3 ms·

They can't, but they want to play that that's how the economy works. That you can place an artificial value on your currency and everyone has to obey. So, you g

by rafaelm 10y ago

They can't, but they want to play that that's how the economy works. That you can place an artificial value on your currency and everyone has to obey. So, you get a disastrous economy like the one we have.

ch4s3 10y ago
>So, you get a disastrous economy like the one we have. Care to elaborate?
- rafaelm 10y ago
  Well, the explanation is waaay to long, but basically when you have a government mandated exchange rate at Bs.10/$ (that can only be accessed by corrupt military and government officials) and a black market rate that has reached 500 times the official rate, you get massive corruption. You sell $5000 at the black market rate of Bs.2000 per dollar, buy $1mm at the official rate of Bs.10. Repeat ad finitum,until you drain the country's reserves. But no worries, we still produce oil and it's the solution to all our problems! Then, the oil price drops in an economy that has no industries (because it's so cheap to import everything at the official rate, who would want to risk producing anything??) and does not produce anything other than oil. So the govt runs out of money to import food, toilet paper,etc. So people go hungry, you get the highest inflation in the world,etc. Add to that, a "socialist" president that in order to fight for the poor, confiscates the little industries, farms, etc we had. No one in their right mind wants to bring a cent to invest here.
- jimmywanger 10y ago
  Also price controls. If you work for government, let's say your minimum wage is 1000 bolivars a week. (Just a nice round number). The official exchange rate means you're earning 100 bucks a week, unofficially you're earning about 10 cents. Government caps bread prices at 10 bolivars per loaf, to make sure capitalists aren't gouging people. Oddly enough, people stop baking bread, as it costs them more money to bake the bread than the revenue they make when they sell it. Extend that to almost every other necessity of life that has been price controlled, and you can see why there are massive shortages. EDIT: This works to some extent in a closed economy, with no imports and a surveillance state. Once you start relying on imported goods to produce, you're in trouble. Your foreign suppliers want hard currency and will laugh in your face when you tell them what you think the exchange rate is.
- ChuckMcM 10y ago
  The two sibling comments mention the effects, black markets (trading outside the rules) and production problems. But they don't mention the 'why'. People who haven't taken some time to understand microeconomics will look at a fiat currency and say "Gee, if I can say this is worth what ever I want, I'll say its worth 10 units", and since they are just paper and ink, if I need a 10 million units to buy something, I'll just print a million of these notes out." And when you do that you get any number of examples of economies that got trounced. The reason is that while there isn't any restriction on naming something, if it tender for trading goods and services it must have two properties, first it is has limited supply (for reasons that get explained in macro economics) and it has to be hard to duplicate (which is needed to keep the supply in check). So consider the farmer, the butcher, and the feed store owner. The farmer has to buy feed for his stock, he gives units to the feed store owner in exchange for feedstock. The butcher needs animals to butcher for selling to people who are eating them, so he gives units to the farmer for his stock. The feed store owner is feeding his family so he gives units to the butcher to buy meat to put on the table. The units (currency) are all traveling in a circle, farmer -> feed store owner -> butcher -> farmer -> feed store owner -> butcher -> farmer ... they don't "mean" anything they are just markers being traded through the economy as it operates. You tell the butcher what they have to charge, or limit the number of units a farmer can ask for his stock, and then the market can't adjust to the changes in expense. It breaks down.
  - jimmywanger 10y ago
    > The units (currency) are all traveling in a circle, farmer -> feed store owner -> butcher -> farmer -> feed store owner -> butcher -> farmer Note that price controls work iff you can dictate prices for each transaction - the price for meat and feed. Actually, in this case the feed store owner muddies the waters, as he is not a direct source of production. If you just think of a cow farmer selling cows to a farmer in exchange for grain, and the prices for the cows to grain is fixed by the state, everything works for a while. Until the farmer realizes that he needs fertilizer for his fields to produce grain. He goes to the fertilizer producer, who is NOT under the state, and attempts to buy the fertilizer for the state-set price. That price is either going to be too high, in which case the fertilizer producer sells the farmer all he needs and more, or the price is going to be too low, in which case the farmer gets none. By "too high" and "too low" I mean the price of fertilizer set by the market, the price where you can both buy and sell fertilizer.

