Hugo Chavez Takes Over the Federal Reserve

Time was when countries believed in strong currencies — strength measured not in the rhetoric of bearded wise men but of bank vaults flush with gold coin.

Venezuelan tyrant Hugo Chavez recently announced that he would be devaluing his currency on New Year’s day. As the Wall Street Journal reported:

News of the devaluation came just after the central bank said the Venezuelan economy contracted 1.9% in 2010, the second consecutive year of declining output in the oil-rich nation after a 3.3% decline in 2009.

Both pieces of news suggest Mr. Chávez is having an increasingly difficult time balancing his populist policies with economic reality, according to economists. His government’s widespread nationalizations of private industry have sapped economic growth, while public spending has sparked inflation that the government has tried to contain by measures such as price controls.

There are a couple of striking aspects to this news. First, in the above excerpt one could easily replace Mr. Chávez’s name with Mr. Obama’s. Nationalizations or de facto nationalizations cripple an economy by replacing functional markets driven by the people with dysfunctional economies driven by central planners and have a secondary effect of chilling entrepreneurship, and thus competition, innovation and capital formation that drive economic growth.

Constantly imposing costs implicit and explicit on the private sector (i.e. those who must survive by providing a product demanded by consumers in quantities, of qualities and for prices willingly paid by these consumers), including the cost of propping up failed businesses and inflating asset prices, disincentivizes people from partaking in mutually beneficial commercial activity.

These consequences apply equally to the Venezuelans as they do to Americans.

Second, what is staggering is that the Venezuelan government is honest enough to admit that it is devaluing its currency. Rather than conjuring up terms such as quantitative easing or liquidity injections to obfuscate the public from the simple fact that it is overnight stealthily taxing, reducing the savings, favoring chosen political constituencies and ultimately driving up the prices that its people must pay for goods and services, the Venezuelan government admits its vices, though it surely sees them as virtues.

The public sees the effects of such policy. According to the report,

Ordinary Venezuelans reacted to the move with a mixture of dismay and resignation. “We don’t have an economy based in reality,” said Francisco Holinek, a furniture salesman in Caracas, the capital.

What makes Venezuela an economic basket case? By imposing price controls, Chavez and his cronies have attempted to solve the problems in markets they have distorted by usurping private property through taxation and outright theft, government spending and currency devaluation, with more intervention.

Their logic goes something like this – if prices rise uncomfortably high due to inflating the money supply, then they just need to forcibly put a lid on these prices. They think that somehow they are either blessed with the mystical ability to master economies, or that their public is ignorant or scared enough to not challenge such machinations.

Sadly, the folks at the Federal Reserve and throughout the US government when it comes to our economy again are only better by degrees and absolved of criticism due to their cleverness and more genteel socialism, involving redistribution of wealth to a greater number of constituencies.

In the labyrinth of regulations, taxes, subsidies, bailouts and money printing that are part of our supposed capitalist economy, the same logic the Venezuelans use is pervasive. Our paternal representatives can manage the economy and when their interventions lead to problems, intervene again to correct them, plugging one leak and creating ten more.

Why do such problems fester and multiply? Because prices have meaning. Prices take into account the tug-of-war between the producer who wishes to sell his product for the highest price possible and the consumer who wishes to buy the product for the lowest price possible. These prices are determined by countless transactions and take into account not only supply and demand, but the costs to the producer in creating such a product and to the consumer in trading his wealth for it. No one man or group of men can determine price, be it that of iPads or India ETFs.

Most importantly, when a government distorts the cost of debt, including its own, by artificially reducing interest rates through currency devaluation, this ultimately throws out of whack the prices of all products in booms and busts, busts which may go on for many years if not allowed to self-correct.

The results of such policy will not only be a crushing of an economy leading to persistently high unemployment, decreased purchasing power and the insolvency of government, but more fundamentally the crushing of the creative spirit of the individual who will no longer receive rewards commensurate with his entrepreneurial acumen but only his ability in political guile.

To restore a semblance of capitalism in this country will require recognition of the evils of fiat currency specifically and central planning generally in all of its forms crude and coy, and an understanding that any government intervention to the benefit of a given party will naturally represent a cost to many other ones and ultimately the loss of the soul of the country in its individualism.

When an entire political and economic system is based on payoffs overt or covert to infinite constituencies, such a system will cease to sustain itself. When the political entrepreneur conquers the market entrepreneur, this is the death knell of economic growth and progress. And we the people have shamefully sanctioned this by allowing the government to serve the interests of particular groups instead of treating us all equally.

Perhaps the painful medicine of economic reality must be administered for the people in this country to understand that such a system as we have today is not only destructive but immoral and must be replaced. At the end of the day the truth always remains, and what must happen always will. Nature bestows on us its lessons, and we avoid those that history has taught again and again at our own peril.

Though I hope with all of my heart that we can avoid economic calamity, save for a swift and truly radical turn in public opinion it appears to be an inevitability with the question when, not if. Let no one say that proponents of economic liberty did not stand athwart history, yelling stop!

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