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Source link: http://archive.mises.org/11430/chavez-devalues-bolivar-venezuelans-go-on-spending-spree/

Chavez devalues bolivar, Venezuelans go on spending spree

January 11, 2010 by

With oil prices off their highs, his country in a recession and prices soaring, President Hugo Chavez devalued the bolivar and “vowed to fight speculation and price increases that could result from the devaluation.”

At Caracas’s middle-class Sambil shopping mall, lines at cashiers reached 50-deep. Carmen Blanco, a 28-year-old accountant, waited to buy a 42-inch flat-screen television she doesn’t need because she already has one at home.

“It doesn’t make any sense to keep my savings,” Ms. Blanco said Saturday. “I’d love to see how things work in a normal country.”

Rothbard described this in The Mystery of Banking : “Chaos ensues, for now the psychology of the public is not merely inflationary, but hyperinflationary, and Phase III’s runaway psychology is as follows: “The value of money is disappearing even as I sit here and contemplate it. I must get rid of money right away, and buy anything, it matters not what, so long as it isn’t money.” A frantic rush ensues to get rid of money at all costs and to buy anything else.”

{ 21 comments }

Jalle January 11, 2010 at 2:28 pm

I can only wish Mr Chávez the best of luck in his war against economic reality. He’ll most certainly need it; reality usually doesn’t budge to government fiat.

BrentR January 11, 2010 at 2:40 pm

Wow! To think: All you need to boost spending is to devalue the currency…

It almost makes you wonder why the US devalues its currency while pretending not to. If they’d only pull back the curtain, we’d really have this ship sailing.

BrentR January 11, 2010 at 2:40 pm

Wow! To think: All you need to boost spending is to devalue the currency…

It almost makes you wonder why the US devalues its currency while pretending not to. If they’d only pull back the curtain, we’d really have this ship sailing.

Wallace January 11, 2010 at 3:30 pm

“Mr. Chávez on Friday weakened the bolivar to 4.3 per dollar from 2.15…”

__

OK… but how exactly did he “devalue” that currency ??

What is the realworld mechanism ?

Chavez gets on TV and says he’s devaluing — then what happens ?

Who does what to whom ??

Hard Rain January 11, 2010 at 4:30 pm

The Romans couldn’t enforce their price controls and devalued currency, even with mass crucifixion.

How does the boy Chavez think he will manage?

J Cortez January 11, 2010 at 4:47 pm

This is not the first currency problem in Venezuela under Chavez. The current currency is the “strong” bolivar which was created after he destroyed the previous “regular” bolivar though socialism and inflation by 2007. (Understand though that while the fool Chavez has caused and continues to cause all sorts of problems, Venezuela pre-Chavez wasn’t perfect either.)

newson January 11, 2010 at 5:22 pm

you’re not seeing the big picture. rapturous applause at the venice film festival, this guy’s a legend with the chardonnay progressives.

http://news.bbc.co.uk/2/hi/8242756.stm

bob January 11, 2010 at 5:53 pm

I read at Mish’s blog that the black market rate for Dollars was already lower than the new rate. If the “official” rate were really exchangeable, why would there be a black market price?

So provided the money printing isn’t ramped up and this hadn’t effected consumer psychology, shouldn’t it make no economic impact?

(Of course both money printing and inflationary expectations have been effected…)

Craig January 11, 2010 at 6:30 pm

OK… but how exactly did he “devalue” that currency ??

If I’m a Venezuelan Ford dealer, for example, I have to pay Detroit in American dollars to bring my cars back to Caracas. Since Chavez controls the foreign exchange, I will have to now pay double for each dollar I need to purchase and pass that cost along to my customers.

The price of imported cars has effectively been doubled.

Daniel Hewitt January 11, 2010 at 6:32 pm

I think Chavez might be a Mises Institute fan. After all, he did steal Bob Murphy’s idea on devaluation as a route back to prosperity.

http://mises.org/daily/3832

Silas Barta January 11, 2010 at 6:46 pm

“It doesn’t make any sense to keep my savings,” Ms. Blanco said Saturday. “I’d love to see how things work in a normal country.”

*sigh* … It’s pretty much the same, sister.

Mitchell Powell January 11, 2010 at 6:57 pm

So provided the money printing isn’t ramped up and this hadn’t effected consumer psychology, shouldn’t it make no economic impact?

