Wednesday, January 02, 2008

In case you forgot how inflation works OR When will the NEW Strong American Dollar be created

Venezuela launches new currency to stem inflation
By Benedict Mander in Caracas
Published: January 1 2008 22:03 | Last updated: January 1 2008 22:03
In an effort to stem record-high inflation, Venezuela launches a new currency on Wednesday – the “strong bolivar” – by slicing three zeroes off the bolivar.

While President Hugo Chávez’s government is hailing the measure as an anti-inflationary measure that will help stabilise the economy, non-government economists fear the strong bolivar will be anything but strong.

“We’re ending a historical cycle of . . . instability in prices,” Rodrigo Cabezas, finance minister, said on Monday, adding that the change aimed to “recover a bolivar that has significant buying capacity”.

“It was necessary to leave behind the consequences of a history of high inflation,” Gaston Parra, central bank president, said in a televised year-end speech. He added that officials aimed “to reinforce confidence in the monetary symbol”.

However, in view of racing inflation, an increasingly unsustainable exchange rate and shortages of basic goods, José Guerra, a former chief economist at Venezuela’s central bank, said: “The monetary ‘reconversion’ is not going to stabilise prices. It’s not going to help reduce inflation, or anything of the kind,” arguing that the new currency could even trigger higher inflation. “It’s a dangerous move,” he said.

In 2007 inflation in Venezuela is expected to exceed 20 per cent, the highest in the region – far beyond the government’s target of 12 per cent.

“There will be confusion,” said Domingo Maza Zavala, whose term as a director of the central bank ended early in 2007. He argues that government campaigns proclaiming the advent of “a strong bolivar, a strong economy, a strong country” – have created the false impression the new currency will have a greater purchasing power than the old one.

“The strong bolivar is being born into an environment not only of monetary instability, but also ex-change rate, financial, economic and social instability. That is not the best climate for its success,” he said.

Although the strong bolivar will bring some benefits such as simplifying transactions and accounts, the cost of introducing it – updating computer systems, for example – has been greater than expected, and may lead companies to round up prices to cover costs.

Economists argue that currency reforms have only been successful when inflation is already under control.

Mr Maza Zavala said the currency reconversion should be accompanied by additional anti-inflationary policy, in particular ensuring the availability of popular goods, especially basic foods, as well as moderating government spending.

Imbalances in the exchange rate regime also threaten the new currency.

José Manuel Puente, an economist at the IESA business school in Caracas, says the exchange rate is at least 20-30 per cent overvalued. But the key problem, he argues, is the gap between the official and the “parallel” exchange rate for the dollar, which recently ex-ceeded triple the official rate of 2,150 bolivars.

Copyright The Financial Times Limited 2008


Anonymous nature said...

Buying International Real Estate
Andrew C. Weitnauer

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8:04 AM  
Blogger Andy said...

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7:12 AM  

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