It was simply bizarre, if not tragic, to hear President Chavez talk about the European crisis last night, saying this was part of the crisis of capitalism, just as the Venezuelan economy was showing signs of unraveling with simultaneous events of a soaring swap rate, monthly inflation rate of 5.2% (11% for food and beverages!) and increasing signs of shortages everywhere. (GDP number not out, but steel company Sivensa reported a 25% drop in Metric Tons sold of products)
But Chavez continued acting as if things in Venezuela were peachy and rosy as his so called XXIst. Century Socialism was the one unraveling the Venezuelan economy, which did not happen much earlier simply because of soaring oil prices. But in fact in terms of impact, the Greek crisis is much smaller than the Venezuelan one. It will not impact the people as much, standards of living are and will remain way higher in Greece and Europe, inflation in Europe is irrelevant and the devaluation of the Euro will in the end make those economies more competitive. (Wasn’t Chavez the one that decided in his financial wisdom to move Venezuela’s reserves to Euros?) Meanwhile Chavez’ irresponsible project accounts by now with a 1,000% devaluation in 11 years and almost a 1,000% inflation in the same period, a reflection of the ignorant and misguided policies Hugo Chavez and his incredible lack of judgement in choosing advisers.
And Chavez continued acting like it was everyone’s fault but his and the case of meat shortages proves once again how silly and misguided Chavez’ policies have been. After taking over cattle ranches which are no longer functioning and destroying half of the country’s heads of cattle, the Government began flooding the market with cheap imports at the Bs. 2.15 per dollar rate which was held constant for almost five years. Local producers obviously had a hard time competing with this, which reduced production even further. Then, so far in 2010, Government imports of meat are down 52% and shortages began to appear and price increases followed. The solution was typical Chavez: Jail some butchers for speculating and, even worse, take them to a military prison. By now, many butchers have shut their doors and meat is quite scarce and Hugo threatens to nationalize the meat industry. This will certainly guarantee that meat will go the way of coffee, cement, sugar, milk and all of the industries that have fallen into the incompetent hands of the Government.
And apparently the swap market is the next one in the Dictator’s sights. After the rate soared in the last few months, manipulators and speculators were blamed and controls were threatened. The reality is that 95% of the foreign currency sold in the swap market is sold in non-transparent fashion by the Government and this year such sales have dropped, much like the meat imports have dropped. The reason is simple, under the “new and improved” exchange controls, two rates were created and Pdvsa was force to sell a large fraction of it’s dollars at this rate to the Central Bank. Thus, Pdvsa stopped selling in the swap market and the swap rare soared. Adding to this, the “parallel” funds were depleted last year as oil prices dropped.
To add insult to injury, when two different exchange rates were created a new level of decision making was introduced: Do you approve dollars for items at the lower Bs. 2.6 rate or the higher Bs. 4.3 rate? Since the supply of foreign currency is not infinite, the foreign exchange control office has been mostly approving items that can be brought in at the lower rate, forcing manufacturers to go to the swap market to get all the raw materials and components. The result is a rate at an all time high value on the same day that inflation is reported to be at it’s highest monthly rate in at least seven years. Coincidentally, that peak was also due to the inventive and ignorant policies of Jorge Giordani, who once again shows he has no clue on economic matters. And Chavez criticizes Europe’s problems…
And while the Ministry of Finance looks for speculators inn the swap market, the Central Bank sells 90 day zero coupon bonds at such a cheap rate that it promotes….
Speculation!!!
If those bonds were offered at a rate near the swap rate or at auction, only importers would participate to satisfy their needs. Instead, the fact that you can buy dollars at Bs. 5 means that if you are assigned bonds, you can make a hefty profit of close to 60% on you Bs. Very fast, which only attracts more “investors” as the swap rate rises.
And once again the solution is to threaten more controls or even suggesting the swap market may even be shut down, a guarantee of the appearance of a black market and an even higher rate.
