The Devil's Excrement

It was a day for remarkable comments by Government officials, proving once again either infinite stupidity or the total absence of scruples by the Chavez administration:

–First there was the President of the National Assembly Cilia Flores who actually said:

“The opposition has issued opinions about Constitutional reform without knowing its content”

Jeez, where should I start on this one. We are supposed to be living in a democracy according to the autocrat/dictator and his cronies. We also have a new Constitution which was supposed to open the country to a new type of more open, transparent and participatory democracy. However, a small circle of people which include only people close to the autocrat/dictator have been discussing a profound modification of the Venezuelan Constitution for six months, but except for scattered leaks, only that small circle actually knows what they are planning in one of the most anti-democratic exrecizes of this blatantly antidemocratic Government. And this stupid lady actually has the nerve to call those that criticize the indefinite reelection proposal ignorant and out of line because of the way the autocracy is being run.

–And then there is the new President of CANTV, who last week, according to today’s Tal Cual said that the company was going to need some US$ 150 million in help from the Government this year.

Now, I would like to understand how a company that had US$ 450 million in cash flow in 2006, which has almost no debt and which distributed, when it was in private hands, over US$ 340 million in dividends in 2006, already needs help from the Government less than two months after being taken over by the Government? Could it be that when the rates were lowered nobody thought of calculating its impact on the company? So, is this what XXIst. century socialism is all about? Take a perfectly working and profitable company and turn it into the same crappy company we had 20 years ago when you would get a dial tine only one out of every three times?

God help us!

–And then there is Deputy Sanguino, the Head of the Finance Committee of the National Assembly, who certainly did not make his alma mater look good in a wide ranging interview in today’s El Nacional, which is full of idiotic statements such as:

“Who cares if we have the highest inflation in the world, if Venezuelans earn their money here and enjoy the goods here”

This one is a jewel, particularly to a Venezuelan who has no job, earns minimum salary or can hardly make ends meet and whose $2 a day have remained invariable since 1998 when Chavez took over, despite the biggest oil windfall in the history of the country. This without mentioning how this inflation is destroying the country’s industrial base, as the Government imports products from abroad at a pace which this year will be triple of what it was in any year in the 1990’s.

Then he ignores history (or lies, your choice):

“We have to remember that we have had very high inflation rates and we have managed to decelerate it and turn it into the lowest in the last thirty years”

Hello? In the last thirty years there have been 5 years of single digit inflation and not one occurred in the last eight years. Moreover, the lowest inflaton level in the last eight years occurred in 2001 and since then inflation has been out of control, despite huge resources, price controls and exchange controls with the exchange rate at the same rate for the last two and a half years. Inflation may be lower this year than last, but only because a one time artificial drop of five percentage points in the value added tax. Structral inflation not only reamins high, but the inflation felt by the poor, who spend more than 80% of their income on food has been ten points higher than the overall CPI.

“If we did not have price controls, shelves would be full, but people would not be able to buy anything”

Well, I guess is better to have people have money in their pockets and empty shelves, as is happening more and more. Today I could not buy turkey, eggs, chicken, pasta and meat at my supermarket. In any case, a very idiotic statement given what is happening.

Then, when asked what will be done with the Fonden Bolivars that come from selling the structured notes, he said:

“They can be converted to foreign currency to give more liquidity to Fonden”

This statement is sheer and absolute idiocy and deserves a Quico-like diagram to explain it better (which I will do at some point), but here is what this financial genius is proposing in his infinite ignorance:

Fonden buys a structured note at 60% of its face value. It sells it to local banks at 90% of its value but at the official rate of exchange of Bs. 2,150 to the US$ and “makes” a “profit” in US$ of 300 million, such bank turns around and sells the note at 60% of its value (what Fonden actually paid for it), gets the dollars and sells them in the parallel market at Bs. 4,100 per US$, thus making a profit.

So what the genius of Sanguino is proposing is to have Fonden turn around and buy dollars from the Central Bank at Bs. 2,150 per $ and start the virtuous (or is it vicious?) circle again.

Thus, at each cycle, Fonden “makes” and creates money, the private banks make money and the Central Bank loses reserves in this new and revolutionary version of the perpetual motion financial machine.

Amazing, no? I promise to explain it in more detail in the near future.

Arbitrary behavior by military and police authorities has now become the rule of the day. Yesterday, during the semifinal of the America Cup, four students (all brothers) painted their hands white and distributed pamphlets at the stadium, defending their civil righst as guaranteed by the Constitution.. They were quickly detained and taken to a military facility by as many as 40 soldiers and some “Chavistas” in red t-shirts, they were held overnight and released today.

