Pencils Palace
Nobody wants dollars?

Related Links
Discussion Boards

By captainccs
September 12, 2007

Posts selected for this feature rarely stand alone. They are usually a part of an ongoing thread, and are out of context when presented here. The material should be read in that light. How are these posts selected? Click here to find out and nominate a post yourself!

When you have free exchange rates nobody wants dollars because you can get all the dollars you want. Institute exchange controls and you create a black market as sure as night follows day. During my lifetime we have had exchange controls three times in Venezuela so I have some personal experience I can bring to this subject. We currently have exchange controls and a black market which is illegal but open and thriving with black market rates publicly quoted.

                  Buy        Sell
Official        2,144.60   2,150.00
Black market    4,850.00   4,920.00

Upper left hand corner:

Our black market dollar exchange rate is calculated quite legally. Here is how. Our local telco CANTV is publicly traded on the Caracas stock market and the corresponding ADRs are traded on the NYSE under the ticker symbol VNT

It's simple arithmetic to figure out the black market exchange rate. The black market does the country no good but lots of people benefit handsomely from it.

But for America the important lesson is that the foreign black markets in US dollars show that the US dollar is very much appreciated when it cannot be freely purchased. But why hoard things that can be bought freely, daily, in the open market?

Then, of course, there is tax evasion. Suppose I can get paid in USD and that I can deposit these dollars in the USA or elsewhere outside my own country. There is no way for the local authority to track those funds so getting paid in US dollars can be attractive in certain circumstances.

But this issue of country borders is every day a bigger fiction. Take my own case. I live in Venezuela (I'm a Venezuelan citizen). I have clients all over the world for whom I do computer work (web applications). There is no physical product involved, just some code that is delivered by ftp to their server. I use an Internet payment processor to collect my fees or I ask the client to wire transfer to my account. The money exchange never touches Venezuela, it goes from my client's country to the country where my account exists. I have hardly used any local resources beside my ISP so there is no "local content" except for my intellectual property which travels with me wherever I go and which will disappear the day I die. The only other major semi-direct input is my computer which has a cost similar to the cost of the Internet connection.

I have to pay my local bills in local currency and that means that I have to sell dollars to buy the local currency. There is no dearth of buyers, people who need to import goods that don't have the official blessing of the currency exchange authorities. As you can see, the willingness or not of accepting US dollars has very little to do with the American economy and everything to do with local restrictive trade and currency policies.

Denny Schlesinger