While Europe’s fiscal woes seem to be on
everyone’s financial radar recently, and rightfully so
, there is
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
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.
here are really not GOOD.
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.
effect of this will be a stall in the consumer goods imports since the
peoples wages will NOT increase…
short clock is now ticking since this will ripple through ALL of South
America in VERY short order…
well be the lighting of the proverbial fuse… everywhere.
‘Nationalizations’ will begin happening and will spread rapidly
throughout the continent… as that happens Europe’s life-blood
will trickle to a halt.
investors will be affected too, but Europe’s sole profitable business’s are overseas…many in South
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
“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
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.
Prepare and plan now, or pay the price later.