There are a number of illegal facts about this detention:

First, the students were detained by the military and taken to a military facility which is not their jurisdiction, only later were they taken to a police building.

Second, they were detained at the university stadium which is located within an autonomous university, where they simply can not be detained by either military or police authorities as established in the Constitution.

But the worst part is that the students are being charged with “inciting hate” and will have to show up at the Court every eight days. Thus, a simple political protest, very much like those carried out by thousands of students in recent weeks is now criminalized by the autocracy, because the protest was carried out in front of foreign reporters during the regime’s “showcase” Copa America and the students were making the Government look bad, shwoing not everyone lkes the Dictator.

What next?

Part of Hugo Chavez’ megalomaniac wish is to attempt to perpetuate himself in power, using his hold on the institutions and Government funds to insure it. Unfortunately, the once “best” Constitution in the world does not allow for more than two terms by the President. Thus, the autocrat decided in January to change the Constitution to allow in his own words and those that surround him to allow his indefinite reelection and thus the perpetuation of the Autocrat/Dictator in power.

Unfortunately, the “people” did not rejoice with this possibility. While Chavez remains popular with his promise to change things and the huge windfall that has allowed the autocrat to give away money in direct assistance to the population, there are too many doubts and concerns about his ability to run the country afetr eight years, as well as the antidemocratic spirit that has permeated his actions. Thus, most polls show that there is a huge resistance to the modification of the Constitution on this issue, which could endanger not only the possibility of that specific change to the Constitution but all of the cahnges Chavez desires to increase even further his stronghold over the country.

This week, the Government unveiled its new strategy and while “new” for this case, it is something we have seen before, the use of a euphemism to call something by a different name a mislead the population. Thus, in the words of the Head of the National Assembly, she explained this week, actually keeping a straight face, that what will be proposed is not for the “indefinite” reelection of Hugo Chavez (Of course, that is who the Constitution is being built for, not for the position but for the autocrat) but rather for his “continuous” reelection.

Of course, this is nothing but another cynical attempt to mislead and deceive the population about the true goals of the autocrat and you can be sure the term “continuous” will show up in the vocabulary of those that surround Chavez in the upcoming weeks and that the full propaganda machinery of the Government will be turned on in order to sell this new euphemism to the people.

Clearly, in the context, there is no difference between the two words, whether indefinite or continuous reelection, what the Government wants is to allow Chavez to become a continuously elected Dictator in Venezuela, which could be allowed if the Constitution were changed using the mechanisms established in it. But whether continuous or indefinite, the change would eliminate the conceot of alternability established in the fundamental principles of the Constitution and thus only a Constituent Assembly could change it, which is not what the Government is proposing

But the revolution has no scruples, believes in no laws and ethicsal principles are just not part of it, so the autocrat wants to take this shortcut and cheat Venezuelans once again. Unfortunately, he may just do it, as a complacent Supreme Court will certainly not stop a vitiated changed of the Constitution, much like it did not stop the shutdown of RCTV and even confiscated its equipment. Add to that a full press campaign with the full resources of the Government, some cheating at the approval of the Constitutional referendum and we may have Chavez indefinitely and continuously, until he dies or his overthrown by one of his cronies with similar megalomaniac ambitions.

June inflation’s numbers clearly worried the Government as the monthly CPI reached 1.8%, given a 12 month inflation of 19.4%. The Government spent all week announcing measures to contain inflation, but in the end, the measures announced by the Venezuelan Central Bank were simply to timid, mostly attacking the results of bad economic policy and not the origin of the problems.

The first measure announced was to increase the savings rate, that paid in savings accounts from 6.5% to 8% and that paid in CD’s from 10% to 11%. The theory behind this is that it will somehow encourage savings, reducing consumption, as well as discouraging people from buying dollars in the parallel swap market. However, all the Central Bank has done is go from rates which are extremely negative to rates that are still extremely negative and this increase will do very little in terms of encouraging savings. In fact, there is a very simple way of looking at it: Currently most Venezuelan bonds denominated in US dollars, whether corporate or sovereign, yield near or above 8% per year, so that anyone with savings would recieve the same yield in US$ than in Bolivars, with the difference that the capital is protected both from the effect of inflation or from a possible (and likely!) devaluation.  Thus, we expect little effect from this measure.

