Posted on 02/09/2013 11:15:53 AM PST by SatinDoll
[To Admin Moderator: I couldn't fit title in completely - here is the rest: This May Well Be the Lighting of the Proverbial Fuse Everywhere.]
While Europes fiscal woes seem to be on everyones financial radar recently, and rightfully so, there is instability everywhere.
This is a global economic crisis and its affecting hundreds of millions of people all over the world.
Earlier this week Argentine President Cristina Kirchner responded to her countrys sky-rocketing inflation rates by freezing prices on food, a move Forbes magazine says will soon lead to widespread corruption in the business community and government.
In Venezuela, where President Hugo Chavez has attempted to control all aspects of his countrys economy, price freezes instituted on essential goods like diapers and cleaning products over a year ago failed to curb soaring inflation which registered at over 22% last year. In response, with their quiver out of arrows, the Venezuelan government announced today that they are devaluing their national currency, the Bolivar, by over a third. The announcement had the immediate impact of increasing the price for a US dollar in Bolivar by nearly 50%.
By boosting the bolivar value of Venezuelas dollar-denominated oil sales, the change is expected to help ease a difficult budget outlook for the government, which has turned increasingly to borrowing to meet its spending obligations.
But analysts said the move would not be sufficient to end the governments budget woes or balance the exchange rate with an overvalued currency. Economists predicted higher inflation and a likely continuation of shortages of some staple foods, such as cornmeal, chicken and sugar.
Venezuelas government has had strict currency exchange controls since 2003 and maintains a fixed, government-set exchange rate. Under the controls, people and businesses must apply to a government currency agency to receive dollars at the official rate to import goods, pay for travel or cover other obligations.
While those controls have restricted the amounts of dollars available at the official rate, an illegal black market has flourished and the value of the bolivar has recently been eroding. In black market street trading, dollars have recently been selling for more than four times the official exchange rate of 4.30 bolivars to the dollar.
Officials said the fixed exchange rate is changing from 4.30 bolivars to the dollar to 6.30 bolivars to the dollar.
Source: USA Today
The free market cannot be controlled in the way politicians and central bankers would like you to believe. Any action to restrict access will lead to an opposite reaction that often involves black markets and panic buying.
Case in point: Americans bought a gun every 1.5 seconds in the last year. Why do you think that is?
Chavez, like the brilliant politicians, economists and financial wizards at the helm of U.S. recovery efforts, has tried to control his economy through central governance for ten years. It has failed on all counts. Inflation has continued unabated. Price controls have led to black markets in everything from goods to currencies. Despite promises to the contrary, people continue to suffer without respite.
But the implications for Venezuelas latest move could be even more serious than just internal Venezuelan shortages.
Perhaps the Black Swan event that no one saw coming just happened.
One of our insightful readers, Just One Guy, explains:
This is a REALLY big devaluation.
The implications here are really not GOOD.
Venezuela is a smidgen on the map, but as a major OPEC nation, it will have in short order BIG implications in the global oil price, say 60 days no more until the effect hits. In the meanwhile the Venezuelan government will enforce price controls internally while trying to skim the differential off its oil sales into the governments coffers.
The net effect of this will be a stall in the consumer goods imports since the peoples wages will NOT increase
A very short clock is now ticking since this will ripple through ALL of South America in VERY short order
This may well be the lighting of the proverbial fuse everywhere.
Further Nationalizations will begin happening and will spread rapidly throughout the continent as that happens Europes life-blood will trickle to a halt.
Our investors will be affected too, but Europes sole profitable businesss are overseas many in South America.
So it begins
Argentina and Venezuela, two of the regions largest commodity exporters, just went critical. It will spread. As we noted previously, nationalization efforts were already under way before this weeks developments.
And, in Chile, businesses are already feeling the impact of Argentinas price freeze:
The Chilean companies Falabella, Sodimac, and Cencosud complying with the freeze do millions of dollars of business in the country.
Some critics of Kirchners economic policy say the freeze could lead to food shortages in Argentina and even black market sales of products.
Price freezes mean no profits for sellers or even losses. Who will import food under these conditions? said Paul Gregory, an economics professor at the University of Houston.
The freeze is bad for Argentina and bad for Chile, he added.
Source: Santiago Times
Similar side effects will be felt by anyone who does business in Venezuela.
The interdependence of global monetary, financial and economic systems cannot be underestimated in this context.
With Europe in shambles, Chinese growth collapsing, South America in panic, and the US now in recession, the potential for a catalyst that will set off another financial meltdown and full-blown economic collapse has increased exponentially.
There are a lot of things that can go wrong here.
One thing you can be sure of is, just as the people of Venezuela had no forewarning about the devaluation of their currency, we wont be told until its already too late.
Prepare and plan now, or pay the price later.
The people of Venezuela had no warning this was about to happen to them. Chavez could be dead soon, taken by cancer, and all Hell will break loose in that nation.
My guess is Cuba will move to occupy Venezuela while President Kirchner is moving to tighten control over Argentinians.
Current events are robbing BHO2 of the time and space he needs to effect changes without alarming the majority of the USA. That is why he is stocking up on ammunistion - IMHO.
Venezuela, Argentina ... and the US are devaluing like crazy. Our MSM won’t report it.
The facts on events do not appear in the MSM - you’re correct.
The media in this country are mostly owned by the big international banks who desire Global government.
Many smaller newspapers here in the USA are owned by progressives or have been threatened into compliance with progressive political positions.
That’s why I don’t watch TV and am online for news.
The laws of economics are as inviolable as the laws of gravity.
Nobody seems to know if Chavez is alive or dead, other than perhaps Fidel Castro and a few of Chavez’s closest advisors. Who is making the day-to-day decisions in Venezuela?
The black market rate has been at this level for years now. This devaluation is a belated recognition by the government that the former official exchange rate of 4.30 bolivars to the dollar was a farce.
devaluing their national currency,
1) Venezuelan price controls (prices < market = prices too low) leads to:
1.1) increase in demand for consumer's goods by Venezuelan consumers
1.2) decrease in production for Venezuelan domestic consumption = decrease in domestic supply of consumer's goods
1.3) increase in Venezuelan exports = decrease in Venezuelan domestic supply of consumer's goods + increase in Venezuelan money supply
1.4) decrease Venezuelan imports = decrease in domestic supply of consumer's goods
2) Devaluation of the Venezuelan currency leads to decreased prices for Venezuelan consumer's goods which leads to:
2.2) increased exports = decrease in supply of consumer's goods + increase in the money supply
2.3) decreased imports = decrease in supply of consumer's goods
Increase in demand + decrease in supply + price controls leads to higher prices and/or shortages of consumer's goods.
Increase in money supply leads to increased inflation and higher prices. Price controls do not slow down inflation and just lead to shortages. It is ridiculous how dumb politicians keep making the same mistakes over and over again.
It is not ridiculous. The politicians know exactly what will happen. The controls transfer enourmous power to insiders who can bypass the controls — for a price.
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