Redstate

The official conversion rate between the bolivar and the dollar overvalues the former by at least 40% and probably a good deal more. Hugo has attempted to deal with the resulting black market by imposing legal constraints on dollar ownership by Venezuelans.

One suspects that to make such a currency-control regime stick, the regime would resort to extreme measures. In Latin America, this is traditionally done by imposing an unofficial death penalty. (That is, people start "disappearing" in the middle of the night until everyone else gets the drift.) It's quite interesting and curious that Hugo has not yet resorted to this. (Either he thinks the problem isn't bad enough yet, or he doesn't think he's strong enough to survive the coup pressure that would result.)

So the black market continues. Hugo's goons have enough control over the official economy that producers are responding to the overvalued bolivar by refusing to bring staple foodstuffs to market. I've heard stories of enormous stashes of agricultural products in Caracas and elsewhere that are being held off the market. This is a rational response to both inflation and an overvalued official currency.

Here's what I think is happening here: Hugo's central bankers are doing a terrible job of sterilizing the country's large inflows of petrodollars. (The phrase "black gold" resonates meaningfully with similar situations from periods in history when the world operated on commodity-money standards.)

Using back-of-the-envelope calculations, Venezuela's annual petrodollar revenues are roughly comparable to the "official" government budget. (The official budget, which has expanded sharply in the last few years, actually understates the real level of government spending, which is augmented by theft appropriations from central bank reserves and other sources.)

The petrodollar inflow is enough to form a monetary base capable of floating an economy several times the size of the real Venezuela one. (I did the math a few weeks back and it was about 5x, but oil prices have fallen since then.)

Unfortunately, what Hugo does with his petrodollars is pass them out into weak hands in the form of social spending. It's no wonder that inflation is the result. What is far weirder is the response. I know of several central banking experts who find the strategy of officially overvaluing the bolivar to be both bizarre and historically unprecedented. It's hard to escape the conclusion that Hugo doesn't know what on earth he's doing, and that he thinks money somehow has value in and of itself.

(Compare the behavior of China's female troika of central bankers, who when not backbiting each other do a fairly sophisticated job of managing a similar but much larger problem to China's advantage.)

Do you all remember the nationalization earlier this year of Venezuela's telecom company, CANTV? This deal is still pending. The biggest chunk of the nationalization was the acquisition of the approximately 28% stake owned by Verizon, for a negotiated value that I guess-timated to be exactly $2 billion. Right on cue, the New York stock markets valued CANTV shares (ticker VNT) at just underneath that indicated value. In the last several weeks, however, VNT shares have fallen nearly 20%. Why is that interesting?

Because a big chunk of the value promised to Verizon took the form of a tacit understanding that it would be permitted to convert a large dividend to dollars. This dividend, constituting a shockingly large percentage of CANTV revenues, was paid out in bolivars in mid-2006, and of course bolivars are useless to Verizon if they are being kicked out of the country. The drop in the stock market's valuation of this nationaliation is another hint that currency shenanigans may be afoot.