Monday, May 24, 2010

Venezuela a great example of misrule, mismanagement

Venezuela a great example of misrule, mismanagement

Published: Monday, May 17, 2010 at 6:58 a.m.

Venezuela has the largest oil reserves outside the Mideast and some of the largest known natural gas deposits. Yet the country is an economic shambles thanks to the mismanagement of its buffoonish and authoritarian president, Hugo Chavez.

This past week, he further crippled the economy by effectively banning private bond trading in order to stop Venezuelans from sequestering their savings in dollar accounts.

He instituted currency controls of 2.60 bolivars to the dollar for priority goods and 4.30 for nonessential items. The black market rate is 8.20 bolivars to the dollar. Not surprisingly, there is a thriving black market, widespread shortages and soaring inflation of more than 30 percent.

In 2003, when Chavez began experimenting with price controls, Venezuela was self-sufficient in beef. Last year it imported more than half of what it consumed. After his police began rounding up butchers for selling beef at more than the state-mandated price, beef disappeared almost altogether from the stores.

The same has happened with coffee. After expropriating roasting companies, coffee warehouses and plantations, production in coffee-producing Venezuela fell by more than 16 percent last year and continues to decline.

Because of lack of investment in the national grid - and with some help from a drought - electricity is rationed and there are frequent blackouts and mandatory power cuts. Similarly, since he barred Western firms from participating in Venezuela's oil industry, investment has fallen and the country has turned to the Chinese for help.

Chavez has been incapable of dealing with the country's chronic crime and the Economist newspaper describes Caracas as "the most violent capital in South America."

He has spent $4 billion on Russian weapons against the imaginary threat of a U.S. invasion. His foreign policy consists of trying to build an anti-U.S. alliance of "21st-century socialists" like Cuba, Nicaragua, Iran Bolivia. He has been accused, convincingly in the case of Colombia, of aiding communist guerrillas and harboring violent Basque separatists from Spain.

In advance of next September's congressional elections, he has begun jailing opposition leaders on assorted trumped-up charges, such as the crime of spreading false information - the false information being criticism of Chavez and his policies.

Venezuelans, to their credit, stubbornly cling to democratic traditions. Despite his control of the judiciary, suppression of the opposition media and lavish spending on his base in the sprawling slums, his re-election in 2012 is no foregone conclusion. There may be a limit to Venezuelans tolerance for lowered standards of living and diminished freedoms.

Chavez' explanation: "There's an economic conspiracy against the revolution to boost inflation, increase shortages and malaise among the people."
We know who the conspirator is.

The preceding editorial was written by Dale McFeatters of Scripps Howard News Service.

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Wednesday, May 19, 2010

Venezuela's Monetary Mayhem

Venezuela's Monetary Mayhem

Fiat currencies plus bad government equal trouble.
Greece is bankrupt. But since it is a member of the euro-zone and can't print money, its richer European neighbors have agreed to bail out its creditors. In return, Greece is supposed to clean up its fiscal and regulatory act. This is why public-sector unions have been wilding in the streets and even firebombed a bank.

Beware of Greeks burning thrifts. They are not unlike the militants who violently protested in Argentina in 2001 when that government hit the fiscal wall. Argentina also had a hyper-regulated economy, a government addicted to spending, and a monetary regime that made it impossible simply to print money to pay its bills. At bottom Argentina's rioting mobs wanted the same thing that their Greek cousins want now: a return to a national currency that can be fabricated on demand.

Critics of the euro seem to think the Greek tragedy vindicates their view that each country should have its own currency and monetary policy. But that wouldn't solve a thing. Let's face it: If Greece weren't today's Argentina, it would be Venezuela. In that country, which has sovereign money—the bolivar—and no monetary rule to prohibit the central bank from financing the government, inflation is now spinning out of control.

In their 2009 defense of economic liberalism titled "Money, Markets and Sovereignty," Benn Steil, of the Council on Foreign Relations, and Manuel Hinds, former finance minister of El Salvador, provide a brief history of the rise of fiat currencies. "The modern mind," they explain, is used to "seeing money as a creation of states." Yet the powerful did not launch the idea some 2,500 years ago "to promote economic activity, but to profit from it," they note. "And today the imposition of national monies remains one of the most potent tools available to governments to extract wealth from their populations and to exercise political control over them."