by rafaelm 10y ago

ch4s3 10y ago

>So, you get a disastrous economy like the one we have. Care to elaborate?

rafaelm 10y ago
Well, the explanation is waaay to long, but basically when you have a government mandated exchange rate at Bs.10/$ (that can only be accessed by corrupt military and government officials) and a black market rate that has reached 500 times the official rate, you get massive corruption. You sell $5000 at the black market rate of Bs.2000 per dollar, buy $1mm at the official rate of Bs.10. Repeat ad finitum,until you drain the country's reserves. But no worries, we still produce oil and it's the solution to all our problems! Then, the oil price drops in an economy that has no industries (because it's so cheap to import everything at the official rate, who would want to risk producing anything??) and does not produce anything other than oil. So the govt runs out of money to import food, toilet paper,etc. So people go hungry, you get the highest inflation in the world,etc. Add to that, a "socialist" president that in order to fight for the poor, confiscates the little industries, farms, etc we had. No one in their right mind wants to bring a cent to invest here.
jimmywanger 10y ago
Also price controls. If you work for government, let's say your minimum wage is 1000 bolivars a week. (Just a nice round number). The official exchange rate means you're earning 100 bucks a week, unofficially you're earning about 10 cents. Government caps bread prices at 10 bolivars per loaf, to make sure capitalists aren't gouging people. Oddly enough, people stop baking bread, as it costs them more money to bake the bread than the revenue they make when they sell it. Extend that to almost every other necessity of life that has been price controlled, and you can see why there are massive shortages. EDIT: This works to some extent in a closed economy, with no imports and a surveillance state. Once you start relying on imported goods to produce, you're in trouble. Your foreign suppliers want hard currency and will laugh in your face when you tell them what you think the exchange rate is.
ChuckMcM 10y ago
The two sibling comments mention the effects, black markets (trading outside the rules) and production problems. But they don't mention the 'why'. People who haven't taken some time to understand microeconomics will look at a fiat currency and say "Gee, if I can say this is worth what ever I want, I'll say its worth 10 units", and since they are just paper and ink, if I need a 10 million units to buy something, I'll just print a million of these notes out." And when you do that you get any number of examples of economies that got trounced. The reason is that while there isn't any restriction on naming something, if it tender for trading goods and services it must have two properties, first it is has limited supply (for reasons that get explained in macro economics) and it has to be hard to duplicate (which is needed to keep the supply in check). So consider the farmer, the butcher, and the feed store owner. The farmer has to buy feed for his stock, he gives units to the feed store owner in exchange for feedstock. The butcher needs animals to butcher for selling to people who are eating them, so he gives units to the farmer for his stock. The feed store owner is feeding his family so he gives units to the butcher to buy meat to put on the table. The units (currency) are all traveling in a circle, farmer -> feed store owner -> butcher -> farmer -> feed store owner -> butcher -> farmer ... they don't "mean" anything they are just markers being traded through the economy as it operates. You tell the butcher what they have to charge, or limit the number of units a farmer can ask for his stock, and then the market can't adjust to the changes in expense. It breaks down.
- jimmywanger 10y ago
  > The units (currency) are all traveling in a circle, farmer -> feed store owner -> butcher -> farmer -> feed store owner -> butcher -> farmer Note that price controls work iff you can dictate prices for each transaction - the price for meat and feed. Actually, in this case the feed store owner muddies the waters, as he is not a direct source of production. If you just think of a cow farmer selling cows to a farmer in exchange for grain, and the prices for the cows to grain is fixed by the state, everything works for a while. Until the farmer realizes that he needs fertilizer for his fields to produce grain. He goes to the fertilizer producer, who is NOT under the state, and attempts to buy the fertilizer for the state-set price. That price is either going to be too high, in which case the fertilizer producer sells the farmer all he needs and more, or the price is going to be too low, in which case the farmer gets none. By "too high" and "too low" I mean the price of fertilizer set by the market, the price where you can both buy and sell fertilizer.