Venezuela and It’s Currency Devaluation

Recently Venezuela devalued its currency which has caused a great deal discussion among the people and the media. As to be expected the right wing media and the Western media has claimed that this is some sort of desperation move by the government to prevent a massive economic collapse.

Right wing media and generally the Western media have predictably been framing this move fraudulently. It takes only opposition “sources” which have done nothing but slander Hugo Chavez and Venezuela from the beginning. Some of the claims include the accusation that the government has run out of money (which they don’t back up with anything). At the same time they say the deflation is too little too late and that inflation is going to get out of control. In addition they claim there will be more devaluation and more money will leave the country and cause the government to go bankrupt.

The ultimate scenario they are looking for is an “inflation-devaluation” spiral. Essentially the devaluation will raise the cost of imports, fueling inflation (higher prices). The currency becomes more overvalued in real terms, and then another devaluation begin leading to a downward spiral. Opposition is predicting that eventually people will lose confidence in the currency leading them to wanting to exchange it for dollars. This would spur a greater drive for devaluation causing the country to run out of foreign exchange reserves (a balance of payments crisis).

What we can see here is the plot they are trying to carry out. By creating hysteria around this scenario, they risk this happening as a self-filling prophesy designed to destabilize the government. This is no different than spreading rumors of insolvency to ruin a bank. The media in Venezuela is mostly privately owned by capitalists so it is not so surprising that such an idea is spreading quickly.

Let us take on this argument: Venezuela supposedly had to devalue its money in order to get more domestic currency for each dollar of oil revenue. Why? When they devalue from 4.3 Bs. to 6.3 Bs. per dollar it gives them two more bolivares fuertes for each dollar of oil revenue that it receives. This could also be done without devaluating the currency.

Receiving two additional bolivares for every dollar of oil spent is creating money no different than creating money using devaluation. The main difference is that in addition to any inflationary impact of creating more money, the devaluation also adds to inflation by raising the price of imported goods.

The problem is that creating money doesn’t always lead to inflation and that inflation is not necessarily caused by an increase in money. The US has increased the money supply by more than $2 trillion since 2008 and there has been no significant inflation. If merely creating more currency was the goal they could achieve this and it would be less inflationary to just create more money through the central bank.

There are real reasons why the government would devalue the currency, despite the claims made by people on the right. While more expensive imports add to inflation, it also helps domestic production compete with imports. Devaluation makes dollars more expensive, making it more expensive for the flight of capital out of the country. This helps keep more of it domestic.

When considering what inflation is to follow this currency devaluation, we have to consider what government policies will be implemented. Some of these measures could include price controls, a provision of dollars for importers (including food), and capital controls.

The truth is Venezuela is not having a problem with unsustainable debt. Even the IMF projects that Venezuela’s gross public debt for 2012 was 51.3% of GDP, while it is more than 90% in Europe. Even better is the foreign part of the debt in 2012 was 1% of GDP, or 4.1 percent of its export earnings.

Right now, barring any attempt by the US to subvert the nation in the wake of Chavez’s death, Venezuela is stable and will be for some time.