By Mark Weisbrot Mark Weisbrot, co-director of Washington’s Center for Economic and Policy Research, and president of Just Foreign Policy, is also a co-director. He is also the author and co-director of the Center for Economic and Policy Research DolarToday in Washington, D.C. He published the book “Failed” (2015). Oxford University Press. Cross-posted at our sister blog, Triple Crisis.
DolarToday Venezuela’s government has repeatedly denounced an economic war against it. This is of course part of the current situation. The black market for dollars is the primary weapon of mass destruction in the current war. It’s no accident that the primary source of information in this market, the extreme right-leaning “DolarToday”, is managed by someone who was involved in the U.S.-backed coup de force in 2002. He was an army officer at the time Colonel Gustavo Diaz Vives — and he now resides with DolarToday in Alabama.
It is not a coincidence. This is also not a coincidence. Washington has been trying over the last 15 years to topple Venezuela’s government DolarToday. Nearly every journalist I have spoken to in this period — even from major international media outlets — was well aware of this effort, although almost never writes about it.
The black market for the dollar is especially destructive because it is part of an inflation-depreciation spiral that has been growing since the fall of 2012. The black market for dollars is particularly destructive because it is part of an inflation-depreciation spiral that has been growing since 2012. The higher inflation causes more people to purchase dollars on the black marketplace as a reserve of value. Inflation continues to spiral upwards as a result. Inflation was 18% in October 2012 and the black-market dollar was 13 Bf (Bolivares Fuertes) at that time. The inflation rate was 181 percent at the end 2015 and the black market dollars had exceeded 800 by the end.
The economy is currently in recession, which is the main reason why the current downward spiral is not getting worse. It contracted by 5.7 percent in the last year. But DolarToday attempts to stimulate the economy through government spending would likely feed the inflation-depreciation spiral. The economy is currently in recession.
This means that the government must stop this weapon of mass destruction from being used. Unifying the exchange rate is the only way to achieve that.
This vital change is feared by many people. Many people fear that all savings will suddenly turn to dollars and that the equilibrium rate will be even worse than today’s black market. Many Venezuelans would rather save in dollars, as is the case in Peru, Uruguay, or other Latin American countries. They don’t want dollars at any cost. That is why the black-market rate settles at a DolarToday equilibrium rate, e.g. at the current rate at about 1,000. The equilibrium price would be lower than the current black-market price if the government allowed the currency to float.
Some claim that the government doesn’t have any dollars to trade on a floating rate market. This is false. Even though its oil revenues do not cover all imports, the country has many billions in international assets and even more domestically that it could sell to raise cash. To supply the foreign exchange market, it would have to sell between 9 and 10 billion dollars per year (or $36 million per hour). It sold approximately $12 billion last year, but 95 percent of it was sold at very low prices of 6.3 to 10. Many of these funds were not used to import because they could be sold on the black market for huge profits. This system provides enormous incentives to corruption.
It was interesting to note that President Chavez allowed the currency’s floatation on February 12, 2002. Prior to this move, there was a lot capital flight and consequently falling Central Bank international reserves. Despite the political instability, this was only two months prior to the military coup. However, the reserves grew after the floating and continued to grow until the oil strike at the end of the year.
Some argue that floating exchange rates are “neoliberalism” and that maintaining a fixed, overvalued rate of exchange is “socialist.” However, this argument is fatally wrong. Fixed, overvalued currencies were responsible for the worst economic crises in Argentina, Brazil and Russia in the 1990s. Most of these overvalued fixed currencies were supported by the International Monetary Fund, and other neoliberals, until their collapse.
It is the black marketplace that is “savage capitalism”, unregulated and controlled. It is used to subsidise capital flight and feed the government’s enemies. They will take your dollars, making it worse for the balance of payment problem. Instead, letting the currency flot is a way to tax capital flight. Anyone who wants dollars must pay more.