Archive for February, 2007

From Diocletianus, to Nixon, to Chavez: A history of failed price controls

February 23, 2007

(In Spanish here)

Most people know little about Roman Emperor Diocles or Diocletianus. While drawing parallels across 1700 years of history is certainly perilous, some of the similarities to our current Autocrat/Dictator are simply uncanny.

Like Chavez, Diocles sought his fortunes in the Army, rising through the ranks and becoming Emperor in 285 A.D. Diocles did well in establishing order within the military, establishing a military despotism, but failed at ordering the economy. He printed money like crazy (sound familiar?) and failed to restore faith in the currency. Then, like so many before and after him, he established price controls, as well as social controls. If you were the son of a farmer, you had to become a farmer, as simple as that. But more importantly, he established some of the strictest price controls by imposing the death penalty on violators.

Diocletianus issued the “Edict on Maximum Prices”, which contained 32 sections and established price limits on over 1,000 products. These included maximum prices on beef, grain, beer, transportation and wages. Despite the harsh penalty, this simply did not work. Merchants simply stopped producing items under control or sold them illegally above the controlled prices. Eventually he had to withdraw the decree as shortages and inflation increased, the opposite effect of what was intended.

Diocletianus story is not the only one; there are dozens of examples of failed price controls no matter how harsh the penalties. From the Code of Hammurabi in Babylon, to Egypt, to the US Civil War, to the French revolution, to World War II, to Nixon, to Venezuela, to Venezuela and now again, to Venezuela, price controls just don’t work. In fact, history shows that they always have the opposite effect to that intended. There isn’t a single case of successful price controls and many books and papers have been written in order to prove it.

Which brings us to Venezuela today. After setting price controls three years ago, printing money like crazy which does not help and then watching inflation rise, as expected, President Hugo Chavez issued a decree last week to attempt to create fear in agricultural producers. While I discussed the decree last week, it is only now, upon my return from vacation that I have had a chance to look at the decree. And it is even worse than I expected.

To begin with, the decree is clearly illegal, given that Article 112 grants Venezuelan extensive economic rights which can not be controlled by the Government. In Spanish:

Artículo 112. Todas las personas pueden dedicarse libremente a la actividad económica de su preferencia, sin más limitaciones que las previstas en esta Constitución y las que establezcan las leyes, por razones de desarrollo humano, seguridad, sanidad, protección del ambiente u otras de interés social. El Estado promoverá la iniciativa privada, garantizando la creación y justa distribución de la riqueza, así como la producción de bienes y servicios que satisfagan las necesidades de la población, la libertad de trabajo, empresa, comercio, industria, sin perjuicio de su facultad para dictar medidas para planificar, racionalizar y regular la economía e impulsar el desarrollo integral del país.

Which translated means:

Aticle 112. All people can dedicate themselves freely to the economic activity of their preference, with no more limitations that those contemplated in this Constitution and those established by laws for reasons of human development, security, health, environmental protection or others of social interest. The state will promote private initiatives, guaranteeing the creation and just distribution of wealth, as well as the production of goods and services that will satisfy the needs of the population, the freedom to work, to form companies, industries, without prejudice to issue measures to plan, rationalize and regulate the economy and promote the integral development of the country.

The decree issued this week, violates both the spirit and the letter of the freedoms and rights guaranteed by this article. While the Government may establish certain limitations, it cannot limit it all, like the decree certainly does or pretends to do. And even worse, it cannot bar anyone from “dedicating themselves freely to their economic activity of their preference”. In fact the decree says that anyone found in violation of the decree will not be able to participate in commerce for ten years. The Constitution certainly does not allow that and if it is ever applied it will violate the Constitutional rights of those punished.

But let’s look at some of the texts of the decree to see how it goes beyond what is legally reasonable in defining the scope of the decree:

Art. 24. Anyone who individually o as a group, carry out acts that block, in direct or indirect manner, the production, manufacturing, import, storage, transportation and commercialization of foodstuffs or products subject to control will be sanctioned with prison of two to six years…

Note how diffuse the definition is. Not only does it allow for you to be punished if you participate directly or indirectly, whatever that may mean, but also the product does not even have to be subject to controls! If it’s food you are handling, directly or indirectly, you can be in for a long prison term and if sentenced, you are barred for ten years from getting involved in commerce.

