Chavez Says Unregulated Currency Market May Disappear

May 12 (Bloomberg) -- Venezuelan President Hugo Chavez said that the unregulated currency market may disappear and that he is waiting for lawmakers to change foreign exchange laws before “hitting speculators where it hurts.”
Chavez ordered the attorney general to act against speculators as part of a bid to curb inflation and regulate the currency market, he told reporters today in Caracas.

http://www.businessweek.com/news/2010-05-12/chavez-says-unregulated-currency-market-may-disappear-update2-.html

If he succeeds good luck on anybody importing anything.

Currency speculators are not servants of the public good.

The currency market is a product of the supply and demand for dollars. Chavez can try to ignore that by dictating the rate dollars are exchanged for bolivars.

BUT:

If he prices it wrong, then the government is either forced to subsidize anyone who wants dollars, or, simply prevent them from getting dollars at all.

"Speculators" & "drought" are always blamed when Marxism fails.

They just pull it out of their asses these days when they need more. The notion that we need a "free market" is this bullshit or that it serves the public good is also bullshit.

but Venezuela operates in an economy where money is used to purchase goods and services.

Let me spell it out for you.

If a Venezuelan wants a dollar, and asks people for one, people right now say "you have to give me 8 bolivars for a dollar".

Chavez, however, will give you a dollar for only 4 bolivars.


Well, where does Chavez get his dollars? By selling oil.

So he gets these oil dollars, and for every oil dollar he can spend 8 bolivars on police, hospitals, social services, etc. Or he can give these dollars to people who want them to buy stuff for only 4 bolivars to the dollar. Then Chavez only has 4 bolivars to spend on social services, etc.

Either way, the fact is that the exchange rate is 8 to 1. Chavez, by trying to make it 4 to 1, is simply making the government subsidize people who want dollars.

"money is bullshit" is an interesting topic (I mean that, I have studied money and monetary systems and wrote my thesis on private bank money in the late 1800's) but that does not mean that Chavez doesn't have a big problem here.

All those poor speculators making a bundle because of Chavez' foolishness? You wonder why they are so anxious to stop him?

So let's just drop it, have a good evening.

I don't think she gets it. But she'll be able to learn the consequences, if she pays attention to what's about to happen in Venezuela. I'd guess we're going to see a shortages in anything from car spare parts to food to clothing, and so on. Bare shelves are typical of communist countries, so I suppose we're about to see them get bare in Venezuela as well. And our dear communist friends will tell us it's for our own good, because we're consuming too much of mother earth's bounty. :-)

You have a nice evening too.

But, Venezuela by operating a currency on the world market will have to live by that conventional dogma, so even if you don't like it please remember what I said as it will accurately predict what is about to happen in Venezuela if the black currency market is shut down.

Sort of like with drugs and other black markets, they just become profitable criminal enterprises, open to entrepreneurs of all stripes. This certainly does undermine the rule of law, and have other consequences, but lets face it, corruption and inefficiency are nothing new to Venezuela, and hardly an invention of Chavez or his minions.

I do look forward to seeing how this comes out, though I do not share your certainty about the overriding importance of currency inflation as a determinant of the outcome.

The parallel market evolved from an illegal market, when the government realized they had to allow a valve for exchanges to take place, otherwise the country's economy would be paralized - Cadivi could not trade at the official rate, and there had to be a way for them to control the "black market". So they evolved the "parallel market", which trades using bonds issued by the government. The "parallel market" has lack of transparency in the bids made for the bonds, which allows for a massive amount of corruption (the bond "winners" get a bounty, and they flip the bonds to the common folk who need to get dollars to bring imports, or the ones who are taking the money out of the country for good).

What is happening now is fairly simple, the government has stopped issuing the number of bonds they need to keep the parallel rate at a "reasonable" price, the bolivar has been collapsing, and this hikes the price of imports - which feeds the hyper inflation we have.

