The Devil's Excrement

I have not been too enthusiastic about blogging this week. Things have gotten so bizarre and depressing that it just seems impossible to even write coherently about what is going on here. But somehow, I feel I am neglecting my self-imposed task of reporting this era in detail. Thus, today I will simply ramble and ramble about the events this week.

When Hugo Chávez was first elected, his presence at summits was quite interesting, he had a star quality about him, and most Latin American leaders seemed to want to meet him, get to know him, take advantage of his popular image to benefit their own popularity by being seen with him. This has changed. Even before his US$ 80 million Airbus had taken off, Chávez was already making waves, by calling Bush’ National Security Adviser Condoleezza Rice “illiterate” after her call for transparent elections in Venezuela. Separately, Chavez charged that the US was simply seeking his overthrow. The truth was, that all of this appeared to be a reaction to the fact that Chavez had been encouraged to believe by his collaborators that there was a possibility that he would meet Bush at the Summit. Just to set the stage, Chavez said right before leaving that that these summits were a waste of time. This is obviously true if you don’t believe you have anything to negotiate, contribute or share with the leaders of the Hemisphere. To top it all off, his interview in local newspaper El Universal, discussed in an earlier post and found here in English, did not help matters, as Chavez disqualified Spain and the US as countries unfriendly to Venezuela, when both are part of the “Group of Friends” involved in looking for a solution to the Venezuelan political crisis, while praising Fidel Castro and attempting to argue he is not really a Dictator.

At the summit, Chavez continued his erratic behavior as he did not attend meetings, even failing to show up at the gala dinner at its conclusion and was definitely beating his own drum. It was not all his fault. In contrast to four or five years ago, none of the leaders of the major Latin American countries wanted to even be seen with him for fears of having his home constituencies associate them with the Venezuelan President. Even Brazilian President Lula, failed to even have his picture taken with Chavez, after they were apparently close right after Lula’s election. The only President willing to meet with Chavez was Mexico’s Vicente Fox, as host of the summit, but Chavez simply failed to show up, meeting instead with Mexican opposition leader Cuauhtémoc Cardenas. 

In his speech at the Summit, Chavez mentioned as one of the social achievements of his administration the example of the fact that the Venezuelan Government provides care for 80% of all AIDS patients in the country. Someone obviously did not give the President all of the information, as it turns out that this care is being provided only after the AIDS association in Venezuela sued the Government to force it to do it. Moreover, the same association is now suing the Government for barring HIV positive kids from Chavez’ Bolivarian schools.

Diplomacy was clearly not Chávez forte at the summit. He said Chilean President Lagos was not saying the whole truth about the Bolivia-Chile difference over the accessibility of the sea to Bolivia. Of course, it as Chavez himself who was ignoring old treaties between Bolivia, Chile and Peru which are being respected by all three countries. The Chileans were diplomatic, answering back that precisely because in Lagos words: the President of Chile tells the truth, this is a serous country, responsible”. All of this forced Vice-President Jose Vicente Rangel (whose wife is from Chile) to say that Venezuela would not break relations with anyone, trying to save the day after Chavez made a snide comment about Chile maybe breaking relations with Venezuela for saying what he was saying.

Chavez also made a somewhat despective remark, mostly ignored by the press abut Peruvian President Toledo, when he quoted Toledo on growth and social programs. It was subtle, but the way Chavez said something like “even Toledo, who is a Doctor in Economics has stated” as if he knew that despite not being educated.

At the end of the summit, Chavez praised Bush for his understanding of the recall against him when compared to his national Security Adviser, curiously, at the same time the Venezuelan Attorney General was doing exactly the opposite , saying that Bush’s statements were out of line and an attempt to get involved in the internal affairs of Venezuela.

But where Chavez truly failed to even come close to the regional leaders was when he was the only one of the 34 Latin American leaders in disagreement with the final declaration of the Summit. The declaration expresses the wishes of the 33 countries that signed it to integrate themselves economically sometime in the future and to work towards this goal. Venezuela was the only country to say they did not want to be part of it. Some analysts have interpreted all this as simply a way of Chávez of beginning to distance himself from the countries which are part of the “Group of Friends” in preparation to not recognizing the signatures for the recall referendum of the recall itself. I am not sure whether this interpretation is right or wrong.