I wonder if we should have a similar decree for politicians that allow inflation to rise above a certain point, directly or indirectly, due to their negligence, ignorance or incompetence. We may not have sufficient cell space for all of Chavez’ economic Ministers if this were the case (or those before them!). But under the autocrat, penalties are a one-way street. Everything they do seems to be always fine and dandy, there is no self-criticism or use of knowledge in establishing policy.

In Article 4, the Government gives itself the ability to declare of public use or social interest the activities of production, manufacturing, import, storage, transport, distribution and commerce of foodstuffs or items under price controls. This simply allows the Government to expropriate or intervene any part of what probably represents a huge fraction of the Venezuelan economy, given the vague, ample and discretionary definition of what it covers. It’s actually hard to think of an area not covered, which is of importance. Is beer food? Gas prices are under control. Some car prices are controlled. Food is food at all levels for the whole chain. Just imagine!

And then it simply get Dictatorial with a capital “D”: The Executive branch, without mediating any formalities ma initiate the expropriation by decree for reasons of security and food sovereignty

In Art. 12. the Government allows itself to “takeover and temporary occupation, confiscation in order to begin selling products again”. While this happens “salaries will continue to be paid”, insuring that you perform a sort of financial hara-kiri or sepuku on yourself.

Of course, never have these guys stopped to think that they are the problem. That much like Diocles, it is their money printing and controls that leads to shortages and inflation. That the more controls that they impose, the more shortages and higher the inflation will be. That fear of confiscation or expropriation will not work, because the fear of death could not stop the same phenomenon in either in Babylon or Rome.

Modern economic history did not begin with Adam Smith, over three thousand years of history have shown that price controls exacerbate the problems and Hugo Chavez’ controls, handled by a corrupt and inefficient bureaucracy are even more likely to fail than in most
of the prior cases in history.

Today is help Bolivia day. Tomorrow?

February 23, 2007

Yesterday it was Argentina, today is Bolivia, tomorrow…the world!!!

Venezuela volvera a subsidiar a Argentina

February 22, 2007
(In English here)

Así pues, presidente Hugo Chávez anunció hoy con gran orgullo que Venezuela comprará de nuevo bonos argentinos para vender a los venezolanos como manera de reducir la liquidez monetaria local. Esta vez será por una suma total de US$ 750 millones. Esta operación es simplemente indefendible, no existe ninguna justificación para que Venezuela actue como puente para Argentina, solo porque ese país dejo de pagar su deuda de forma irresponsable. Éste es simplemente un subsidio para ese país de los venezolanos.

Por otra parte, con excepción de lo político, no hay ventaja alguna para Venezuela o sus ciudadanos haciendo esta operación. De hecho, si la emisión entera del Bono del Sur anunciada por Chávez estuviera compuesta toda por bonos venezolanos , disminuiría los costos para el país en el futuro del servicio de su deuda.

El gobierno podría, por ejemplo, emitir los mismos US$ 750 millones en un nuevo bono venezolano con una cupón más bajo y utilizar los ingresos para recomprar bonos de la república ya emitidos que son más costosos. Pero claramente no tenemos suerte, las metas del autócrata/dictador son más importantes que el futuro de la gente venezolana que regala de nuevo lo que legítimamente les pertenece.

Un país más pobre subsidia así uno más rico, solamente en esta revolución estúpida podía pensarse en esto. El GDP de la Argentina per capita es casi el triple del de Venezuela, tan sencillo como eso.

La parte más ridícula de la emisión es decir que darán prioridad a los “inversionistas pequeños”. No conozco a nadie que estaría interesado en un bono soberano argentino denominado en dólares y en un bono en Bs. (TICC) indexado al US$ que rinde el 5%, que es a parte venezolana de esta emisión. Solamente los bancos pueden estar interesados en este último papel. La mayoría los “inversionistas pequeños” simplemente usan esto como una manera más barata de invertir en billetes verdes, compran el Bono del Sur, venden el bono argentino a cambio de dólares de los E.E.U.U. y venden el TICC con ganancia. Al final compraron dólares a un precio más barato y se llevan el dinero a sus cuentas en el extranjero. Hay también especuladores, compran el bono, venden las partes s, incluyendo los dólares en el mercado paralelo y realizan una buena ganancia.

