The problem began when Venezuela payed its bills with newly printed high-powered money, fueling inflation. Banks made loans with that money, further fueling price increases.
The normal solutions - as we see in China - is to purchase real assets, like land. But Venezuelans won't buy real assets in 'Zuela because the government is on a expropriation program for both domestic and foreign owners. Their land will be confiscated.
So, as prices rise, no one wants to hold Bolivars, the nation's currency, and they sell it as fast as they can to buy other currencies.
The sale of the currency forces the value of the Bolivar to fall, increasing import prices.
In response, the government buys these Bolivars with currency held in reserve. The currency stabilizes briefly.
Speculators now join with panicked sellers in selling Bolivars and the decline accelerates.
When the government's money runs out - as it always does - sellers buy back their positions at a dime on the Bolivar, and make a tidy profit.
For reference, see Zimbabwe's recent debacle.
For the future, watch the US's struggle to avoid the same fate.
Remember the simple rule:
Inflation dominates the function explaining currency movements, hot money further fuels this change, and trade is irrelevant at this point.
* * * * * J B K * * * * *
San Francisco
Venezuelan President Hugo Chavez is selling dollars from central bank reserves for the first time in six years in what Goldman Sachs Group Inc. and Barclays Plc say is a futile bid to shore up the bolivar in unregulated trading.
The central bank, under orders from Chavez to "burn the hands" of speculators betting against the bolivar, said it sold $179 million since Jan. 13, the first dollar auctions since trading restrictions imposed in 2003 spawned the unofficial market. Chavez said on Jan. 15 he wanted to strengthen the bolivar more than 30 percent in unregulated trading, where it fetches 6.3 per dollar, to contain inflation after he devalued the official rate as much as 50 percent to 4.3.
The plan will fail because Chavez's nationalizations and land seizures are prompting Venezuelans to pull money from the country, said Alberto Ramos, a Goldman Sachs economist. More than $93 billion has left the South American nation since 2005, according to the central bank's capital account data.
"You have a problem that can't be resolved by throwing reserves at it," Ramos said in a phone interview from New York. Venezuelans "pay a huge premium to get their assets out of the country, out of the reach of the government, so that they can't confiscate them," he said. "Under that situation, $20 billion, $50 billion or $100 billion is not enough. The entire capital stock of the economy could leave."
http://www.bloomberg.com/apps/news?pid=20601086&sid=a.eiJxW7dsGY