Meanwhile, nothing has been done about improving the supply of foreign currency to the swap market which is really the only logical solution to the problem. Perhaps the 11.1% increase in food and beverages in April (a month which had a ten day vacation) will wake up the Government into action. But somehow, I suspect it will be the wrong action…
The track record is there!
The Devil's Excrement 
May 10, 2010 at 7:00 am
If it weren’t for oil, people would probably be paying just as much attention to Venezuela now. There’s nothing else keeping the country relevant in the world right now.
May 9, 2010 at 11:44 pm
Nicolaas,
They’ve abandoned the Z$! Now is that a fact? Why was that? It was soo successful. They were printing them by the trillions. That’s what I get for not paying attention.
May 9, 2010 at 11:38 pm
Kevin,
You state:
“It works in Zimbabwe. They now have trillion Z$ notes.”
That is not true. The ZimDollar was abandoned some time ago. There is no ZimDollar today. They Dollarized their economy: they use mainly USD, the SA Rand, the British Pound, the Euro and the Botswana Pula.
May 9, 2010 at 11:29 pm
moctavio,
Yes, exactly. The only way the government can control the swap rate (keep it from rising) in order to control inflation is to supply the dollars that people want to buy at a lower rate.
If they try to suppress it by arresting people who use it or publish it, they will create generalized shortages by August like you said. One reason that is is climbing now is because of the industrial shutdowns due to the electricity problems. That means that some things that had been domestically produced now have to be imported. That increases the demand for parallel market dollars. If the rains come, that might ease before the elections. Alternatively, if Hugo sacrifices a chicken and the gods respond, the price of oil could go up and he could supply more to the swaps rate. Or, before the election, he could just put the BCV’s foreign reserves on the table to avoid shortages or further depreciation and inflation.
Or, if he isn’t lucky or doesn’t have the BCV reserves available, the shortages will emerge in August. Then, those who really want to import, if they can’t go to the current parallel rate (because it’s illegal), they will just have to create a new and more depreciated parallel rate. It works in Zimbabwe. They now have trillion Z$ notes.
So pray for rain. And maybe you should sacrifice a chicken. I don’t know what you do in Venezuela, but in Africa, after you sacrifice the chicken, you get to eat it, so that’s not so bad.
May 9, 2010 at 10:58 pm
Deana: I did understand what you mean.
Only that in that precise statement I was referring to people who can actually value stability, (even if only for a few decades!) but play for political benefit with a limited amount of irresponsibility. These are not uncivilized sorts. Only a bit uncaring about the long term.
We are perfectly conscious that Chavez has started vicious cycles of his own. Some very literally deadly to persons.
I do not think, however, that the man and his mad movement, in the middle of what he fancies a “Revolution” will need any spurring to become critical and hopefully melt down.
Or that you can spur on something like this on a clear conscience. Leave that to the Chavezes, the Jauas, the Bernals, the Rodriguez Araques, the Mario Silvas and the Giordanis. They have shown they have no conscience anyway. In fact, if there were a method to check them or removing them without violence, I would want to know what it is.
I think that the end will be ruinous. That this farce will be played to the bitter end. That as a nation we will become free market advocates and near libertarians, in seeing the catastrophe of “21st. century socialism”. But it will be painful, a near-death (I hope not death!) experience for my country. That Venezuela will be set back more than 4 decades, and that many will suffer and some will die (apart from the toll from crime, that does not seem to abate).
But I would not wish this on anyone’s country. I am mostly libertarian, and would become a conservative in the true sense of the word, if only to prevent self-righteous madmen from playing their games.
In fact, I would recommend to have common sense ready, a workable plan, and to preserve and cherish whatever piece of freedom and civilized discourse and behavior we can. A real opposition to savagery.
May 9, 2010 at 10:50 pm
Kevin:
If the Government tries to control the swap rate today, shortages by August will be generalized and things will get worse.