What I do know is that after rebuffing his colleagues Chavez went straight to Cuba, surely to sit down with his Communist alter ego to plan their strategy going forward to preserve Chavez’ power. Curiously, while Hugo Chavez calls for the Central Bank to give him US$ 1 billion in reserves, Cuba has violated its somewhat illegal agreement with Venezuela by which Venezuela provides Cuba with 53,000 barrels of oil a day. Under the agreement, there is a grace period, but Cuba owes Venezuela by now more than US$ 800 million which should have already been paid. As Chavez arrived back in Venezuela, the bizarre got even more bizarre. Despite the efforts of some members of the Chavez administration to make the discussion of the US$ 1 billion disappear to appease international markets, in his State of the Union speech today, Chavez requested that the national assembly approve a “law for the utilization of excess international reserves” clearly reviving an issue which ahs all markets nervous. He added something like “Nobody is going to make believe that growth in macroeconomic numbers, or growth in the economy is good, the only thing that matters is that people are treated well, that is why I have so much respect for Fidel Castro”

As a well know economist I had lunch with told me yesterday: “ With his destruction, Chavez may be making two of my dreams a reality, that the dollar will circulate freely in Venezuela as people completely mistrust the local currency and that PDVSA is privatized as the only way for the country to survive”.

I fear he may be right in the end and the thought is so depressing that I will end my ramblings right here.

I have not been too enthusiastic about blogging this week. Things have gotten so bizarre and depressing that it just seems impossible to even write coherently about what is going on here. But somehow, I feel I am neglecting my self-imposed task of reporting this era in detail. Thus, today I will simply ramble and ramble about the events this week.

When Hugo Chávez was first elected, his presence at summits was quite interesting, he had a star quality about him, and most Latin American leaders seemed to want to meet him, get to know him, take advantage of his popular image to benefit their own popularity by being seen with him. This has changed. Even before his US$ 80 million Airbus had taken off, Chávez was already making waves, by calling Bush’ National Security Adviser Condoleezza Rice “illiterate” after her call for transparent elections in Venezuela. Separately, Chavez charged that the US was simply seeking his overthrow. The truth was, that all of this appeared to be a reaction to the fact that Chavez had been encouraged to believe by his collaborators that there was a possibility that he would meet Bush at the Summit. Just to set the stage, Chavez said right before leaving that that these summits were a waste of time. This is obviously true if you don’t believe you have anything to negotiate, contribute or share with the leaders of the Hemisphere. To top it all off, his interview in local newspaper El Universal, discussed in an earlier post and found here in English, did not help matters, as Chavez disqualified Spain and the US as countries unfriendly to Venezuela, when both are part of the “Group of Friends” involved in looking for a solution to the Venezuelan political crisis, while praising Fidel Castro and attempting to argue he is not really a Dictator.

At the summit, Chavez continued his erratic behavior as he did not attend meetings, even failing to show up at the gala dinner at its conclusion and was definitely beating his own drum. It was not all his fault. In contrast to four or five years ago, none of the leaders of the major Latin American countries wanted to even be seen with him for fears of having his home constituencies associate them with the Venezuelan President. Even Brazilian President Lula, failed to even have his picture taken with Chavez, after they were apparently close right after Lula’s election. The only President willing to meet with Chavez was Mexico’s Vicente Fox, as host of the summit, but Chavez simply failed to show up, meeting instead with Mexican opposition leader Cuauhtémoc Cardenas. 

In his speech at the Summit, Chavez mentioned as one of the social achievements of his administration the example of the fact that the Venezuelan Government provides care for 80% of all AIDS patients in the country. Someone obviously did not give the President all of the information, as it turns out that this care is being provided only after the AIDS association in Venezuela sued the Government to force it to do it. Moreover, the same association is now suing the Government for barring HIV positive kids from Chavez’ Bolivarian schools.