Your response a certain lack of understanding of the way the currency market works. Venezuela's is fairly complex - it's designed this way to allow for corrupt practices, government favoritism, and control. but it's understandable if you just sit and look at it.

Bottom line, they won't really shut it down. Either they continue to allow a parallel market - but with even more favoritism and corruption than before, and/or there will be a black market anyway. Right now the population is moving to figure out thousands of linkages to defeat the currency control mechanism set up by the government. And the way things work in today's world, their ability to shut off the flow is about as good as BP's ability to stop the flow of oil offshore the gulf of mexico. I'll wait to see how they do it.

Furthermore, your petulancy regarding this issue also shows you lack a clear understanding of how damaging these type of controlled currency exchange systems are - there's no way for the government to set a good price, so they cause shortages, or even worse, allow for a lot of money to be profitted from by people with connections. By supporting these ugly corrupt practices, which are destroying our economy, and glibbly dismiss everything we say, you truly break my heart.

Mr Fletcher called them "black markets", and that is a well-defined term.

And Mr Chavez is clearly thinking about making it illegal, or something like that, making threats. So why argue about terminology? I think you are being picky.

Frankly, you have a lot of nerve to call ME "petulant", but it does show you have a good English vocabulary.

I know perfectly well how currency markets work, I just realize, as you do not seem to, that there is a lot that is arbitrary about them, we are not talking about empirical truths here, nothing remotely like physics or chemistry and only the most simple-minded mathematics, we are talking about stuff that was made up as things went along for the benefit of the people who happened to be in control of those markets. I don't believe in religious dogmas either, and for much the same reasons.

The currency market has been controlled by the Venezuelan government. They did it for their own benefit, as you said. The corruption in the system is easy to discern - there's no transparency and we see too many Chavistas who are loaded with US dollars suddenly. So we know they are getting the dollars via the CADIVI set up.

The problem for Chavez is he lacks the ability to issue enough bonds to control the market like he used to. This is caused by the lousy reputation of the Venezuelan bonds, and the lack of cash flow he has. Why he lacks cash flow is hard to tell, the oil prices are very high. So maybe the problem is caused by mismanagement, or he's giving too much money away to Bolivia, Cuba, and all those wanabe commies who are our parasites.

The government here has been so mismanaged, they indeed took the old black market, and started playing it, so it changed names and became the "parallel market" because it worked alongside the official "controlled market". However, it does reside in a grey zone. For example, it is illegal to say what the parallel market exchange rate is. But you can find it easily by using google and the words "Venezuela FX"

So every morning everybody waits for the market to open, the prices are posted on the internet, and even the government goes ahead and places cash in it, via the stock brokerages which move the money around using government bonds. It's a gimmick, the government knows it happens, it allows them to plug more corruption into the system, and now they complain because it's getting out of control - too many people are panicking and the government lacks the cash to pump it. Your comments just show you don't do nuances when it comes to these issues. Not being in Venezuela, you don't understand the everyday routine, don't get to see the Chavistas suddenly driving Mercedes Benz and buying million dollar homes, and the other signs of what's evolving here, a strange blend of communist populism with huge corruption, militarism, personality worship, hyper-inflation, high crime rates, and an incredibly incompetent leadership.

If they were to lose control of it, then there would be something to worry about.

Control as they see it is "control the rate". By controlling the rate so the bolivar was too high, they killed off local industry. The only control governments should exert is control as regulators, making sure there's transparency, and there are breaks set if the currency starts to drop too fast. But the system here is exactly the opposite, they keep it murky, which helps their corruption schemes, and they try to control the rate too high, which makes local industry non-competitive. This in turn makes the country like an addict, it has to have imports to survive, because we can't produce it internally. So what they're doing is poisoning the country.

You, of course, can have your own ideas, but they don't have to care about that.

Oh well, now we know you got your red hat on.

Nothing to do with "red hats".

