Price Controls in Venezuela

After a number of currency devaluations, the Venezulean government has begun enforcing price controls. The most recent devaluation was 50%. This devaluation was regarded as a break from the two-year-old “strong bolivar” policy Chavez had previously adopted.

However, as to why Chavez or the media would refer to his previous policy as strong for the bolivar is beyond me. A quick look at the Venezulean money supply (M2 specifically) over the past two years proves otherwise: on 01/04/2008 and 01/01/2010, the M2 money supply was 152.845 billion bolivar and 235.732 billion bolivar, respectively. This represents an increase in the money supply of a little over 50% in just two years. To put this into perspective, the M2 money supply in the U.S. increased by a little over 10% during the same period of time.

Why did Chavez think he could create a stronger currency by decreasing its denomination?  Basic economics tells us that the value of a good is determined by its supply and the demand for it. Money is no different.

Unfortunately, our country is repeating the mistakes made by Chavez when he was first elected, which included nationalizing key industries and failing to reign in rampant government spending.

In the end, one can only hope that the forced nationalization of industries is the worst punishment the Venezulean government can come up with. In ancient Rome, individuals were executed for violating wage and price controls.

Published in

Post a comment