Devaluing from Afar

Hugo Chavez hasn't been heard from for a while. To be precise, he hasn't been heard from since December 11, when he underwent surgery in Cuba. However, he apparently still directs economic policy from his sickbed.

His most recent action was to make Venezuela the latest entrant in the 'currency war' by devaluing the official exchange rate of the Bolivar by 32%. Venezuela's inflation rate is at about 22%, and the new Bolivar exchange rate of 6.3 to the US dollar still has a long way to go until it reaches the black market rate of 19.53.

The main reason for the – quite unpopular – official devaluation appears to be the country's growing budget deficit. Venezuela's government mostly lives off the country's oil revenues. Ever since Chavez replaced the former management of the state-owned oil company with his cronies and confiscated the oil assets owned by foreign companies, oil production has been in free-fall, but oil sales still provide the biggest chunk of government revenue even so. By devaluing the Bolivar by 32%, the dollar revenue from crude oil sales will increase commensurately in Bolivar terms. Presto, budget deficit problem solved.


Chavez uses the budget to distribute various goodies to voters, a very successful strategy so far. The last election seems to have strained the budget  quite a bit though. Devaluations are unpopular because they mean that things consumers like to buy (such as TVs) will cost a lot more henceforth.

On the other hand, there was actually a shortage of such goods anyway, as the  government had begun to ration foreign exchange. Moreover, since both the old and the new exchange rate are unrealistic, more devaluations are likely to follow later this year.



Bloomberg reports:

“Venezuela devalued its currency for the fifth time in nine years, a move that may undermine support for ailing President Hugo Chavez and his allies ahead of possible elections later this year.

South America’s biggest oil producer may have to call elections if Chavez, who hasn’t been seen for two months after undergoing cancer surgery in Cuba, dies or steps down. He ordered his government to weaken the exchange rate by 32 percent to 6.3 bolivars per dollar starting Feb. 13, Finance Minister Jorge Giordani told reporters yesterday in Caracas.

A spending spree that almost tripled the fiscal deficit last year helped Chavez, 58, win a third six-year term. The devaluation can help narrow the budget deficit by increasing the amount of bolivars the government receives from oil exports. Yet the move also threatens to accelerate annual inflation that reached 22 percent in January.


“While a weaker currency may stoke inflation, it may also ease shortages of goods ranging from toilet paper to cars because the government was restraining the supply of dollars it allocated to the private sector as it waited for a more favorable rate”, said Francisco Rodriguez, a Latin America economist at Bank of America Corp. in New York.

“Any tackling of the massive economic distortions, even if far more is required, is positively viewed by markets,” Kathryn Rooney Vera, a strategist at Bulltick Capital Markets, said in an interview from Miami. “We expected more, and more is indeed needed to correct fiscal imbalances and adjust economic distortions, but this is something and there may be more to come.”

The weaker exchange rate will give the central government an additional 84.5 billion bolivars ($13.4 billion) in revenue, mostly from oil sales done in dollars, according to Caracas- based research company Ecoanalitica.


Chavez last devalued in December 2010 when he weakened an exchange rate on so-called essential goods by 40 percent, unifying the two fixed foreign exchange rates it had at the time. In January 2010, he had created a multi-tier exchange system in an attempt to spur non-oil exports and curb the consumption of luxury imports. The move prompted Venezuelan consumers to rush to buy appliances including flat-screen televisions before prices were adjusted.

While Bank of America’s Rodriguez estimates that devaluing the currency will reduce the government’s budget deficit by half, he said the government will have to take further measures within the next year.

“It gets them through their most urgent problem which is to generate more bolivars to finance the current spending flow,” Rodriguez said. “This is a move that will turn out to be temporary. They will have to devalue again by the end of the year.”


(emphasis added)

An inflation rate of 22% p.a. usually doesn't just drop from the sky. It sounds as though the Bolivar printing press has been kept quite busy. Quite possibly the budget deficit was in part financed by the central bank.


Food Shortages

Let's consider those shortages for a moment though. “Ranging from toilet paper to cars”? Does Venezuela not even produce toilet paper? We somehow doubt it. However, there have been scattered reports about shortages of food and many other non-durable staple items of daily consumption in Caracas over a number of years.

The main reason for these shortages is simply that the economic policies imposed by Venezuela's government don't work. For instance, similar to what Argentina has recently done, Venezuela has tried to stymie inflation by imposing price controls on food and other items. This has driven many small businessmen to the wall – small butchers, bakers and the like had to close up shop, as the government-imposed maximum prices no longer covered their costs. Shortages of the items concerned are the inevitable result. No doubt the  distorted exchange rate and the rationing of dollars also play a role – see for instance this recent report on food shortages in Caracas

However, such reports already made the rounds in 2007, 2009 and 2011, well before the recent rationing of dollars began. Here is for instance an excerpt from a 2007 article (this was when oil prices had just rallied to all time highs, mind). It correctly blames the price controls for the shortages:

“Welcome to Venezuela, a booming economy with a difference. Food shortages are plaguing the country at the same time that oil revenues are driving a spending splurge on imported luxury goods, prompting criticism of President Hugo Chávez's socialist policies.