Diplomacy was clearly not Chávez forte at the summit. He said Chilean President Lagos was not saying the whole truth about the Bolivia-Chile difference over the accessibility of the sea to Bolivia. Of course, it as Chavez himself who was ignoring old treaties between Bolivia, Chile and Peru which are being respected by all three countries. The Chileans were diplomatic, answering back that precisely because in Lagos words: the President of Chile tells the truth, this is a serous country, responsible”. All of this forced Vice-President Jose Vicente Rangel (whose wife is from Chile) to say that Venezuela would not break relations with anyone, trying to save the day after Chavez made a snide comment about Chile maybe breaking relations with Venezuela for saying what he was saying.

Chavez also made a somewhat despective remark, mostly ignored by the press abut Peruvian President Toledo, when he quoted Toledo on growth and social programs. It was subtle, but the way Chavez said something like “even Toledo, who is a Doctor in Economics has stated” as if he knew that despite not being educated.

At the end of the summit, Chavez praised Bush for his understanding of the recall against him when compared to his national Security Adviser, curiously, at the same time the Venezuelan Attorney General was doing exactly the opposite , saying that Bush’s statements were out of line and an attempt to get involved in the internal affairs of Venezuela.

But where Chavez truly failed to even come close to the regional leaders was when he was the only one of the 34 Latin American leaders in disagreement with the final declaration of the Summit. The declaration expresses the wishes of the 33 countries that signed it to integrate themselves economically sometime in the future and to work towards this goal. Venezuela was the only country to say they did not want to be part of it. Some analysts have interpreted all this as simply a way of Chávez of beginning to distance himself from the countries which are part of the “Group of Friends” in preparation to not recognizing the signatures for the recall referendum of the recall itself. I am not sure whether this interpretation is right or wrong.

What I do know is that after rebuffing his colleagues Chavez went straight to Cuba, surely to sit down with his Communist alter ego to plan their strategy going forward to preserve Chavez’ power. Curiously, while Hugo Chavez calls for the Central Bank to give him US$ 1 billion in reserves, Cuba has violated its somewhat illegal agreement with Venezuela by which Venezuela provides Cuba with 53,000 barrels of oil a day. Under the agreement, there is a grace period, but Cuba owes Venezuela by now more than US$ 800 million which should have already been paid. As Chavez arrived back in Venezuela, the bizarre got even more bizarre. Despite the efforts of some members of the Chavez administration to make the discussion of the US$ 1 billion disappear to appease international markets, in his State of the Union speech today, Chavez requested that the national assembly approve a “law for the utilization of excess international reserves” clearly reviving an issue which ahs all markets nervous. He added something like “Nobody is going to make believe that growth in macroeconomic numbers, or growth in the economy is good, the only thing that matters is that people are treated well, that is why I have so much respect for Fidel Castro”

As a well know economist I had lunch with told me yesterday: “ With his destruction, Chavez may be making two of my dreams a reality, that the dollar will circulate freely in Venezuela as people completely mistrust the local currency and that PDVSA is privatized as the only way for the country to survive”.

I fear he may be right in the end and the thought is so depressing that I will end my ramblings right here.

A friend of mine, Jaime Requena, the same one that wrote the Requena Files on the left of this blog in the Venezuelan links, sent this week to me a copy of his book (in Spanish) “Half a century of Science and Technology in Venezuela” which I am still reading. In it, in Chapter 3, there is an article published in 1950 by Venezuelan scientist Humberto Fernandez Moran. I had never seen this article entitled “General ideas about the foundation of a Venezuelan Institute for Brain Research”, published in Acta Cientifica Venezolana, Vol. 1, Number 3 (1950)page 85-87. Fernandez Moran poses a visionary proposal for a research institute which became a realty under his leadership and is now known as IVIC, Instituto Venezolano de Investigaciones Cientificas. This represented at the time a huge jump in organized scientific activity in Venezuela as well as in the financing of scientific research in the country which still plays a role in Venezuelan science. But if his vision of the importance of organized science and its role was impressive, I was even more impressed about his scientific vision:

