How Annoying to Have Elections

Venezuela's Chavez is facing quite the pickle. The country's main export, oil, isn't generating as much cash as before due to lower prices. There's an election around the corner, and his main constituency, the poor, are increasingly unhappy about the poor economy. Inflation is soaring at 27% and the government can't do much to tame it as any steps would further weaken the economy already mired in recession.

The solution? Devalue the currency. Chavez has decreed that the bolivar will now be worth 4.3 per USD, down from 2.15. Since the devaluation will immediately make imports twice as expensive, the government has established a separate exchange rate -- 2.6 per USD, for imports of food, medicine and other "essential goods" (I'm sure iPods and plasma TV's for government officials count as essential).

The result? Immediate chaos. People rushed to spend their money this past weekend, fearful that their purchasing power for imported goods will plummet (it will). The black market rate for the bolivar (what you'll actually get on the street) plummeted to 6.25 bolivar per USD. The government estimates devaluation will add a further 5 points to inflation (likely a gross underestimate). Imports will become very expensive and the domestic economy will suffer as people and companies grapple with the meaning of the dual-tiered devaluation and spiraling inflation.

For the government, these risks are outweighed by the benefit of immediately having more bolivars to spend for every barrel of oil sold. Those bolivars go into government programs to help win elections. The slowdown of imports also acts as a kind of trade barrier to protect and stimulate local manufacturing. And many banks, which hold US dollars, will benefit too. Time will tell if this is a shrewd move to maintain power, or the desperate move of a madman pushing his country further into economic oblivion.

Devaluation Sparks Chaos in Caracas - WSJ.com