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Could this happen to the dollar?Doctor Dinero's Discussions Before I start, let's review a little Venezuelan history. The Clinton strong dollar policy caused a dislocation ripple greatly effected the results of the Venezuelan elections. The price of oil dropped to around $10/bbl, a big benefit of the strong dollar. This caused their major export to be worth nearly nothing causing a massive recession. Chavez won the election in 1998 to bring about change. Chavez's butter and more butter campaign promises increased government spending and created a large budget deficit (similar to the US's guns and butter spending). Over those past 6 years the Bolivar has dropped form 350 Bs to the now official rate of 1920 Bs per dollar. Almost a 40% devaluation per year against the dollar (sound similar to our 30% devaluation in the US during the last two years). And they are only devaluing against the dollar, for a proper perspective you must take into account the dollars own devaluation (think 60%). Last year after the failed strike in December 2002, Chavez implemented currency controls. I originally thought this was done to primarily keep opposition businesses in line, primarily the newspapers, (no dollars, no international trade, no raw materials, like newsprint, no opposition point of view.) However, I think the countries financial difficulties are much more severe. When I landed in Caracas, I was greeted with the usual cab driver mobbing; but this time after saying no to a cab ride, they would ask "change money, 2500 Bs to the dollar" (the official exchange rate was 1600 Bs per dollar. I have also heard people getting 3200 Bs to the dollar). The next day I got to experience an official 20% devaluation of the currency exchange overnight to 1920 Bs to the dollar. The Venezuelan central bank stated that this devaluation will have no effect on inflation. (Sounds like a statement from the US Federal Reserve book). I spoke with some of my Venezuelan friends about this and they mentioned to be careful (many fake Bs, police crack down, etc.) For me, I would rather change money with my friends, which helps enables them to try and protect their savings. Too bad they prefer choosing another paper currency as their preferred saving vehicle. I noticed in their upscale malls, in upscale neighbor hoods, there are not traditional jewelry stores. I saw little gold being worn (most men did not have wedding rings, and the married women had simple silver rings), it could be also be for safety (if you ware too much jewelry you could become a target. Their middle class is being destroyed by the constant devaluation and price inflation. Most have to work multiple jobs to pay for basic necessities; unless you are underprivileged, which in that case you get free food, electricity, and shelter. Many of the middle class save in dollars for inflation protection (when they can get them), they do not trust their stock market, and are not allowed to purchase US stocks from Venezuelans accounts. So they take their dollars, and schedule a trip to the US. Open a bank account. Some of the more savvy open up brokerage accounts. Others, who can only get access to Bs, buy real-estate as their only way hedge devaluation. So as the dollar continues its devaluation, what will the US people do? Save in other paper currencies like the Venezuelans? Will the US in act currency controls once the bond market is in turmoil and the stock market has tanked? Will the US government force 401ks and IRAs into Government bonds (for retirement safety, the stock market is too risky.) Will they prohibit the buying and "hording" of bullion? Will it be cheaper to use a George Washington as a sheet of toilet paper? This brings me to the good people over at the Daily Reckoning website; who like to talk about using the Zimbabwe dollar as toilet paper (since it is cheaper to use). Looking at the older Bolivar notes, the ones that would make it cost-effective to use (the lowest denomination); they are quite old and dirty. I think I would pay a heavy premium for sanitized toilet paper (just me I guess). Only time will tell what comes our way. However, there will always be a black market for those who have bullion. The only thing I know for sure is that it is good to be back in the US, but I wonder if we will eventually be paying more for gold and silver bullion (the ultimate currencies) than what is published as spot prices. And you may want to stock up on Toilet Paper. Protect yourselves, buy gold and silver bullion, and be cautious of all paper currencies. Unfortunately we have to use them for "all debts private and public." Cheers, Doctor Dinero 321gold Inc |