Si, esto es verdaderamente revolucionario, pero por lo estupido, que desgracia!

Venezuela to subsidize Argentina once again

February 22, 2007

(In Spanish here)

So, today President Hugo Chavez proudly
that once again Venezuela will buy Argentinean bonds to sell to
Venezuelans as a way of reducing local monetary liquidity. This time it will
be to the tune of US$ 750 million.

This operation is simply indefensible,
there is no justification for Venezuela acting as a bridge for Argentina,
just because that country acted irresponsibly when it defaulted in its debt.
This is simply a subisidy for that country b the Venezuelan people.
Moreover, other than political, there is no benefit for Vemezuela or its
citizens by doing this. In fact, if the whole Bono del Sur issue announced
by Chavez of it were to have all Venezuelan components, would decrease costs
for the country in the future in its debt service.

The Government could, for
example, issue the same US$ 750 million as a new Venezuelan bond with lower
coupon and use the proceeds for the sale to buy outstanding bonds of the
Republic which are more expensive. But clearly no such luck, the goals of
the autocrat/dictator are more important than the future of the Venezuelan
people who are once again cheated of what rightfully belongs to them. A
poorer country subsidizing a richer one, only this stupid revolution could
even think of that. Argentina’s GDP per capita is almost triple that of
Venezuela, as simple as that.

The most laughable part of the issue is to say they will give priority to “small investors”. I know nobody who would be interested in an Argentinean US dollar denominated Sovereign bond and a Bs. denominated bond (TICC) indexed to the US$ that yields 5%, which is what the Venezuelan part is all about. Only banks can be interested in the latter. Most “small investors” simply view this as a cheaper way of investing in greenbacks, they buy the Bono del Sur, sell the Argentinean bond in exchange for US dollars and sell the TICC at a profit. In the end they bought dollars at a cheaper rate and take the money to their account abroad. There are also speculators, they buy the bond sell the parts, including the dollars in the parallel market and make a tidy profit.

Yeap, it is all definitely very revolutionary, what a disgrace!

Quote of the day

February 20, 2007

Quote of the day from the newspapers before going to the beach:

“Since 2003 the efforts of the Government have been focused mainly in production plants for milk, sugar, coffee and refrigeration plants for meat and processing ones for fruits and vegetables. It is precisely  these basic items that now present shortages, thus official intervention has not improved the insufficiencies of the economy.”

In fact, shortages follow the efforts of the Governmnet. That is, the top priorities for the Government have shown the most intense shortages: Sugar, milk and meat in that precise order. This is nothing new, it is the history of Venezuela, where sectors where the Government participates are always lacking.

Watch out now electricity and phone service, you can bet the Government will be forced to nationalize the other cell phone companies when they clobber the “new” , “old” CANTV in the marketplace. More Government has never worked as a solution to these problems, least of all in this silly revolution where corruption is all over the place and ignorant and inexperienced miltary (pardon the redundance) believe they can run everything.

We have seen this movie before.

Another giant cynical expression of populism by Mayor Bernal

February 19, 2007

In another giant cynical admission, the Mayor of the Libertador District of Caracas, said today that he did not “recover” the Sabana Grande Boulevard earlier, because “it was not the momemnt to advance” and that it was only after “the consolidation of power by Hugo Chavez that he “started to rescue this urban space”.

Thus, in one sweeping statement, this cheap populist leader tells us exactly what is behind the silly revolution: It was Bernal that allowed the same urban spaces to be invaded and taken over by street vendors six years ago, in the name of populism, telling us how they deserved to earn a living and it was not humane to push them out. Today, six years later, when studies show street vendors no longer support the Government and Chavez has “consolidated his power” it is fine to remove them, also in the name of populsim.

Just another lesson in how fake the “love for the people” of the revolution is. In a few months, when the new Constitution needs to be approved, maybe the revolution will need the vote of the street vendors and will allow them back into these same urban spaces that today Bernal claims to love and desires be free of them.