Milk has all but vanished from shops. Distraught mothers ask how they are supposed to feed their infants. Many cafes and restaurants serve only black coffee.

Families say eggs and sugar are also a memory. "The last time I had them was September," said Marisol Perez, 51, a housewife in Petare, a sprawling barrio in eastern Caracas.

When supplies do arrive long queues form instantly. Purchases are rationed and hands are stamped to prevent cheating. The sight of a milk truck reportedly prompted a near-riot last week.

Up to a quarter of staple food supplies have been disrupted, according to Datanalisis, a public opinion and economic research group. To Chávez's detractors the scarcity is evidence that his revolutionary "21st century socialism" is driving South America's oil power towards ruin.

Government price controls on staple foods are so low that producers cannot make a profit, they say, and farms and businesses hesitate to invest in crops or machinery, or stockpile inventories, for fear of expropriations.

"We've warned about this from the beginning – all of these price controls in the long run end up producing shortages," Ismael Perez, of the industry group Conindustria, told Reuters.”


(emphasis added)

Clearly, shortages of basic food items are nothing new for Venezuela. The devaluation from one unrealistic exchange rate to another, only slightly less unrealistic one, won't alter the fundamental problem. One wonders whether the looming ascendance to the throne of vice president Nicolas Maduro – Chavez' designated heir – will change anything. Probably not, considering that his slogan is “I am Chavez”.



chavez and maduro

Hugo Chavez and his heir designate, Nicolas Maduro: the two seem to have merged, as Maduro lately asserts: “I am Chavez”.

(Photo credit: Matilde Campodonico / AP)




Emigrate While You Can... Learn More




Dear readers - we want to once again thank all of you who have supported us with donations.


To donate Bitcoins, use this address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke


Thank you for your support!

5 Responses to “Boli-Splat”

  • No6:

    Since socialism causes so much harm, why not a law against it, we have laws for everything else.

  • JasonEmery:

    roger said, “There will be more succumbing to this… the question is whether there will be a country that suddenly triggers global panic after succumbing to this kind of mayhem.”

    Yes, there will be more. Specifically, the USA, among others. The actual annual federal deficit for the fiscal year ending 09/30/2012 was $6.9 trillion, or 45% of gdp, using honest, GAAP accounting. So obviously, hyperinflation has already started here. The only question is when foreigners start parting with a portion of the trillions of liquid dollars floating around the world economy.

    It will not be very long. Certainly less than two years from now, but perhaps as little as two months.

    • roger:

      To be honest, for the kind of hyperinflation that Venezuela & Argentina are currently experiencing, I would look somewhere else first before the US. USD is the cornerstone of global trade & financial system. Basically if you’re expecting hyperinflation on USD, you’re expecting the world’s financial system to topple. Given the current policies, we will reach that point but it’s probably among the last, if not the very last, to happen among the major currencies. IMO, UK is more likely to reach that point first before the US.

      But what I’m really thinking of is one of the less major currencies…but consequential enough to set up a chain reaction/epidemic. What could it be?

      • JasonEmery:

        Net food importing countries are going to try to avoid high inflation at all costs, pun intended. In some cases this isn’t possible, but if there is a policy choice, it will be to avoid excessive currency collapse. Japan, for example, imports a lot of food and they will cannot tolerate the level of high food price inflation that is shrugged off here in the USA.

        So I would guess it will be a food exporting nation that leads the way. If I had to guess one or to nations, I’d say Brazil or maybe Argentina. Given their proximity to each other, maybe both together.

  • roger:

    Hyperinflation like this seems to become epidemic. Before the Venezuela news, Argentina announced price limits on supermarket goods. Egypt appears to be almost, if not already, at this stage. In some ways, it bears some similarities to the 1998 Asian crisis (one country after another succumbing to falling exchange rates), but there are major differences.

    There will be more succumbing to this… the question is whether there will be a country that suddenly triggers global panic after succumbing to this kind of mayhem.

