Communism doesn't work, Chavez in denial

Story: "Venezuela President Hugo Chavez's plan to curb inflation by lopping three zeros from the currency may backfire because the move fails to address production bottlenecks that are pushing prices higher, economists said.

The government will cut three zeros from the bolivar's exchange rate by February 2008, Chavez said last night in a televised speech, citing rising consumer prices. He also will cut the value-added tax rate and clamp down on ``speculators'' to halt last month's 4 percent increase in the cost of food.

The steps aimed at slowing inflation and boosting local output miss the root causes exacerbating imbalances in South America's third-biggest economy, according to economists at Goldman Sachs Group Inc. and Bear Stearns & Co.
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``He has a funny understanding of the problem,'' Alberto Bernal, a Latin America economist with Bear Stearns & Co., said in an interview. ``Cutting a number of zeros from the bolivar is irrelevant in the end.''

Chavez, who won a third term in December, was granted decree powers last month by Congress in his drive to seize key industries and put the country on the path of socialism. The president said he plans in ``coming hours'' to decree a law that allows the government to expropriate any business that sells food products higher than government-set prices.

The annual inflation rate rose to 18.4 percent last month, the highest in Latin America, from 10.4 percent in May.
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Price regulations and other controls, including a crackdown on businesses buying currencies outside official government channels, have helped to make food production unprofitable, leading to a decline in supply and spurring inflation.

``Inflation isn't a problem that you solve with a few detentions,'' Carlos Caicedo, head of the Latin American office at London-based political risk advisers Exclusive Analysis, said in a telephone interview ``Speculation is a symptom of the disease, not its real cause.''

Chavez, speaking during his daily ``Hello President'' show, said he would lower value-added taxes 3 percentage points on March 1 and by an additional 2 points in July. The highest current value-added tax rate is 14 percent.

``The only economic indicator that has me a bit worried is inflation,'' Chavez said. ``Cutting three zeros will have a positive psychological effect and lower inflation expectations.'' "

Yeah, that'll show them! Instead of dealing with a major economic problem, Chavez has decided to just change the official value of the currency, and tell his people the problem is solved. Well, it isn't, because the market forces that are driving that inflation will still be there, with little affect on the rate of the inflation.

And in true Bolshevik style, Chavez has declared war on the bourgeois capitalists.
"Government officials blame private businesses and citizens who buy dollars outside government channels for accelerating inflation. Chavez said those found guilty of ``hoarding'' and ``speculating'' may receive prison terms of two-to-six years.

Venezuela's currency, set by the government at an official exchange rate of 2,150 bolivars per U.S. dollar, was little changed today at around 4,025 per dollar in unofficial parallel markets at 11:45 a.m. New York time. It weakened to a record low 4,700 last month after Chavez announced his plans to nationalize several companies in the phone and energy industries.

Government bonds that offer currency-risk protection fell today. The yield on the 6.25 percent dollar-denominated bond due April 2017, known as TICC, rose to 4.07 percent, compared with 4.06 percent yesterday, according to Mercantil Servicios Financieros SA. The price, which moves inversely to the yield, fell to 118.2 centavos from 118.3. "

Its a simple economic fact, if an area is regulated by the government, a black market will arise that more closely reflects that of the market. The Russians had to deal with it in the Soviet days, Chicago had to deal with it in the prohibition days, and now Chavez is dealing with it in our time.
Didn't work for the soviets, Chicago took forever, and Chavez probably won't have any success either.