February 9th, 2013
While Europe’s fiscal woes seem to be on everyone’s financial radar recently, andrightfully so, there is instability everywhere.
This is a global economic crisis and it’s affecting hundreds of millions of people all over the world.
Earlier this week Argentine President Cristina Kirchner responded to her country’s 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 country’s 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 Venezuela’s 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 government’s 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.
Venezuela’s 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 Venezuela’s 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 it’s oil sales into the government’s 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 Europe’s life-blood will trickle to a halt.
Our investors will be affected too, but Europe’s sole profitable business’s are overseas…many in South America.
So it begins…
Argentina and Venezuela, two of the region’s largest commodity exporters, just went critical. It will spread. As we noted previously, nationalization efforts were already under way before this week’s developments.
And, in Chile, businesses are already feeling the impact of Argentina’s 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 Kirchner’s 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 won’t be told until it’s already too late.