By now most of you may have heard that Venezuelan President Hugo Chavez devalued the Venezuelan bolivar earlier this week.Ã‚Â By changing (or some would say manipulating) its currency from 2.15 bolivars to the dollar to 4.3 bolivars to the dollar, Venezuelans will now enjoy skyrocketing inflation (some predict it could exceed 60%). With annual inflation of 27% already, Venezuela has taken a page out of the Zimbabwe Macro-Economic Policy guidebook (sarcasm intended). So who are the intended beneficiaries of the policy?
Clearly Chavez initiated the policy to bolster a weak economy by pushing exports. With this new strategy, US value-add manufactured equipment producers, particularly drilling and oilfield equipment, chemicals, industrial engines, and computer accessories makers will suffer as the price for their goods becomes only more expensive but prohibitively expensive. And already, the Wall Street Journal reported that our trade deficit widened by $36.4b in November due to a faster rise in imports vs. exports.
So the question becomes this is this currency manipulation? This University of Michigan site defines currency manipulation as follows, “The use of exchange market intervention to keep the exchange rate above or below the equilibrium exchange rate. The term is most likely to be applied to a country that keeps its currency undervalued for the purpose of making its good more competitive. The most interesting definition within “currency manipulation relates to the ‘equilibrium exchange rate definition’ which appears as follows:
“This is ambiguous, since there is no single agreed upon model of the exchange rate:
1. The exchange rate at which supply and demand for a currency are equal.
2. The exchange rate at which there is balance of payments equilibrium.
3. The exchange rate at which purchasing power parity holds, in some form.
4. The exchange rate at which the expected change in the exchange rate, in the near future, is zero.
5. The exchange rate at which the country’s international reserves are neither rising nor falling.
Vietnam devalued its currency by 5% late last year, in an attempt to boost exports. Japan did it too during their “lost decade. Venezuela has now devalued its currency by 50%. In fact, this Reuters article discusses how the “Fair Currency Coalition, comprised of many metal producing industries, particularly steel believes the Venezuelan currency devaluation serves as a proxy for understanding what China has been doing with its currency since 2000. The coalition is behind two bills in Congress S1027 and HR 2378, designed to “slap duties on imports from countries with prolonged misaligned currencies.
In a follow-up post, we’ll take a look at the Big Mac Index in conjunction with China’s currency as well as US currency history and discuss how it relates to our trade deficit.