“In the last decades a new discipline has been created that encompasses all of the processes of communications, the control and integrated dominance of machines and biological systems, looking for common elements: “Cybernetics (Wiener, Rosenblueth) and is destined to play a role comparable to atomic energy, because it provides the basis for the creation of huge(!!)  calculating machines and to the legion of hardware that replaces men and even surpasses him in the execution of superhuman tasks. Each one of these computing machines executes in a determined time certain functions equivalent to the effort of a few thousand human brains. They are only prototypes, the machines of the future that will translate millions of abstract operations in actions corresponding to inconceivable complexity, like it would be for example the automatic control of the whole communications system of a country or the management of an industry. But despite this unilateral superiority these machines can only be considered as primitive models of the brain, lacking intuition, the capacity for creative change and the characteristic autonomy of this organ. One can foresee however, the possibility of associating in complementary fashion the two systems, reaching in that way an entity which would be incomparably superior…..It is impossible to predict in all of its magnitude what this link between these two complementary disciplines will represent for our civilization in the future”

Blows my mind how visionary this was….the work is still going on 53 years later!!!

A friend of mine, Jaime Requena, the same one that wrote the Requena Files on the left of this blog in the Venezuelan links, sent this week to me a copy of his book (in Spanish) “Half a century of Science and Technology in Venezuela” which I am still reading. In it, in Chapter 3, there is an article published in 1950 by Venezuelan scientist Humberto Fernandez Moran. I had never seen this article entitled “General ideas about the foundation of a Venezuelan Institute for Brain Research”, published in Acta Cientifica Venezolana, Vol. 1, Number 3 (1950)page 85-87. Fernandez Moran poses a visionary proposal for a research institute which became a realty under his leadership and is now known as IVIC, Instituto Venezolano de Investigaciones Cientificas. This represented at the time a huge jump in organized scientific activity in Venezuela as well as in the financing of scientific research in the country which still plays a role in Venezuelan science. But if his vision of the importance of organized science and its role was impressive, I was even more impressed about his scientific vision:

“In the last decades a new discipline has been created that encompasses all of the processes of communications, the control and integrated dominance of machines and biological systems, looking for common elements: “Cybernetics (Wiener, Rosenblueth) and is destined to play a role comparable to atomic energy, because it provides the basis for the creation of huge(!!)  calculating machines and to the legion of hardware that replaces men and even surpasses him in the execution of superhuman tasks. Each one of these computing machines executes in a determined time certain functions equivalent to the effort of a few thousand human brains. They are only prototypes, the machines of the future that will translate millions of abstract operations in actions corresponding to inconceivable complexity, like it would be for example the automatic control of the whole communications system of a country or the management of an industry. But despite this unilateral superiority these machines can only be considered as primitive models of the brain, lacking intuition, the capacity for creative change and the characteristic autonomy of this organ. One can foresee however, the possibility of associating in complementary fashion the two systems, reaching in that way an entity which would be incomparably superior…..It is impossible to predict in all of its magnitude what this link between these two complementary disciplines will represent for our civilization in the future”

Blows my mind how visionary this was….the work is still going on 53 years later!!!

In a comment today I mentioned a graph with both the exchange rate and the so called “implicit” exchange rate on it and said that it was available to anyone that wanted it. I sent it to a few people and they asked lots of questions, thus I decided to post it here and explain it as best as I can.

The graph is shown above. The greenish line is the actual exchange rate from January 1997 until sometime after exchange controls were imposed a year ago. The blue line is what results from dividing the monetary liquidity as defined by the Venezuelan Central Bank (coinage, bills, and deposits both retail and wholesale, close to M1 + M2 in the US) by the “total” international reserves. Thus in some sense you can think of this as the “implicit” exchange rate in the sense that if every Bolivar in public hands were to be converted into US dollars, that would be the price at which such a conversion would take place. Thus, if the greenish line is above the blue line it means that all of the bolivars in circulation, deposits etcetera are 100% backed by the international reserves. If the greenish line is below, then there is no full backing and part of the money in circulation in some form is based on trust. The explanation gets complicated here, because there is also the FIEM, the “Fondo para la Estabilizacion Macroenomica”. This fund, created in 1997 was a savings plan of oil income held at the Central Bank. Some people began talking about “total” reserves which included international reserves plus the money held in the FIEM. The blue line is actually adding both of them. The problem with that nomenclature is that when money is taken out of the FIEM it does go into the international reserves, but it also generates the bolivars, while when it is still in the FIEM has not generated any bolivars. Thus, there is in addition a pink line, which is subtracting the FIEM from the “total reserves”, to reflect the fact that the FIEM has not generated any of the liquidity available.

