Inflation Fears Pummel Cocaine Markets

The DEA assumes that if the street price of coke is rising, it is an indication that their interdiction efforts are successful. Well, the price is rising, but might one make another conclusion?

And it says it has spied one: The cost of pure coke rose 44 percent in the United States between January and September 2007. The dea credits its own efforts, of course, along with increased Mexican and Colombian cooperation, for the downturn in supply it says caused the price hike.

But the agency omits an important factor: the plummeting value of the dollar, especially as compared to the soaring euro. Even as the dea has made it more bothersome to bring coke into the United States, the sliding dollar has made importing it less profitable. Both the UN and dea note that a kilo of coke brings in two times as much in Europe as it does in America.

As with any commodity, producers look to maximize earnings by selling in markets with the strongest currencies. But unlike oil, for instance, the value of which is measured in dollars, the cocaine market is more fluid. “The euro has become the preferred currency for drug traffickers,” declared then-dea administrator Karen Tandy at an anti-drug conference last May. “We’re seeing a glut of euro notes throughout South America,” she said, adding that “9 of 10 travelers who carried the $1.7 billion euros that came into the United States during 2005 did not come from Europe…They came from Latin America.”

When many think of “drug dealers” and “drug traffickers”, the thought springs to people with no other options, who have no choice but to turn to illegal enterprises to survive. In reality, we’re talking about savvy, enterprising businessmen, who simple operate outside the established legal framework of industries. They deal with competition, “regulation”, supply chain management, and all the other minutiae of running a successful business and providing value to a customer. They just have a much higher risk tolerance than your average dot-commer (which is then rewarded by very high returns on investment).

They also– because they operate outside the legal framwork– have the ability to be much more agile than many traditional businesses. They don’t have to worry about a government invalidating their business license, or a trading partner closing their borders: they operate past closed borders to begin with. That agility makes it a fascinating market to study, and if they’re dropping the dollar in favor of the euro on a widespread level, what exactly does that say to us about the future of the dollar? If it’s not trustworthy to drug dealers, exactly why should I trust it?

And what exactly does it say about oil prices, a market which is currently captive to trading in dollar terms, that oil is rising in price far more than a typical supply-and-demand curve might justify? Might there be some inflation-related price pressures here?

The Euro: not just for supermodels anymore.

Hat Tip: Radley Balko

  • UCrawford

    Killer headline, Brad. The article was good as well, but I thought the headline deserved an extra kudo…it’s like something you’d read in The Onion :)