Thursday, January 21, 2010

Reality Still Matters

An exchange rate held to an unnatural level and prices restricted by government decree are a familiar tune. In Venezuela, some have bolivars and want to buy dollars for their imports. The government has tried to maintain a fictional exchange rate and has rationed dollars, but markets are what arise naturally whether you want them to or not.

Predictably, the Venezuelan government's restrictions on foreign exchange and price controls are not working and these controls are creating problems that they try to solve with yet more controls. More rules cannot repeal reality and they only serve to create corruption, discourage foreign and domestic investment, and slow production. The sellers of goods are understandably reacting to the reality of more bolivars in circulation by raising prices. You can tell people to ignore reality and sell at the old prices, but the historical record is that people are smarter than that and it never works.

Chavez accomplishes his objective of increasing government control exceptionally well. As he is moving so quickly and with quotes like this,“People, don’t let them rob you, denounce it, and I’m capable of taking over that business" it is obvious what he wanted all along. Perhaps the motives of politicians here are more pure, but if something like the Senate healthcare bill passes it will 'require' more controls to fix the problems it creates.