Argentina crafted its "convertibility law," which required pesos to be backed up by dollar reserves, precisely to confront this problem. But the politicians weren't about to downsize their role, in spending or in regulation, and eventually too much debt led to bankruptcy. In 2002, the government pulled the plug on peso convertibility. Eight years later the so-called floating Argentine peso is a disaster. The country remains mired in economic mediocrity and double-digit inflation, and is held hostage by an illiberal government.

Anchoring the currency to the dollar and thus outsourcing monetary policy to the U.S. Federal Reserve had been a success, but special interests and politicians could not bear that it robbed them of power. Venezuela is another place where the politicians see no reason why the state's appetite for grabbing private-sector wealth should be constrained. Maintaining price stability ought to be a no-brainer because the government has oil revenues earned in dollars to back up the local currency. But the bolivar is now in free fall.

Hugo Chávez

In January, strongman Hugo Chávez announced that he would devalue the bolivar to 4.30-to-the-dollar (except for essentials) from 2.15. He assured Venezuelans that the government would be able to provide all the dollars needed to run the economy at the weaker bolivar level and that the black-market rate, which was six to one, would converge with the official rate.

But the private-sector was not convinced, and the black-market rate for dollars went even higher, pushing prices of imports up sharply. Nine days ago the cost of the dollar soared above eight, signaling a vicious inflationary spiral.

The source of this monetary mess is the state's hunger for power. Whereas Castro used terror to make himself dictator of Cuba, Mr. Chávez has used the state's control of oil revenues and the central bank to purchase his dictatorship. It's no secret that his popularity, despite the deterioration in Venezuelan living standards, comes from printing and spreading bolivars around low-income barrios as well as among nouveau-riche business elites and the military.

With too many bolivars chasing too few goods, Mr. Chávez is now blaming "speculators." Recently he arrested 47 butchers for evading his price controls. The Congress he controls has also proposed legislation to criminalize trading in the parallel market for dollars. Yet beyond terrorizing the nation, the crackdown is unlikely to improve things because the market needs dollars to function. "The collapse of the economy is very near," one Venezuelan wrote to me on Saturday.

The lesson here is that without political will, fiat money in any form—be it in a monetary union, anchored to a reserve currency or run by the sovereign—is unreliable. As Messrs. Steil and Hinds note, "money untethered to a commodity gives rise to inflation when managed by corrupt, irresponsible or incompetent rulers," thereby covering Greece, Argentina and Venezuela in one breath.

Harkening back to the wisdom of a 15th century Spanish canon lawyer, the authors capture today's fiat currency problem: "The ruler's power to create value from the valueless by designating it 'money' was bound to lead to inflation."

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Saturday, May 15, 2010

Venezuela is Crumbling

Really? It has been crumbling for a while.
Venezuela is Crumbling
Economic misery in Hugo’s populist paradise.
BY Jaime Daremblum
May 14, 2010 12:00 AM

Recent weeks have brought more depressing economic news from Venezuela, where populist leader Hugo Chávez seems intent on destroying not only democracy but also the last remaining vestiges of private enterprise.

On April 21, the Latin Business Chronicle predicted that Venezuela would post the world’s highest inflation rate in 2010, ahead of even the war-torn Democratic Republic of Congo.

On May 5, the United Nations Economic Commission for Latin America and the Caribbean reported that foreign direct investment (FDI) in Venezuela dropped from $349 million in 2008 to negative $3.1 billion last year, “mainly as a result of nationalizations.” In other words, the Bolivarian Republic experienced a net FDI outflow of $3.1 billion in 2009.

On May 7, the Venezuelan central bank released data showing that consumer prices rose by 5.2 percent from March to April. As Bloomberg News noted, this represented the largest monthly increase since 2003. Meanwhile, the annual inflation rate hit nearly 32 percent.

On May 11, the Chávez-controlled National Assembly introduced legislation designed to clamp down on currency trading and strengthen the bolívar, Venezuela’s national monetary unit. “This is a very negative measure for the Venezuelan economy,” Barclays Capital economist Alejandro Grisanti told Dow Jones. “It will increase the pressure on prices and will deepen the contraction of the economy.” In January, Chávez devalued the bolívar in order to facilitate greater social spending. Since then, the currency has plummeted, making Venezuela’s already dire inflation problem even worse.

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