The New York Times looks at the Chavez Royal family

February 18, 2007

And in a carefully written article, Simon Romero looks at the Chavez Royal family, with all its power and newly found riches. this will not play well in Miraflores:

““They started out with nothing and now call themselves revolutionaries, though they are revolutionaries with all the best trappings of power.”

“The family ranch near Sabaneta, called La Chavera, has been a frequent source of scrutiny for the political opposition, which contends that the family’s landholdings there and elsewhere in Barinas have grown from a small area to more than 7,000 acres in the past eight years, according to “Hugo Chávez Without His Uniform,” a biography of the president by Cristina Marcano and Alberto Barrera Tyszka.”

and of course, he tells us about Chavez’ father not so humble or revolutionary background, despite Chavez tales to the contrary:

“The governor, who is in his 70s, has long been a fixture in state politics in Barinas, where for decades he was a loyal organizer for Copei, a conservative political party. From his schoolteacher origins, he rose to become director of education programs for Barinas during the early 1980s.’

(Note added: Funny how the NYT absolutely screwed up the location of Chavez’ hometown Sabaneta, placing it Northeast, rather than southwest)

Another step towards dictatorial control of the country, another step at failed economic policy

February 17, 2007

Today the Cabinet approved what is simply another step in Hugo Chavez Dictatorial takeover of the country. A decree was approved today which in its article 4 simply states:

“All of the assets neccessary to develop the activities of production, fabrication, import, storage, transport, distribution and commercialization of foodstuffs and products subject to price controls are declared of public utility and social interest”

What this means is that the Government can now take over, occupy, nationalize and expropriate any facility in the chain of production, distribution and delivery of any product subject to price controls at will. The products can also be confiscated at will by Government officials. Since the Government can add products to this list at will, this means just about any sector can be threatened with this decree and it gives the Government another weapon to subjugate and create fear in people. This decree is a clear violation of a Constitutrion that guarantees economic freedom in Venezuela, but clearly absence the rule of Law and the lack of independence of the Supreme Court guarantee that it will stand.

Another sad step in giving Hugo Chavez dictatorial control over the country. Another step in making food production unattractive for investment, insuring that shortages and inflation will intensify in the future. Another failed policy by an ignorant Government.

When one thinks one has heard everything, a loony Admiral speaks his empty mind

February 17, 2007

While Alek has said most of what was needed and Jorge noted the quote below, I can’t let it go without saying something about the remarkbale statements by Admiral Cabrera. It is a measure of the loony leaders of our country, that one has to hear such a high ranking member of the Venezuelan military suggesting we have something akin to Al Qaeda in a supposedly common fight against the US. Moreover for him to suggest that Sept. 11th. was self-inflicted by the US Government is simply stupid even if he thinks it may be true.

I wonder why Admiral Cabrera is so quick to react to this news from a wire sevice, joining the fray with Al Qaeda and stupidly blaming the US for our problems. What does the Admiral think of the way his fellow military officers are getting rich or are already rich under Chavez’ watch? Or about the wild spending spree in weapons that take food out of the mouths of poor Venezuelans? Or the gift of oil to Cuba? Or the many unauthorized gifts by the Autocrat/Dictator to other countries? Has he ever complained about any of them? I certainly haven’t heard him. Each and everyone of those acts represents a bigger theat to Venezuela and Venezuelans than anything the US does, it is just simpler to blame his incompetence and that of his fellow officers and politicians on someone else.

It is only when high ranking military officers like Cabrera begin denouncing the real problems of our country that we will be able to fix them. If he really believed in what he was saying, he should then call on Venezuela to stop selling oil to the US immediately. But if he did, he may lose all of his perks, including bodyguards, homes, cars and a salary 40 times the minimum salary. And he definitely does not want that!

Quote of the day

February 15, 2007

It should be seen how truthful that information is….it sounds illogical that Al Qaeda,
that is against the north American imperialism would go against a State that is precisely
fighting that hegemony, although differently

Rear Admiral Luis Cabrera, member of President Chavez General Staff. referring to Al Qaeda’s threat against Venezuela’s oil facilities.


When asked what he meant by “differently” he said “we fight with the Constitution,
with legality, with morality and with the truth, not with terrorism”

source here.

Reported by Jorge Arena,
Ghost blogger emeritus.