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Venezuela Launches First Nuke In Currency Wars, Devalues Currency By 46%

Tyler Durden's picture




 

While the rest of the developed world is scrambling here and there, politely prodding its central bankers to destroy their relative currencies, all the while naming said devaluation assorted names, "quantitative easing" being the most popular, here comes Venezuela and shows the banana republics of the developed world what lobbing a nuclear bomb into a currency war knife fight looks like:

  • VENEZUELA DEVALUES FROM 4.30 TO 6.30 BOLIVARS
  • VENEZUELA NEW CURRENCY BODY TO MANAGE DOLLAR INFLOWS
  • CARACAS CONSUMER PRICES ROSE 3.3% IN JAN.

And that, ladies and gents of Caracas, is how you just lost 46% of your purchasing power, unless of course your fiat was in gold and silver, which just jumped by about 46%. And, in case there is confusion, this is in process, and coming soon to every "developed world" banana republic near you.

 

and just as we (and Kyle Bass) have warned - this is what happens to the nominal price of a stock market as currency wars escalate... how do those US investors who flooded Venezuela with cash feel now? bringing back those VEF gains is going to hurt...

The chart above is a free lesson in nominal vs real: the hardest lesson for some 99.9% of the world's population to grasp. One person who certainly knows how to devalue a currency in real terms FDR, whose 70% devaluation of the USD courtesy of executive order 6102, is merely an appetizer of what is about to be unleashed upon the US.

From Bloomberg:

Venezuela devalued its currency for the fifth time in nine years as ailing President Hugo Chavez seeks to narrow a widening fiscal gap and reduce a shortage of dollars in the economy.

 

The government will weaken the exchange rate by 32 percent to 6.3 bolivars per dollar, Finance Minister Jorge Giordani told reporters today in Caracas. The government will keep the currency at 4.3 per dollar for some products, he said.

 

A spending spree that almost tripled the government’s fiscal deficit last year helped Chavez win his third term. Chavez ordered the devaluation from Cuba, where he is recovering from cancer surgery, Giordani said. Venezuela’s fiscal deficit widened to 11 percent of gross domestic product last year from 4 percent in 2011, according to Moody’s Investors Service.

 

The move can help narrow the budget deficit by increasing the amount of bolivars the government gets from taxes on oil exports. While a weaker currency may fuel annual inflation of 22 percent, it may ease shortages of goods ranging from toilet papers to cars.

 

In the black market, the bolivar is trading at 18.4 per dollar, according to Lechuga Verde, a website that tracks the rate. Venezuelans use the unregulated credit market because the central bank doesn’t supply enough dollar at the official rates to meet demand.

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Fri, 02/08/2013 - 23:38 | 3228105 chindit13
chindit13's picture

Cheap places have a way of becoming wildly expensive, leapfrogging everything between their blighted past and unrealistic hopes for the future.

Case in point (other than Moscow, Delhi, Mumbai RE):  my previous Port of Call

Go back to 2000, and a piece of land just at the edge of the city could be had for about $250.  The land measured 24'x50', which is the traditional sized lot to build a six-story, twelve flat poorly-cured concrete and rusty re-bar apartment.  Thirteen years later that same plot sold for $141,000, or the equivalent of over $5 million per acre.  Over the same period per capita income has "skyrocketted" from about $75 per year to $300 per year.  Hello Emerging Middle Class!

Anything special about this plot?  Well, it's neck deep in tropical vegetation, is home to its own ecosystem with rats and Russell's vipers, sits just meters from a gray-water creek (Proud [Typhoid] Mary Creek) that is a mixture of one half household sewerage and one half rain runoff, with a generous sprinking of household garbage on top almost thick enough to walk across the creek's thirty foot width, and the plot itself is sufficiently fluid so that even in the dry season one's feet sink in a few inches if one has the courage to traverse it.

