Currency Devalutions Are a Warning to the United States

Socialism: The huge currency devaluations that hit Venezuela and Argentina last week could be seen coming a mile away. This is a warning to the U.S. about big-government spending policies financed by printing money.

The markets have given a resounding vote of no confidence to many emerging-market currencies, triggering sell-offs as far flung as Turkey, Russia and South Africa.

But nowhere were the losses as catastrophic as those in two socialist Latin American countries that have thumbed their noses at fiscal discipline, ruthlessly used printed cash to expand their states and treated their citizens as cash cows, gleefully chasing out thousands of the most productive.

Venezuela and Argentina were the driest tinder in the box for the latest conflagration. It was no surprise.

Venezuela's bolivar currency effectively lost half its value when President Nicolas Maduro announced that airline tickets would no longer be sold at the official 6.3 rate to the dollar, but rather at 11.36.

Meanwhile, Argentina's peso tumbled 18% in one week to 7.88 to the dollar, its biggest fall since the great default and devaluation of 2001-02.

Both governments attempted to prevent this outcome by shackling their currencies with capital controls, but they prevented nothing because the money's not there.

With foreign reserves down to $20 billion in Venezuela's case and $29.5 billion in Argentina's, there is too little money left to defend the currency and pay the debts.

Based on swap rates, the market forecasts a 79% chance of default by Argentina in the next five years. And this won't be the end of it. All forecasts point to worse to come.

Yes, everything seemed fine for years, despite Venezuela's 30% rise in M2 money printing since 2007 or Argentina's sixfold increase in M2 money since 2008.

That's like falling out of an airplane and saying, "So far, so good." Everything's fine until the great collision with reality. Because, to paraphrase economist Herbert Stein, anything that can't go on won't.

Sure, governments will blame speculators, while others, like economist Joe Stiglitz, will call currency devaluations "restoratives" for balance of payments crises.

But the reality is, they are terrible events that destroy a nation's savings, hitting small savers who cannot move money abroad the hardest.

That's the money that becomes a nation's seed capital for new enterprises and future economic growth.

And they inevitably lead to inflation. For 2012, Venezuela's inflation surged to 56.1%, its central bank said. In Argentina, the rate was 28%, according to a watchdog.

These man-made disasters are due to governments spending more than they have to buy votes. In Argentina, spending rose 50% in the past decade, and in Venezuela it surged 60% in just the past year.

The numbers are so hard, and crisp and predictable, it's astonishing anyone could be surprised by them.

And that's what brings to mind the U.S. and its money printing - M2 money supply is up 34% since President Obama took office - to finance its multi-trillion-dollar expansion of government.

Who's minding the store?