Venezuelan Devaluation


In a move expected since last year Venezuela has ‘revalued’ the bolivar by a factor of 1000. The Reuters news story opens:

CARACAS, Jan 1 (Reuters) – Venezuela opened the New Year on Tuesday by revamping its bolivar currency in an effort by the government of President Hugo Chavez to tackle the highest inflation in the Western Hemisphere.

The bolivar’s official exchange rate is now 2.15 bolivars per dollar, compared with the previous official rate of 2,150 per dollar. The change does not constitute a devaluation since the prices of goods in bolivars are expected to be reduced by the same amount. (Emphasis added)

Consulting Wikipedia on the subject of devaluation:

Generally, a steady process of inflation is not considered a devaluation, although if a currency has a high level of inflation, its value will naturally fall against gold or foreign currencies. Especially where a country deliberately prints money (a usual cause of hyperinflation) to cover a persistent budget deficit without borrowing, this may be considered a devaluation.

OK, normal inflation is not considered devaluation but ‘deliberately printing money to cover a budget deficit’ sadly describes exactly what Venezuela is doing. Toward the end of the Reuters article the government’s self deception is evident:

Government leaders say the measure will have a positive psychological effect on consumers by demonstrating the strength of the bolivar.

Venezuela’s 2006 inflation was 17 percent, and reached 18.6 between January and November of 2007.

Elsewhere in the same article they say 20.7% in the 12 months to November a slightly longer period – but who’s counting! It gets worse – here is Wikipedia again:

In some cases, a country may revalue its currency higher (the opposite of devaluation) in response to positive economic conditions, to lower inflation, or to please investors and trading partners. This would imply that existing currency increased in value, as opposed to the case where a country issues a new currency to replace an old currency that had declined excessively in value (such as Turkey and Romania in 2005, Argentina in 2002, Russia in 1998, or Germany in 1923).

Again the second case applies to Venezuela. Wikipedia left out Zimbabwe in the list of epic inflations. I witnessed the initial stages of the Zimbabwe hyperinflation personally including the strikingly similar governmental rationalizations. Mugabe waited so long to ‘revalue’ that it was essentially too late to even be workable. Zimbabwe is now reduced to barter or using South African currency. Chavez isn’t in that bad shape yet, but he is working on it.

Both Chavez and Mugabe are buffoons adept at manipulating their image as heroic revolutionary socialists while pursuing risibly ruinous economic policies. I think this second picture of Chavez from Google Images catches that combination of Marxism and machismo peculiar to Latin America:


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