It is not easy to impose controls on the swap rate: You need to change three laws to ban “permutas” , it will take legally a month to do so. During that month the swap rate would soar to 10-12 bolivars in my opinion.
If the Government wants to lower the rate, there is only one way: Provide more dollars to the swap market, there are ways of doing this. After all, the Government is the biggest provider of dollars to the swap market in a very non-transparent and corrupt way. Just that adds one or two Bolivars to the price.
May 9, 2010 at 10:44 pm
The exchange rate that counts is the one at which you can by unlimited (unrationed) amounts of foreign exchange. That is the one that determines the price of imports in Venezuela.
The two legal rates don’t count because you can’t walk up to the teller’s window and buy what you need, especially if you don’t have connections. When you are allowed to buy as much foreign exchange as you like at the official rate (when the currency is convertible) — that rate determines the price of imports. But it’s not that way in Venezuela if you want to buy dollars at 2.6 or 4.3 bolivars per dollar.
So it has been the parallel rate at which you needed to exchange more bolivars to buy more imports. That is why the government or PDVSA sold its dollars at the parallel rate to control inflation (the price of imports). Now the government may crack down on the parallel rate and exchanges at the parallel rate will no longer determine the price of imports. So the parallel rate will become another official, rationed, albeit more depreciated, official rate. There will be 3 official rates, 2.6, 4.3, and probably 8+ something.
So what will happen? There will soon emerge a new parallel “parallel” rate somewhere underground or on the street corner where you can buy as much as you like but at a much higher rate. The new rate will determine the price of imports which will be much higher and the government will soon try to control that. This will go on until it all collapses or until they learn.
Which will happen first? Bets gentlemen?
May 9, 2010 at 10:44 pm
Nicholas: It is an oversimplification, what I mean is that if Greece had the drachma, it would devalue its drachma debt and the crisis would be mostly over, the country is already making decisions on cutting deficit spending. Venezuela’s crisis can not be solved by devaluation or fiscal restraint alone, the distortions are huge, from gasoline prices (a liter of gas is 1.1 US$ cents at the swap rate!), to the destruction of local production, to excessive role of Government in the economy.
Disentangling this is a HUGE problem compared to the solutions needed to solve the greek crisis. Of course, devaluation in Greece will bring some inflation, but compared to Venezuela it will be peanuts. In fact, Venezuela devalued and it solved little because there are so many distortios and problems. That is what I mean by saying our problem is much bigger. Greece can make decisions that could push another crisis for a few years even if it does not solve the structural problems. Venezuela does not have that luxury and people are being hurt like crazy right now.
May 9, 2010 at 10:33 pm
deananash,
A lot of people felt the same as you regarding Robert Mugabe during their hyperinflationary meltdown of quintillion percent hyperinflation.
They had their complete meltdown: they wiped out 100% of the real value of their ZimDollar with their central bank printing ga-zillions of 100 Trillion Dollar pieces of paper and calling it money. At least 3 million people (30% of the population) left the country. They had some deaths too.
But, Mugabe is still there. They did start over with Dollarizing their economy. They have lost the sovereignty of creating their own money. Now they are in a real economy: very few distortions besides corruption and abuse of political power.
The have no monetary economy. Only a non-monetary economy.
There is a cold irrefutable logic in what you say, but, it seems that it does not always work exactly as you think it will work.
May 9, 2010 at 10:19 pm
Miguel,
You state: “Greece’s problem is that it is part of the euro, if it was not, it would just devalue 20-30% and viola, problem solved.”
I am sure you agree that it could not possibly be correct to solve any country´s structural problems by “just devalue 20-3% and viola, problem solved.”
May 9, 2010 at 9:32 pm
loroferoz, I never implied that you were talking about Chavez, and I happen to agree with your follow-up comments as well.
Nevertheless, the sooner that Chavez can ruin everything, the sooner you’ll be rid of him. That’s why I encourage you to encourage him. Or remove him from office.