Now, since 1997, one can see a period in which there was full backing of the bolivar by the international reserves, i.e. there were more dollars in the international reserves than money in circulation or deposits in local currency, at the real exchange rate. (There was less trust in the currency). Then, beginning in 1998 the implicit rate went up as liquidity went up, but reserves did not. Thus the backing was only partial, from 75% to 100%.  (This means there was more trust, due mostly to the savings in the FIEM). For a while 2000-2002 the parity was actually quite good, there were roughly equal number of dollars than the bolivars in circulation at the real exchange rate. Suddenly in 2002, you can see that the pink line goes up, while the other one stayed below until February of 2002. Essentially, liquidity was increasing, pressuring the currency, but the Government kept the exchange rate fairly constant within the “band system” until it was forced to liberate the exchange rate in February 2002. Since that time, most of the time the implicit rate (pink line) has stayed below the real exchange rate (blue line) as the currency went from Bs. 600 to the official rate (today) of Bs. 1600 or the parallel rate of Bs. 3000. This means that most of this time there has been full backing of the currency (There is less trust).

One very interesting aspect of this plot is that it may tell us something about the sudden creation of bolivars, as Chavez is requesting now from the Central Bank. The blue line and the pink line got closer because the Government was taking money out of the FIEM. This means in practice moving dollars into the international reserves AND creating the corresponding bolivars at the same time. (The money from the FIEM belonged to a) the Central Government, b) PDVSA and c) the regional Governments). As money was taken out rapidly from the FIEM, the bolivars were given to their owners that used it, increasing liquidity which went to buy dollars, pressuring the exchange rate. In December 2001 the FIEM had US$ 7.1 billion, which went down to US$ 3.3 billion in December 2002 and is now down to US$700 million. Thus, only in 2002, US$ 3.8 billion was converted into bolivars and it definitely had a strong impact on the exchange rate. To me this shows the effect of those “new” bolivars in the system. Of course, inflation which had been held down near 10% began moving up at the same time, exceeding 30% in 2002. Sorry for the long explanation, hope it is clear.

Interview with Chavez in today’s El Universal. Quite a few veiled threats in there:

On the CNE: The referee (the CNE) has to be very careful, because if the referee loses the respect of the players, and specially the spectators, maybe the game will not end. I trust the good judgment of the referee, but if there is strong proof, visible, the truth will be there.

On violence: If they insist in the path of violence, it could be their end, physical or political…

On the private sector: If we start again falling in a situation where the owners shut down companies, I have the decree ready to take them over. If any TV station encourages rebellion, I take it over too. ……I have maintained myself within the Constitution…but I am not willing to continue doing it.

Finally, on Sunday, Chavez mentioned again his request for the one billion dollars from the international reserves:

“We are looking for references in other countries, doing a comparative study, there are laws that are established so that when a country has excess reserves they can be used (??). We have to open the gates in regulated fashion, directed towards national production” he proposed “an extraordinary fund to promote agricultural development, another one for small businesses, another for tourism, another fro education and health, extraordinary expenses, instead of having those dollars in some bank in North America or Europe” He added: “ That is the basis for the battle. What happens is that we are facing the rules of neoliberalism.” He closed by saying:” The gold bars in the Central Bank are moldy, it is stupid to keep gold bars in cold storeroom, when you could move them and get credit”

Well, up to now I believed he was just picking a political fight to take over the Central Bank, now I am not so sure, he is saying that he wants to borrow money against the reserves, certainly insane, to use the word used by one of the readers of this page in the comments.  

