The level of credibility this currency has depends exclusively on the government's ability too hold the peg. In other words, the country has to generate enough export revenue to earn enough Dollars or other hard currency in order to maintain the convertibility, i.e. maintain the peg rate against the US Dollar.
When there is a black market, it tells you that people are scrambling to convert Bolivars into Dollars while the converting is good and they're prepared to pay a premium for it because they think the government in power wont be able to maintain a Dollar peg for much longer.
This has happened in virtually every "developing" country south of the hemisphere, meaning Africa, South America and Asia.
In Venezuela, this was the natural result of socialist mismanagement of the economy. Why? Because the first thing that socialist governments do -- which is what Chavez did -- is they nationalize foreign assets. So when you nationalize foreign assets in your own country, there isn't going to be any more foreign investment.
These countries always try to negotiate first under the threat of nationalization but that never works because private business and industry whose assets are going to be nationalized know that it really doesn't affect them that much because the country still has to export whatever those assets are producing.
In other words, just because the assets are nationalized doesn't mean that the companies that formerly owned those assets are completely out of the picture. The country that did the nationalizing doesnâ€™t have the infrastructure or expertise to run the assets that it nationalized. Then they have to keep the corporate managers and workers around because theyâ€™re the only ones that know how to maintain the asset.
The corporation is still earning the same amount of money that they earned before. It is Exxon and Chevron who are most affected by this, but they still have a contract with the Venezuelan government to run the facilities because the Venezuelan government canâ€™t run the facilities themselves. The corporations don't want to lose their investment because they know that the likelihood is that eventually -- since it has happened in every case, except for Cuba -- the assets are going to be returned to them anyway when there is a change in government.
With few exceptions that has happened in every country that has brought in the socialist government which has nationalized assets. When the socialist government is finally thrown out of power because the country's broke and the conservatives are put back into power, they return the assets to their rightful owners because they know it's the only way they can bring in foreign investment back into the country. They have to make the country a credible place to do business in again. This is the inherent problem of putting the peasants in charge.
So is currency devaluation going global?
For the rest of this Exclusive Analysis by Independent Political/ Economic Analyst Al Martin, click here -- Al Martin Raw.
* AL MARTIN, author of "The Conspirators: Secrets of an Iran Contra Insider," is an Independent Political-Economic Analyst with 25 years of experience as a trader on NYMEX, CME, CBOT and CFTC. He is also currently trading the commodity futures market day and night and has a teleconferencing service to facilitate transactions in the markets. This is a service for independent market-experienced traders.
For more details on commodity futures trading recommendations and more FREE sample columns, take a look at Al Martin's website "Insider Intelligence" Insider Intelligence for weekly exclusive commodity futures trading recommendations.
Also a Kindle eBook version of "The Conspirators: Secrets of an Iran Contra Insider" by Al Martin is coming soon. And a Kindle eBook version of "One Nation under Fraud: The Collected Writings of Al Martin," a collection of Al Martin columns published on Al Martin Raw.com since 2000, is also in the works. Stay tuned...