Wednesday, January 2, 2008

Venezuela Introduces New Currency in Plan to Halt Inflation

Venezuela endures the highest inflation rate in South America. The official inflation rate is over 20%, the unofficial rate is over 100% when taking in account the underground economy and realistic exchange rate to other currencies.

The middle class is pressed as more wealth is transferred to social programs with no associated economic benefit. Businesses are under increasing pressure as the government continues to seize resources, placing productive employment in jeopardy. Business growth has declined rather then risen over the last 12 months, while inflationary pressure strains the Venezuelan economy.

While the government has pushed the new currency as the “strong bolivar”; most of the nation has dubbed it the “weak bolivar”. It is generally helpful to lob off three zeros on currency note from a mass psychological perspective, after all who wants to pay 2000 of a currency unit for a loaf of bread. However attempting to sell a new currency as a cure for inflation and a stimulant for economic growth is far-fetched, if not absurd. Sloganeering with "A strong economy, a strong bolivar, a strong country" will not alter reality that the currency change is nothing more than window dressing.

For the government, Chavez's introduction of a new currency is merely an attempt to conceal the extent of the inflationary problem from the people of Venezuela, a traditional national problem that is difficult to hide. Unfortunately this solution will not really resolve the issue, and the second half of 2008 is likely to see stagflation in the local economy as Chavez continues to push fiscally-irresponsible social policies.

One immediate concern will be if the chill spreads like the flu to other economies in the region. The Latin American countries are interlinked in both trade and stock market performance. Surprising many pundits the Latin American market (as seen by the ILF ETF) has continued to have a hot run despite the rising regional risk.

Venezuela Introduces New Currency
Venezuela Launches New Currency As Chavez's Government Seeks to Stem Inflation