The second measure announced was the increase of bank’s reserves from 15% to 17%, as well as increasing reserves for repos from 13.25% by 0.25% per week until the rate reaches 17%. This measure will sterilize some US$ 1 billion, which is not very much compared to current monetary liquidity which stands around US$ 55 billion. Moreover, this is a one time shot, once that liquidity is sterilized, there will be no addition to it. Once more, we expect little from it.

Finally, the Central Bank eliminated the issuing of 14 day repos to suck up liquidity and created a 54 day CD at a rate of 11%, one percentage point over the 30 day CD’s currently in use which have been issued in the amount of US$ 15 billion. This measure may have some impact, but it is hard to gauge until one sees the response of financial institutions to it. To be somewhat effective, the Central Bank would need to issue an additional US$ 5 billion, but this will depend on the interest by financial institutions to lock their excess liquidity up for an extra 24 days in order to gain 1% point. In any case, this will have an additional cost if successful.

None of these measures will have an effect unless the Government attacks the origin of the problem: the extraordinary growth in monetary liquidity created by its own excess spending. But clearly the Government has no plans to attack this part of the problem. Moreover, besides the high liquidity, the Government forced inetrest rates down to an artificial level but is now afraid of turning them up. These low rates have encouraged people to borrow and this puts pressure on prices.

The Government’s contradictions on economic policy were quite clear when yesterday the Head of the Finance Committee of the National Assembly advocated higher interest rates for credit cards to discourage consumption, while the Superintendent of Banks called for the same rates to be dropped by three percentage points.

Unfortunately for the Government (and us!) the second half of the year usually yields more pressures on prices as the school year begins, merchants get ready for Christmas and rains interfere with agricultural production. This month there will be a one shot impact on the CPI of 2%, as the value added tax was dropped by that amount, but this does not address the root of inflaitonary pressures and simply gives an illusory lower rate for a short period of time.

What is clear is that the 12% inflation targe of the Government is unreachable and so will be the new 14% level. By the end of the year, we will have a number more like 17-18%, which covers up the true underlaying inflation of 22-23%, which has been masked by the 5% reduction in the VAT.

What are we
to make of PDVSA’s announcement yesterday that
Venezuela and Iran will invest US$ 4 billion in the
Orinoco oil
belt? Let’s see, we are talking
about Iran, a country with a dysfunctional oil industry,
where production has been in decline for years due to the lack of investment
and Venezuela, a country which has invested little in
maintaining its own oil production in the last three
years.

In fact,
save for some details, the two countries have followed very similar paths
which
are likely to lead to the same results long term. In Iran, declining oil
production, combined with declining refining capacity and increased gasoline
consumption have led to shortages and now rationing. This is in due in part
to
the fact that increasingly oil income has been spent in pet projects of the
leadership, including direct assistance projects. In that country, foreign
oil
companies have actually been invited back to run oil fields as a way of
sustaining investment in oil production.

This is not
too different that the path set by Hugo Chavez in
Venezuela. PDVSA has been spending increasing
amounts in social projects, at the expense of investment in sustaining oil
production and refining capacity. The results are lower oil production at a
time of increased local consumption much like
Iran. Gasoline consumption is up to 770
barrels a day, thanks to subsidized gasoline prices as well as car prices,
which
are imported at the officinal exchange rate. In fact, numbers from the last
report by PDVSA of its financials (Once again we have yet to see the 2006
financials) suggest that Venezuela, much like
Iran is also importing gasoline.

But then,
there is the question of technology. Heavy crude upgrader technology has so
far
been in the domain of a few oil multinationals. Neither
Iran nor Venezuela own such a technology and people
question whether PDVSA can even handle some of the heavy crude projects of
the Orinoco oil
belt that it recently took
over. While the Cerro Negro project seems to be manageable, experts believe
that PDVSA will have a hard time running the Petrozuata facility, leaving
aside
issues such as how PDVSA will compensate the owners of the technology for
its
use.

Thus, PDVSA
seems to have chosen a partner that contributes little to the project beyond
the common fundamentalist ideology and their common enemies.

In the end,
this will probably ending up being another announcement like the Amazon
pipeline, which is full of fluff but lacks any consistency and not much
really
will come from it. Another empty announcement to satisfy the autocrat’s
megalomania and wishful thinking.

In criollo there is a saying: “Se juntaron dos
mochos para rascarse”, which can be loosely translated as “Two amputees got
together to scratch each other”. In the case of the Venezuela-Iran
project of the Orinoco oil belt, this is what
seems to be happening, but one wonders whether they even have the most basic
scratching capability.