However, at this late date, I think having him ruin everything is preferable. Why? Because there are simply too many (25%?) who believe his nonsense. Simply eliminating him doesn’t solve that problem, on the contrary, it cements it.
Better to discredit 21st century socialism and then begin anew. Ask any Chinese how they feel about communism and you’ll soon realize the benefits of allowing the bitter fruit to mature. Only problem with this is that death and destruction follow. But the sooner it comes, the sooner it’s over with – and the death tolls will be lower.
May 9, 2010 at 8:34 pm
Arturo the Troll: Just like the Bolivar, you have reached a new all time low. If you dont undrestand what I said it proves you are a real moron. Yes the Venezuelan crisis is bigger in size, the size of the problem is much bigger and the results much worse, the greeks will not have 11% inflation in food in one month, their standard of living will not be hurt like those of Venezuelans, in fact, they will continue living much better than even middle class Venezuelans. Greece’s problem is that it is part of the euro, if it was not, it would just devalue 20-30% and viola, problem solved. Venezuela’s problem is that a huge devaluation in January has done nothing to solve the problem, inflation is now roaring ahead and people will be hurt, really hurt, because the country is shit thanks to Chavez. Solve that!
The average Greek will pay a much smaller price than the average Venezuelan, it will be an adjustment of the currency that will devalue the euro (or the drachma) by say 20-30% but not the way people live like here. Venezuela has had 1000% devaluation in 11 years, that is HUGE compared to Greece. It is a huge problem for Venezuela and not easy to solve, least of all with an ignorant clown like Chavez. If you dont understand that, you are a true moron.
But we knew that.
How come you never address problems like 1,000% devaluation in Chavez’ years, or 1000% inflation? You also dont take responsibility for your fanatism.
Troll.
May 9, 2010 at 5:14 pm
The US has its own debt crisis looming or has anyone missed the huge debt balloon that this current administration has given us? The value of the US dollar is going to drop like a stone when our Greek moment comes.
I think the Greek government could fall this year and the radicals will take over and they will find it is not possible to create wealth out of thin air. Wealth creation requires investment and production and when you restrict and restrain the private sector you limit wealth creation and you limit what can be looted for use by the government.
May 9, 2010 at 4:57 pm
yadda yadda yadda…….its so much easier to pontificate bullshit than to take to the streets and take your country back from the cubans and chavista untermenshen…..
now if the bloggers would used their forums to call for insurrection against the goons that are daily taking their freedom and property away then they move beyond entertainment to credibility
May 9, 2010 at 2:44 pm
When hyperinflation gets completely out of hand and prices change by 5 or 10% per day, you have to update all your non-monetary items in terms of the DAILY PARALLEL RATE – like Brazil did for 30 years. Updating in terms of the monthly change in the inflation rate is useless when prices change daily by 5 or 10 %. I am sure you will agree with me.
May 9, 2010 at 2:39 pm
The most important thing (understood by hardly anyone) about our 700 year old generally accepted traditional Historical Cost Accounting model that all accountants in the world implement as well as all accountants in Venezuela,
is the fact that
UNLESS you have 100% of the updated original real value of all contributions to the current balance of your company´s capital and retained profits and capital reserves (all items in your shareholders´ equity) currently invested in revaluable fixed land or buildings with an equivalent updated real value – revalued or not –
your accountant is unknowingly destroying the real value of that portion not backed 100% by revaluable fixed assets – under the Historical Cost Accounting model.
Almost no-one understands this.
The simple fact is that doing your accounts the traditional way results in you unknowingly destroying the real value of your capital and retained profits at a rate equal to the annual rate of inflation unless you have 100% of all contributions to equity invested in revaluable fixed property.
Accounting in units of constant purchasing power stops that – whether you have any fixed assets or not – as long as you break even.
May 9, 2010 at 2:22 pm
m_astera, you stated:
“I’m not too sure about defining the US $ as a unit of constant purchasing power.”