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • MponengGold and Gold Stocks – It Gets Even More Interesting
      Technical Backdrop If only we could get a dime for every bearish article on gold that has been published over the past two weeks...but one can't have everything. When a market is down 83% like the HUI gold mining index is, we are generally more interested in trying to find out when it might turn around, since it is a good bet that it is “oversold”. Of course, it if makes it to 90% down, it will still be a harrowing experience in the short term. We like these catastrophes because...
  • resultThe Greatest Racket of All Time
      The Successes of the Global War on Terror One would think that the so-called “Global War on Terror”, which has been given fresh impetus by the Paris attacks, must be going swimmingly. What else could explain the great enthusiasm with which it is pursued? It may be recalled that it started in earnest after the WTC attack – also a declaration of war, as it was put at the time. As is often the case when Islamist fundamentalists strike, the actual attackers immolated themselves on...
  • winterThe Long, Cold Winter Ahead
      Not Immune Cold winds of deflation gust across the autumn economic landscape.  Global trade languishes and commodities rust away like abandoned scrap metal with a visible dusting of frost.  The economic optimism that embellished markets heading into 2015 have cooled as the year moves through its final stretch.   Photo credit: David Byrne   If you recall, the popular storyline since late last year has been that the U.S. economy is moderately improving while the...
  • santaHow Do People Destroy Their Capital?
      There is no Santa Claus I have written previously about the interest rate, which is falling under the planning of the Federal Reserve. The flip side of falling interest rates is the rising price of bonds. Bonds are in an endless, ferocious bull market. Why do I call it ferocious? Perhaps voracious is a better word, as it is gobbling up capital like the Cookie Monster jamming tollhouses into his maw. There are several mechanisms by which this occurs, let’s look at one...
  • oil rigJunk Bonds Under Pressure
      While the Stock Market is Partying ... There are seemingly always “good reasons” why troubles in a sector of the credit markets are supposed to be ignored – or so people are telling us, every single time. Readers may recall how the developing problems in the sub-prime sector of the mortgage credit market were greeted by officials and countless market observers in the beginning in 2007.   Photo credit: Getty Images   At first it was assumed that the most highly...
  • I'll have TurkeyThe Plane Incident in Syria
      A Strange Event The topic of the SU-24 Russian plane shot down by Turkey over the weekend in Syria has been discussed all over the media ad nauseam by now, but we want to add a few observations and suggestions of our own. Some have perhaps not received the attention they possibly deserve.   Image of Russian jet shortly after it was hit by a Turkish missile. Luckily someone was promptly at hand to make a qualitatively acceptable video of the incident. As is well known, cameramen...
  • Young-European-Jihadists-ChappatteAngry Belgian Muslims and the Price of Welfare Statism
      Ill-Tempered Mohammedans in the Socialist Paradise In the wake of recent revelations about the identities of the morons involved in the horrific Paris attacks (happily, most of them shuffled off the mortal coil as well, thereby improving the aggregate degree of moral clarity and intelligence in the world), a friend pointed us to an article at Unz Review that asks: “Why Does Belgium Have Such Angry Muslims?” Our instinctive, immediate reaction was to argue that the bland, boring...
  • Chart-intraday averageCan Investors Trust the New Gold Fixing?
      Statistical Analysis of the New Gold Fixing   Since 20 March 2015 a new gold price fixing organized by the London Bullion Market Association has been in operation. It has replaced the previous price determination process, which was in place for more than a century and became subject to criticism as it was highly vulnerable to manipulation. Has manipulation now ceased?   Gold fixing at N.M. Rothchild and Sons offices in London. The first fixing took place there on 12 September...
  • King and CEOGiant “Green Energy” Boondoggle Flops in Spain
      $29 billion Vaporized As is well-known, Spain is one of the countries in the euro area's periphery that has been thoroughly bankrupted by its decision to join the euro area and enjoy an artificial credit expansion-induced boom as its interest rates initially collapsed. This was aided and abetted by the ECB, which sat idly by as the euro area's true money supply exploded into the blue yonder with annualized growth rates ranging from 6% to 18% during the boom years.   Tower at...
  • BN-GO061_WAJ_Mo_J_20150121165559US Money Supply Growth Finally Begins to Crack
      Breaking Below the Shelf In our recent missive on junk bonds, we inter alia discussed the fact that the growth rate of the narrow money supply aggregate M1 had declined rather noticeably from its peak in 2011. Here is a link to the chart. As we wrote:   “We also have confirmation of a tightening monetary backdrop from the narrow money supply aggregate M1, the annualized growth rate of which has been immersed in a relentless downtrend since peaking at nearly 25% in 2011....

Support Acting Man




Own physical gold and silver outside a bank

Realtime Charts


Gold in USD:

[Most Recent Quotes from]



Gold in EUR:

[Most Recent Quotes from]



Silver in USD:

[Most Recent Quotes from]



Platinum in USD:

[Most Recent Quotes from]



USD - Index:

[Most Recent USD from]


THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Buy Silver Now!
Buy Gold Now!