It is always a shock to come back. Things accumulate and you
spend the day in a daze trying to catch up. I had about 1200 emails at
work, which I had to sort out through. Then I had to make sure I paid my
DSL connection with CANTV, which was not paid automatically because CANTV’s
new billing system is not working too well. In the bizarre logic of
services in Venezuela, I was warned today to make sure I check whether it
is paid or not automatically next month, to insure I don’t get disconnected
again. Of course, it does not seem to occur to any of them that since it is
their billing system that is not working, they may hold off on
disconnecting anyone’s service. In the end it is CANTV that is losing
money, but it is now a “social” company so money is no object or objective
in the revolution. I still have no connection to the Web, but if I move the
laptop to the back of the room and tilt it just so, I manage to get a
fringe signal from a careless wireless network which allows me to do a few
things, even if sometimes I have to stand up with the laptop in my hands to
get a good connection.

But of course, these inefficiencies are
everywhere. So much faith in the ability of the Government to get things
done by the revolution, when in reality it gets very little done or blocks
them from getting done. The supermarket had a clipping from the newspaper
quoting someone in the Central Bank saying that there is a shortage of both
bills and coins in Venezuela. This clipping sort of gave the cashier the
right to ask me for exact change rather than the other way around. It seems
to be my fault if I don’t carry all sorts of combinations of bills and
coins to give them the exact number, because you know there is a shortage
which somehow is not supposed to affect me in the receiving end of things.

Such shortages are not new, they seem to recur in the last few
decades, which was the reason why the Venezuelan mint was started, it was
argued that the delay in ordering bills and coins from abroad did not allow
for the Central Bank to truly manage and plan the needs of the public. So,
lots of money went into setting up the mint, but it seems as if there is
nobody at the Central Bank in charge of estimating the needs for various
denominations of bills and coins as monetary liquidity increases. Or maybe
that person was fired so that someone “rojo, rojito” could be hired to
replace him or her and this last person is still trying to figure out what
all that stuff about monetary liquidity is all about.

It is the
same with passports. A “corruption-proof” system was installed so that you
would have to go to the Internet to get an appointment to get a passport
and the “randomness” of managing to get in the system would make the
playing field even for all Venezuelans. But of course it has done exactly
the opposite. You have to wake up at 4AM to try to get in the system and
hope to get in or you just simply hire one of the many “digital
facilitators” that somehow have managed to get “blank” slots in the
appointment system to get you in for a fair price. But you wonder why
it is that they simply can’t order enough passports to have supply match
demand. After all, if there are 25 million Venezuelans, so many planes
leaving the country each year, so many people going through our borders,
how hard can it be to estimate how many new passports you would need to
have ample supply for four or five years. But maybe even asking such
questions is being hypercritical of the revolutionary process. The problem
is there is little new in this, but the revolution has not fixed it either
and they have been at it for three years longer than anyone
before.

Thus, besides food shortages we now have passports, bills,
coins and now also medicine shortages. You see, to obtain CADIVI dollars
for raw materials for pharmaceuticals at the official rate of exchange, you
have to have all sorts of certifications from various Government
institutions, most of which are fairly inefficient in giving them out.
Then, you apply at CADIVI, which requires an evaluation of your request.
Once you get approved, then you have to go to your bank, get the dollars
and then finally pay your supplier. Your supplier sends the raw materials,
which are checked at customs extensively and if you are lucky enough you
may have them all in place to make the product.

But of course, at
each step there are delays and inefficiencies and in the end there are
medicine shortages. But the problem is never the inefficient and
complicated process, but some sort of Maquiavelic plot by the private
sector to sell regulated medicines at black market prices in line with the
parallel exchange rate, which only exists in the mind of the Head of the
Tax Office. Of course, it does not occur to any of them to think that
exchange and price controls and all of its obstacles and inefficiencies
have anything to do with the problem. After all they invented
them.

And, of course, each step and process may also have a
“facilitator” which makes manufacturing and production more expensive and
in some cases, it is simply not worth selling a product to generate losses,
so you ask for a price increase and wait for approval, which leads to
another shortage.

But you wonder how they can justify the shortage
of bills, coins and passports. After all, these have been showing
widespread shortages, despite the fact that in theory they do not have the
same complicated route to their acquisition. Maybe someday it may occur to
someone that the shortages have a common problem and it happens to be
Government policies and inefficiencies.

In the meantime, the
solution is to create new controls, new steps, and new supervision by the
same thoughtless, idiotic, brainless and inefficient bureaucrats, thus
perfecting the “revolution” that will solve all of our problems in the next
century.

Yeah, sure.