Sunday, January 10, 2010

Attention Venezuela: Prepare for Shortages

Venezuelan President Hugo Chavez obviously didn't pay attention in Econ class 101, specifically the part about price controls causing shortages.

Chavez said that businesses have no reason to raise prices following the devaluation of the bolivar and that the government will seize any entity that boosts its prices.

Chavez said he’ll create an anti-speculation committee to monitor prices, according to Bloomberg. The government is the only authority able to dictate price increases, he said.

“The bourgeois are already talking about how all prices are going to double and they’re closing their businesses to raise prices,” Chavez said in comments on state television during his weekly “Alo Presidente” program. “People, don’t let them rob you, denounce it, and I’m capable of taking over that business.”

Chavez devalued the bolivar as much as 50 percent on Jan. 8 for the first time in almost 5 years. The government forecast an inflation rate of 20 percent to 22 percent this year, after consumer prices rose 25 percent, according to the National Consumer Price Index.

The government also will “attack” the so-called parallel exchange rate, which Chavez called “illegal.”

Venezuelans turn to the parallel rate when they can’t get government authorization to buy dollars at the official exchange rate. The bolivar traded at 6.25 per dollar on Jan. 8, traders said.

“They put the value of the dollar at more than 6 in an arbitrary and illegal manner,” Chavez said. “We have to organize to reduce and attack that speculative, illegal dollar that hurts the Venezuelan economy.

If Chavez is successful in keeping prices below market rates,shortages will ultimately result. Most recently, price controls in Zimbabwe resulted in shortages and food riots.

Hopefully there are enough loopholes in his declaration that businessmen will be able to get around the controls, but it is not going to be pretty.


  1. Anyone have an accurate and up-to-date stat on Venezuelan unemployment? This article says 8.5% as of last July. (Be careful, some of the top Google hits report a 2009 figure that is a 2008 estimate.)

    I ask because various people are saying Bernanke needs to get the inflation juices pumping in order to kickstart the US economy.

  2. Indexmundi which gets its data from the CIA factbook reports 2009 unemploymnet at 7.4%

  3. Right but if you look at that diagram you'll see the 7.4% estimate was made in 2008. I think the real number is a lot higher.

  4. Can someone explain to how this is going to cause prices to double? I read in the FP that the official exchange rate will be going from 2.15 bolivars to 1 USD to 2.6 bolivars to 1 USD.

    As well, if the currency is devalued by 50 percent, why is it that inflation is only expected to go from 20 to 22 percent? Shouldn't it go from 20 to 40 percent?

    How does a currency devaluation work???