And I'm a professional in the field. Let me try to explain to you the way it works here:

The government has two official rates, the 2,6 and the 4,3 bolivares per dollar. The ability to get dollars at those rates depends on the organization/individual's ability to deal with the CADIVI bureaucracy. CADIVI has the dollars to assign to the buyers. There are two types of buyers, one is the bona fide importer trying to bring goods, and two there are what we call Boligarchs who are people tied into the ongoing government corruption chains.

But the key issue is that CADIVI doesn't issue dollars to all those who ask for them. So the "parallel market" emerged. The government declared this market illegal, so it became a black market. Because the demand for dollars was intense, the parallel market shot up (I can't quote the rate because I can be jailed for doing so). As the rate shot up, businessmen trying to import goods who could not get dollars from Cadivi went to the black market, paid whatever they had to, and got dollars to bring materials in. This amounted to anything from a refrigerator to spare parts for motorcycles, to shirts and books.

When the government realized the black market rate was getting out of hand (that was about two years ago), they started selling US deniminated bonds which could be paid for with Bolivars. And PDVSA itself started selling blocks of US dollars it got from oil sales straight into the black market. This kept the black market rate at a "decent" level.

However, the economy has been doing very poorly, PDVSA has been running low on cash, and the government has been borrowing a lot (and those bonds are junk, so they fetch very high interest rates). So the result has been a lack of dollars going into the market, which has driven the bolivar down. And since a lot of what is spent in that market is meant to buy imports, then those imports cost more in Bolivars. Which means inflation kicks up even more.

So as you can see, the inflation we see, the bolivar crash in the black or open market, are a result of the government's inability to provide dollars to fit the demand. Their new policies are going to make matters worse, because if people can't find the dollars to buy imports, then there's going to be enormous scarcity.

Why scarcity? Because under Chavez the nation's productive capacity has withered - he either nationalized industries which go on to perform poorly, or he scares the private sector, so they don't invest (why invest if the government is going to steal what you bought?). So we are in a perfect storm, a real mess - inflation raging at over 30 % per year, the economy dropping, a government with stupid policies which are about to choke off trade and production, a middle class in panic, many of them refusing to act because they're afraid they will be taken to jail as "profiteers", and many trying to flee with whatever they can. The brain drain is horrific, the universities have whole classes in the post graduate side deserted, doctors are leaving in large numbers, so are engineers, anybody who speaks english and can get a visa or a job is gone or planning to leave. And those red-clad fat guys you see surrounding Chavez are mostly a bunch of incompetents. Many of them had mediocre college careers, some of them are known criminals, and they are completely unable to even grasp how to pull themselves out of the hole. And this is why soon you won't see me posting from Venezuela anymore. I'll be elsewhere, and good riddance, the country is gone.

As you can tell, I speak very good english, and I'm educated. I'm just part of the brain drain leaving Venezuela :-)

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But Ricardo Sanguino, head of the legislature's finance committee and one of the sponsor's of the currency bill, said he's confident that central bank oversight of the free-floating market will rescue the bolivar.

He said the bank will make sure not to allow arbitrage, in which people were accessing dollars at the cheaper, official rates and then reselling them at a higher value in the free-floating rate.

"Lots of people and business would get dollars at the official rate, saying they needed to cancel debts abroad, but then went playing the unregulated market to turn a profit, hurting the country," he told state television shortly after the bill was approved.

The bill, if signed into law, is expected to put a huge dent in the business of brokerage houses in Venezuela, which have already been limited in what they can do, as a result of Chavez' socialist agenda. Stock market trading is virtually non-existent in Caracas, as our other financial activities such as investment banking or IPOs.

http://online.wsj.com/article/BT-CO-20100513-718344.html?mod=WSJ_latestheadlines

The practice they have had to sell cheap dollars to people wasn't really arbitrage, it was massive corruption - because most of the people who got those cheap dollars in excessive amounts were chavistas. The brokerages can go out of business, or not. But if there's no ability to buy dollars to get spare parts, then there's going to be one hell of an economic meltdown. Let's see what happens in the near term, but these guys have a tendency to ruin everything they touch.