January 13, 2010 Reading Time: < 1 minute

In something of a reversal of the usual government policies to keep prices high, the government of Venezuela is going to great lengths to keep prices low, even in the face of inflation. According to CNN,

The Venezuelan bolivar currency, which had been fixed at 2.15 to the U.S. dollar since 2005, was devalued to 4.3 to the dollar. For food and medicine, Chavez announced a second fixed exchange rate for these “necessity” goods at 2.6 bolivares to the dollar.

There are many questions that can be raised about such a decision, but the foremost will be whether or not these businesses can even survive such a policy. As a currency falls in value, the natural reaction is for prices to rise. This reaction is not difficult to understand. If a dollar is worth less now than yesterday, it takes more dollars to buy something today than it did yesterday. If a business is forced to keep its price at yesterday’s level, then it is selling it’s goods below their value. It will cost more to replenish the goods than can be made selling them. This formula necessarily leads to bankruptcy.

Yet the Venezuelan military is patrolling the streets to enforce Chavez’s policy of low prices for necessities. Should any business selling such goods try to make a profit to stay in business, the government becomes the new owner. It’s a lose-lose situation for businesses and consumers alike. The only real beneficiary here is Chavez, as he gets to spend seemingly without incurring the costs. But this plan will inevitibly lead to a downward spiral that makes everyone in Venezuela much worse off.

Tom Duncan
Sound Money Fellow, Atlas Economic Research Foundation

Tom Duncan

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