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  • Mathieu Provencher

Venezuela falling and failing

Let's talk about Venezuela's currency!

So, what can we say about it: (1) the currency is depreciating (loosing value) since we need more and more BsF to buy one dollar; (2) if the official exchange rate is indeed constant during that period, the government of Venezuela is trying to (and failing at) protecting its currency against speculative attacks (which most of the time simply means that there is a confidence crisis on the Economy, which reflects on the currency of the country).

Now here comes the interesting question: how can a government guarantee a certain exchange rate while the markets don't agree. Before I answer this, you guys should know that you can't go against the markets for long. So, how can we do this... there are three strategies that are very common: (1) a government will control exchanges of currencies and force their exchange rates (capital controls, like the case we discussed about Argentina); (2) the government (more precisely the central bank of the country) can artificially change the market exchange rate to make it reach the amount it wants (we call this currency manipulation, China did a whole lot of it in the past decades and Peru tried, and failed, to do this in the past year or so); (3) the government will guarantee an exchange rate and will use its foreign currencies to absorb any losses it may make (it was used by Argentina during the dollarization period, where they pegged - which means fixed - their currency to the dollar).

From what I've heard, it is illegal to trade BsF at an exchange rate that is not the official one when you are in Venezuela, which means that the government went for the first option.

I learnt that the central bank of Venezuela has increased the amount of money in the country by approximately 60% per year for the past three years and that inflation is around 40% in the country. The government is keeping its capital controls (that fail miserably because of the size of the black market) and is printing money to pay for its badly chosen short-run policies. This, my friends, is the sound of idiotic populist policies that start to break down the economy, what a wonderful economic event to behold!!!!! By the way, socialist policies are not all idiotic... but these definitely are.

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