Once the new owner builds that 12 flat superstructure---this term is accurate because buyers get merely a concrete shell and must do all internal "decorations", such as partitions, plumbing, wiring, flooring, etc. themselves---he will sell apartments for an average of about $28000 apiece.  Buyers will be landlords for the most part, putting in an additional $3-5000 in fixtures such as non-grounded electricity, single sheet 1/8th inch pressboard or plastic partitions, and a decorative hole in a portion of the kitchen which will feed the aforementioned proximal creek.  The shower will be a cement cistern, to be filled whenever both the water and power are running at the same time, and serving as an upscale breeding ground for both malaria and dengue mosquitoes.  The floor will be a large, poorly cut sheet of linoleum laid atop the original cement.  Cooking will be on a renter-supplied habachi burning homemade charcoal or biochar.  The room will rent out at about $95/month, giving the owner about a 3% yield.  An extended family will share the flat and rent, with the term "extended" meaning those of the same species, as in The Family of Man.  The walls, if the owner did not paint them in either Puss Yellow or Diluted Pee Green (both from the recently debuted "Third World Collection" of Sherwin Williams), will be adorned with 3'x5' colorful posters of either white babies or Britney Spears.  Those posters will cover most of the mold that grows during the monsoon season as water seeps through the concrete wall from the outside.

Just for background, banks pay 13% on deposits, and the "local money market" sets rates at 5% per month.  Yes, per month, same as China's shadow banking system.

So why does the owner purchase and rent this place when he can put the money in the bank or become a loanshark?

Capital gains, baby!  Lazlo Birinyi's ruler is everywhere.

Fri, 02/08/2013 - 23:40 | 3228141 Muppet Pimp
Muppet Pimp's picture

Always enjoy your insight Chindit.  Long time no see man, you are missed around here.

Sat, 02/09/2013 - 03:38 | 3228317 IridiumRebel
IridiumRebel's picture

This is why I am investing in real estate. Wonderful post.

Sat, 02/09/2013 - 10:57 | 3228593 Vooter
Vooter's picture

LOL...beautiful...

Sat, 02/09/2013 - 14:48 | 3228944 W74
W74's picture

Where was your previous Port of Call?  Sounds like you were talking about Mumbai, but I'm not sure if you meant to put that in the parenthasies or not.

Sat, 02/09/2013 - 10:54 | 3228589 Vooter
Vooter's picture

Yeah, it would be really cool--if eating, drinking and hanging out is your goal in life...

Fri, 02/08/2013 - 21:35 | 3227867 Quantum Nucleonics
Quantum Nucleonics's picture

This isn't the shocking news Tyler makes it out to be. They are just setting the official rate to where the black market has been for quite a while. Far more important is that they froze prices of groceries. Yea, that always works.

It's interesting to note that if you want to buy corn flour, i.e. basic staples, you need to pay in dollars in the alley.

Fri, 02/08/2013 - 23:34 | 3228130 Son of Loki
Son of Loki's picture

My neighbor is from Cambodia. He tells me he would not be alive if he did not have "small gold coins" to buy his way from Cambodia to China...then on to Vietnam...then on to Canada .....then on to here, the USA..during the wars of the 1960s and 1970s.  He says paper money was simply worthless to the people he had to bribe to escape at each point.

 

I am glad he did. He now owns three restaurants and is very generous to local organizations and is a super hard worker. Even now, he says 10% of his earnings go into PMs. Same for his kids who work in his restaurants. 10% each of them....

 

There's an important lesson here frm that culture. All should take heed.

Sat, 02/09/2013 - 13:47 | 3228813 W74
W74's picture

That doesn't even make sense. Cambodia borders Vietnam so why not go directly there? Also, to get to China he would've had to travel through Laos or perhaps through Thailand then Laos, or Thailand then Burma. Either way our of those your story doesn't make sense because that seems like a lot of out of the way travel plus too many border crossings.

I could be wrong though, and your guy had a legit reason for doing what he did and perhaps my Geographic training is simply getting the better of me. It would be like living in Philadelphia and then traveling to Vermont before making your way to New Jersey. It just doesn't make sense.

Fri, 02/08/2013 - 23:41 | 3228142 They Tried to S...
They Tried to Steal My Gold's picture

This is a ridiculous article....and untrue -The government has released inflation numbers at 2.3% for the last year.

