Will The Next Crisis Have Its Origin In Belarus?

Big trouble is brewing in little Belarus as the following articles demonstrate:

Belarus central bank halts cash forex sales

MINSK, March 22 (Reuters) - Belarus's central bank has halted foreign currency sales to local banks in a bid to save dwindling reserves, the bank said on Tuesday.

The former Soviet republic is running out of foreign currency reserves due to a large trade deficit, earlier overspending by the government and high demand for cash dollars and euros among the population. [ID:nLDE72E0IA]

The central bank this month halted most foreign currency sales to banks by requiring them to be booked 30 days in advance. It did, however, continue sales of foreign currency in cash for foreign exchange points.

But in a letter to local banks seen by Reuters on Tuesday it said an earlier document allowing for cash foreign currency sales was now cancelled. The central bank later confirmed the letter was valid.

"Banks now have to rely on their own long positions in foreign currency," said a Belarussian banker, speaking on the condition of anonymity. "(But) the reality is that banks have no long positions in foreign currency."

The central bank's foreign currency reserves shrank 20 percent in the first two months of this year to $4 billion and now cover just a few weeks of imports.

In Belarus, currency crisis pushes economy from troubled to dire

April 9, 2011

Lukashenko campaigned in the fall on the notion that Belarus has a model economy. To prove it, he ordered that pay for workers in the state sector be increased by up to 50 percent. That turned out to be a key factor in launching the crisis.

It was confirmation that the government had abandoned its pledges of reform, made when it got a loan from the International Monetary Fund in early 2009, and Belarusans understood that the additional rubles they were getting were backed by nothing, said Stanislav Bogdankevich, former head of the national bank.

So they went on a buying spree — of dollars, euros, cars, gold, sugar. They emptied their bank accounts and bought dollars, until, finally, the government realized in March that the country was running out of hard currency and began an array of restrictions, all of which caused further disruptions. Ratings agencies then downgraded Belarus’s debt rating and that of six commercial banks.

The national bank was forced to act to protect reserves, said Yury Alymov, the acting chairman. Now it promises to make no further changes in currency market regulations. The government has ruled out a devaluation of the ruble.

As a result, it’s almost impossible to get any but the smallest amounts of dollars or euros, except on a black market where the exchange rates are 20 to 100 percent higher than the official rate.

Hat tip to Bill for this one:

Belarus central bank halts sales of gold for roubles

MINSK, April 15 (Reuters) - Belarus' central bank has stopped selling gold to local retail customers for Belarussian roubles BYR=, it said on Friday, after demand for precious metals soared due to expectations of a currency devaluation.

The bank did not explain its decision.

Belarus is in talks with Russia on a $3 billion bailout package that Minsk hopes will help it avoid a painful devaluation of the rouble and offset the large current account deficit.

Belarussians bought 470 kilograms of gold from the central bank last month, up from 209 kilograms in January and February together, as they sought to protect their savings.

Analysts say that Belarus will have to eventually devalue the rouble by about 20-30 percent even if it receives aid from Moscow.

As we examined in the previous post, gold is a store of value.  Politically controlled fiat currencies are not stores of value but rather stores of wrath.  We have seen Venezuela undergo a currency devaluation in the past year as socialist Mr. Chavez continues to develop his worker's paradise.
The darker side of human nature is rarely considered in the discipline of economics, but perhaps it should hold center stage, as history shows that fiat currencies have a very short life expectancy and bring much suffering after promising prosperity.
A short quote from an article by Chris Mack seems appropriate here.

Is This Time Different For The Dollar?

According to a study of 775 fiat currencies by DollarDaze.org, there is no historical precedence for a fiat currency that has succeeded in holding its value. Twenty percent failed through hyperinflation, 21% were destroyed by war, 12% destroyed by independence, 24% were monetarily reformed, and 23% are still in circulation approaching one of the other outcomes.

The average life expectancy for a fiat currency is 27 years, with the shortest life span being one month. Founded in 1694, the British pound Sterling is the oldest fiat currency in existence. At a ripe old age of 317 years it must be considered a highly successful fiat currency. However, success is relative. The British pound was defined as 12 ounces of silver, so it's worth less than 1/200 or 0.5% of its original value. In other words, the most successful long standing currency in existence has lost 99.5% of its value.

Given the undeniable track record of currencies, it is clear that on a long enough timeline the survival rate of all fiat currencies drops to zero. Fiat currency bulls will probably not argue with this fact, but the remaining argument to hold fiat cash is that the decline of fiat currencies is manageable to such an extent that the loss in purchasing power will have a minimal or unnoticeable impact. The purchasing power of the British pound has eroded by a seemingly manageable 3% average annual rate.

The US dollar was taken off of the gold standard in 1971 when it was 1/35th an ounce of gold. At 40 years old, it has already lost 97% of its value. Yet it has lasted longer than the average fiat currency so perhaps its performance should be labeled "better than expected". The US dollar has fallen by an average 9% annually over this 40 year period when measured against gold. As such, investment advisers may want to readjust their inflation expectations when projecting dollar based investments. The S&P 500 appreciated at 7% over the same 40 year period – not even keeping pace with the decline in purchasing power of the dollar.