Interview with Chavez in today’s El Universal. Quite a few veiled threats in there:

On the CNE: The referee (the CNE) has to be very careful, because if the referee loses the respect of the players, and specially the spectators, maybe the game will not end. I trust the good judgment of the referee, but if there is strong proof, visible, the truth will be there.

On violence: If they insist in the path of violence, it could be their end, physical or political…

On the private sector: If we start again falling in a situation where the owners shut down companies, I have the decree ready to take them over. If any TV station encourages rebellion, I take it over too. ……I have maintained myself within the Constitution…but I am not willing to continue doing it.

Finally, on Sunday, Chavez mentioned again his request for the one billion dollars from the international reserves:

“We are looking for references in other countries, doing a comparative study, there are laws that are established so that when a country has excess reserves they can be used (??). We have to open the gates in regulated fashion, directed towards national production” he proposed “an extraordinary fund to promote agricultural development, another one for small businesses, another for tourism, another fro education and health, extraordinary expenses, instead of having those dollars in some bank in North America or Europe” He added: “ That is the basis for the battle. What happens is that we are facing the rules of neoliberalism.” He closed by saying:” The gold bars in the Central Bank are moldy, it is stupid to keep gold bars in cold storeroom, when you could move them and get credit”

Well, up to now I believed he was just picking a political fight to take over the Central Bank, now I am not so sure, he is saying that he wants to borrow money against the reserves, certainly insane, to use the word used by one of the readers of this page in the comments.  

According to this report in Cuba, in order to join the “other” revolution, you have to go to the free markets and get foreign currency. Cuban citizens will no longer be allowed to use the Internet using the state phone system which is paid in the local currency, pesos. Instead, they will have to access the Web buying a card which can only be purchased in US dollars. Thus, Cuban citizens will have to find dollars to surf the web. This means that they will have to join those parts of the Cuban economy which pay in US$, if they want to participate in two revolutions at once. Maybe turn a few tricks, participate in the black market or sell illegal goods. Interesting way to promote the market economy.

I found this table in the year end report by the Venezuelan Central Bank. I am not even sure why it is there, it pretends to show that only after 1999 did the index of human development go up, but it was only the overvaluation of the currency that led to the GDP per capita to go up briefly and thus that index, an effect lost once the currency was devalued. Anyway, what I found interesting is that this table quantitatively shows that the forty years of democracy was not the failure that it is made out to be the President (which I knew, but I did not know these “officials numbers”), so that publishing the details all the way back to 1960 was, at least, politically incorrect of the Central bank President (Who was appointed by Chavez):

Year     Life Expectancy           Literacy rate    Percentage in school GDP per capita

                  (years)                          (%)                     (%)                   (US dollars)

1950            55.19                          50.96                    27.59                   2520

1960            58.06                          63.30                    45.26                   3896

1970            63.85                          75.92                    49,87                   4074

1980            67.70                          84.73                    58.23                   5349

1990            71.20                          90.90                    62.31                   5192

2000            73.34                          90.90                    64.12                   3477

I found this table in the year end report by the Venezuelan Central Bank. I am not even sure why it is there, it pretends to show that only after 1999 did the index of human development go up, but it was only the overvaluation of the currency that led to the GDP per capita to go up briefly and thus that index, an effect lost once the currency was devalued. Anyway, what I found interesting is that this table quantitatively shows that the forty years of democracy was not the failure that it is made out to be the President (which I knew, but I did not know these “officials numbers”), so that publishing the details all the way back to 1960 was, at least, politically incorrect of the Central bank President (Who was appointed by Chavez):

Year     Life Expectancy           Literacy rate    Percentage in school GDP per capita

                  (years)                          (%)                     (%)                   (US dollars)

1950            55.19                          50.96                    27.59                   2520

1960            58.06                          63.30                    45.26                   3896

1970            63.85                          75.92                    49,87                   4074

1980            67.70                          84.73                    58.23                   5349

1990            71.20                          90.90                    62.31                   5192

2000            73.34                          90.90                    64.12                   3477