 

I beleive it was the BLS that released that.... 

Sat, 02/09/2013 - 00:03 | 3228170 jonjon831983
jonjon831983's picture

No wonder why that ex-Iranian Central Banker tried to cash that 300 Million Bolivar cheque a couple weeks ago.

Sat, 02/09/2013 - 02:09 | 3228282 gwar5
gwar5's picture

good one, so true.

Sat, 02/09/2013 - 00:34 | 3228209 kennard
kennard's picture

This government posted exchange rate, and the supposed devaluation, is irrelevant, since the (black)market rate is 18 to the dollar.

Sat, 02/09/2013 - 00:36 | 3228210 silverdragon
silverdragon's picture

Anyone holding fiat got raped. Round one for Silver and Gold.

So the Chinese stock up on Gold to back their currency and then the Euro and dollar devalue. Tell me it aint so.

Buy silver and take physical possession, immediately!

Sat, 02/09/2013 - 02:23 | 3228287 chindit13
chindit13's picture

Actually, anyone holding a non-bolivar fiat did just as well, and given yesterday's price action plus any spread on buying/selling gold or silver, the non-bolivar fiat holders did better than PM holders.  In fact, dollar holders have done better than gold or silver holders over the last year, and the last two years.  Past performance is no guarantee and all that, but........

If the dollar goes, then yes, any physical asset will outperform the fiat, but plenty of smaller currencies have gone the same route while the dollar has continued to exist.  What happens in Venezuela or Zimbabwe has little to no impact on the US, EU, China, Japan, etc.

Everyone picks his poison, but given that the only meaningful measure of success is what is the means of exchange during one's time above ground, it is understandable that some people are comfortable with a hedge rather than an all-in position.  If we are to judge from history, we must consider not only Weimar, but also Nelson Bunker Hunt.  And if the dollar has fallen, whatever it is, 97% since 1913, that is primary concern only for those still getting paid in 1913 wages or those who treated fiat like PMs and buried them in the back yard.  Of course, anyone earning a wage in 1913 is likely to be pushing daisies already, so both paper and metals are meaningless to them now.

Sat, 02/09/2013 - 03:30 | 3228313 IridiumRebel
IridiumRebel's picture

Wonderful post. You hold onto 1700 dollars and I'll hold on to my ounce of gold and we will see who the fuck is where in 10 years!

Sat, 02/09/2013 - 13:40 | 3228801 W74
W74's picture

Anyone holding non-bolivars did well only if they were planning on buying Bolivars.

Sat, 02/09/2013 - 00:49 | 3228221 NoelConfidence
NoelConfidence's picture

Supernova goes pop!

Sat, 02/09/2013 - 02:07 | 3228281 gwar5
gwar5's picture

At least they got their gold. Chavez is dead! long live Chavez!

 

Suckers in Venezuala better throw out Chavez II if they don't want a decade of more of the same shit. Wonder if Germans are taking note of this.

 

Sat, 02/09/2013 - 14:47 | 3228938 earleflorida
earleflorida's picture

or, perhaps Merkel pulls a Hugo...

Sat, 02/09/2013 - 02:44 | 3228297 mrmister
mrmister's picture

What's all this about? All they did was debase their currency by half. BLAM!

Sat, 02/09/2013 - 08:08 | 3228421 AnAnonymous
AnAnonymous's picture

If that can not help 'american' oil addiction, what can?

Sat, 02/09/2013 - 09:46 | 3228501 slackrabbit
slackrabbit's picture

Nuke is exactly what I thoguht.

Expect central bankers to be busy preparing their own develatuions within the next quater...if not the market.

My guess expect trade 'sanctions' shortly...

Sat, 02/09/2013 - 12:05 | 3228655 Village Smithy
Village Smithy's picture

I'm not sure that Ben is still in the loop. Economic affairs will soon be overseen by the Dept. of Defence.

Sun, 02/10/2013 - 16:15 | 3231086 resurger
resurger's picture

Race to the bottom

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