Saturday, February 17, 2007

Bloomberg Printer-Friendly Page

Bloomberg Printer-Friendly Page

Feb. 16 (Bloomberg) -- 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. Flush with oil money and government spending, which jumped about 50 percent last year, economic growth and inflation are both surging.

``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.

`Hello President'

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.''

Unregulated Markets

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.

Socialism is for morons. "for want of an economics class, the country was ruined" I love the people who think Chavez is making us look bad, and that other Latin American countries will embrace socialism. Let them. But this time we shouldn't bail them out when their economy collapses. Why aren't American leftists streaming into Venezuela? If they went total free market libertarian, I'D move! I wish there was a place built to order for Libertarians. The U.S. is the closest we have!

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