Sorry, Bob. As much as I would like for Chavez’s messing around to have no impact on the economy, it has. Even if he’s not printing money directly, he has control over all the (legal) exchange rates, and therefore has almost direct control over how the Bolivar relates to the dollar. Although it is true that a great deal of money goes around the Venezuelan govt, a lot of it goes directly through it, because a lot of people don’t want to take the risk of moving great deals of cash illegally, and would rather take the economic hit when changing dollars into Bolivars. On top of that, there’s a “grey market” which moves a lot of money, and it operates with semi-legal status and holds to an unoffically governmentally imposed rate between the government and black market rates.

Taylor January 11, 2010 at 7:52 pm

Venezuelan GDP gonna SOAR next quarter!

Robert Hodge January 11, 2010 at 8:03 pm

Instead of a brand new 42in TV, Ms. Blanco should have spent that money on silver.

Jeff N January 11, 2010 at 8:49 pm

“OK… but how exactly did he “devalue” that currency ??

If I’m a Venezuelan Ford dealer, for example, I have to pay Detroit in American dollars to bring my cars back to Caracas. Since Chavez controls the foreign exchange, I will have to now pay double for each dollar I need to purchase and pass that cost along to my customers.

The price of imported cars has effectively been doubled.”

To take this even further, if the government buys and sells the bolivar at say 4 bolivars to 1 dollar and the equilibrium exchange rate is anything but this rate, private enterprise will buy/sell the bolivar and sell/buy dollars to the government at a profit until the equilibrium becomes the government fixed rate. As long as the equilibrium is not the government rate, there is profit opportunity, forcing rates to the government fixed rate. The only stipulation is that the government has enough reserves of both the dollar and bolivar to cover all exchanges.

I see devaluation of the bolivar as an attempt to imitate the Chinese Yuan and stimulate their export market

HL January 11, 2010 at 10:31 pm

Democracy is the theory that the common people know what they want, and deserve to get it good and hard.
H. L. Mencken

Caley McKibbin January 12, 2010 at 3:39 am

So Oliver Stone is out of the closet as a communist now.

Caley McKibbin January 12, 2010 at 3:44 am

What is next? A documentary on how Hitler was really a good guy ridiculously demonized by “the media”. Stalin? I don’t suppose he went to the jails and interviewed the political prisoners.

rightcoast January 12, 2010 at 8:44 am

“What is next? A documentary on how Hitler was really a good guy ridiculously demonized by “the media”. Stalin? I don’t suppose he went to the jails and interviewed the political prisoners.”

It’s funny you say that, because, well … I’ll just let the URL from this story yesterday speak for itself.

http://popwatch.ew.com/2010/01/11/oliver-stone-says-hitler-is-an-easy-scapegoat/

Wallace January 12, 2010 at 10:15 am

“OK… but how exactly did he “devalue” that currency ??

________

…still unanswered.

People owning ‘bolivars’ would seem to have many choices if they wanted to exchange them for other currencies — just pick a commercial exchange center… say in London, Tokyo, US, Brazil, Mexico, or locally.
Currency exchange is a standard function of commercial banks worldwide.

How can Chavez control the bolivar exchange rate across the world ??

He might somehow use severe police powers & central banking for exchange rate control in his country — but surely the world currency markets are beyond his control.

The term currency “Devaluation” is often used — but I doubt most people here know {me included} how it is done in specific realworld actions.

mikey January 12, 2010 at 11:55 am

Wallace, this question requires an understanding of fixed versus floating exchange rates.
In Canada, for example, the central bank lets the market decide what the C$ is worth in relation to other
currencies, thus there is never any need to revalue the
currency up or down, it varies on a continuous basis according to supply and demand on currency exchanges.
China, on the other hand has its currency officially
pegged at so many to the US $. (actually it can float
within a very limited range.)But China has adopted a policy of keeping its exchange rate arificially low.That is to say, market forces would push the value higher if they could.This is a deliberate policy, to
make Chinese goods artificially cheap, thus encouraging exports and hence domestic manufacturing.Countries that do this tend to pile up enormous reserves of currency from the countries they trade with, as a result of this artificially induced trade imbalance.
Now we come to Venezuela which has the exact opposite type of fixed exchange rate. The currency is pegged like China’s, but it has been artificially higher than the market would have set.
It has made its exports artificially expensive.
It has depleted its reserves of foreign currency, while at the same time other countries have large holdings
Venezuelan money. Foreign central banks demand their own currencies back in exchange for Bolivars.
But this is impossible, at the previous high rate.Thus
the only option is to change the exchange rate downward.
(Note that this is a swindle of foreign buyers of govt
bonds.)

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