Venezuela announced today that it is devaluing it’s currency from 4.30 to 6.30 bolivars to the dollar – a 46.5% purchasing power reduction for holders of the South American nation’s currency. This isn’t the first time this has happened in Venezuela, but that makes it no less devastating for the South American nation’s citizens.
Check out the following from Fox News:
Venezuela’s government announced Friday that it is devaluing the country’s currency, a long-anticipated change expected to push up prices in the heavily import-reliant economy.
Officials said the fixed exchange rate is changing from 4.30 bolivars to the dollar to 6.30 bolivars to the dollar.
The devaluation had been widely expected by analysts in recent months, though experts had been unsure about whether the government would act while President Hugo Chavez remained out of sight in Cuba recovering from cancer surgery.
Why the devaluation? To ease the nation’s fiscal woes:
It was the first devaluation to be announced by Chavez’s government since 2010, and it brought down the official value of the bolivar by 46.5 percent against the dollar. By boosting the bolivar value of Venezuela’s dollar-denominated oil sales, the change is expected to help alleviate a difficult budget outlook for the government, which has turned increasingly to borrowing to meet its spending obligations.
Unfortunately for Venezuelans, Chavez’s efforts to ease his budget problems came at their expense. Imagine waking up one morning and discovering gas prices had risen overnight from $4 to $6, or a McDonald’s Big Mac combo meal now cost $10, or a latte at Starbucks had risen to $6. How would you feel? This is what Venezuelans will dealing with in the coming days and weeks.
By devaluing the currency by nearly half, Chavez effectively made everything 50% more expensive in his country – all because he wasn’t willing to reduce his borrowing and balance his nation’s budget. Basically, he stole the purchasing power of his citizens so his government didn’t have to face a day of reckoning over its reckless spending.
Could this happen in the United States? I think so. With a federal government swimming in debt and no end to it in sight, the government is going to have to figure out ways to reduce its debt load. The oft chosen method for making a huge national debt more manageable is to devalue the currency it’s denominated in, whether by outright by decree or more slowly over time by money supply inflation.