I don´t think I have defined the US $ as a unit of constant purchasing power or stated that it is or can be done. It is impossible for the US $ or ANY currency to be a unit of constant purchasing power.
For the USD or any currency TO BE a unit of constant purchasing power, it has to be subject to ZERO inflation and ZERO currency fluctuation. That has been impossible to date in any currency ever.
However, a person´s or a company´s economic activities can be STATED IN units of constant purchasing power in any currency: all you have to do is update or inflation-adjust the nominal values (original historical costs) of all NON-MONETARY ITEMS in terms of the change in the purchasing power of whichever monetary unit of account you choose.
When you choose the BsF, you have to update all your NON-MONETARY ITEMS in terms of the change in the purchasing power of the BsF; that means you have to update all your NON-MONETARY ITEMS in terms of the change in the Consumer Price Index in Venezuela. You cannot inflation-adjust or update current year MONETARY ITEMS: it is impossible. You cannot update the notes in your pocket: you cannot reduce their value all the time automatically.
You can also Dollarize your daily operations and accounting when you account all your economic activities in USD or in any other RELATIVELY STABLE “hard” currency, e.g. the Euro or the Pound. When you Dollarize you daily operations and accounting, you state your company´s activities “almost” in units of constant purchasing power: you will remove the probable 60% 2010 annual hyperinflation from your accounts, but you will still be left with the current 2.3% inflation in the US Dollar. Your accounts will not be 100% stated in units of constant purchasing power because you have not inflation-adjusted them for the change in the purchasing power of the USD – only for the loss in purchasing power of the BsF.
Stating your accounts and operations in units of constant purchasing power stops your accountant from implementing the very destructive stable measuring unit assumption. It stops him or her from implementing real value destroying 700 year old traditional Historical Cost Accounting – the best thing your accountant will ever do for your company.
May 9, 2010 at 1:13 pm
It is not illegal to hold dollars. It is illegal to export or import more than 10,000 dollars. The law says it is illegal to buy or sell dollars and the penalties begin at 10,000. The law exempts securities which is why the permutas (swaps) are allowed. No Venezuelan bank can offer $ bank accounts. The Government has a monopoly on the purchase and sale of gold.
May 9, 2010 at 1:06 pm
I’m not too sure about defining the US $ as a unit of constant purchasing power. The US dollar does not appear to have held its purchasing power very well over the past twenty years. From what I have read, it has devalued 98% since 1913.
Gold might be a little better, in a perfect world, but even gold is subject to speculation and price manipulation.
Worth noting, though, that despite the gold price distortions of the past fifteen or twenty years, an ounce of gold in 2010 will buy the same goods that it would in 1913.
I’m not really arguing for a gold standard, just pointing out some facts.
May 9, 2010 at 12:55 pm
If I am not wrong, there is a limit in dollars that you can hold on your wallet, I think is 10.000 $, but if any one knows maybe can comment this.
Yes the limit is US$10,000 without prior approval.
May 9, 2010 at 12:42 pm
Nicolaas, Yes is not legal to have dollars in bank accounts in Venezuela; even in The Citibank can not have or opens accounts in dollars in Venezuela.
If I am not wrong, there is a limit in dollars that you can hold on your wallet, I think is 10.000 $, but if any one knows maybe can comment this.
Sure MO knows the amount of dollars you can hold in home or in your wallet.
May 9, 2010 at 12:01 pm
deananash: I was not referring to Chavez in that statement. The ones who “pump” the economy are more responsible people, even if only because of short-term self interest. The “politicians on Keynes” and social-democrats who promise and promise, and who sink a country into debt, never foreseeing (or feigning never to foresee) that kids now, will have to pay the bill when they get big. Yes, I hold these more worthy of reproach than the Gordon Gekko’s of the world. THOSE use to play with their own money, or with money they have to answer for, and anyhow, the whole country is never forced to play along with their speculative games. THESE sink whole nations into debt with their speculation and are held great statesmen in their retirement, without having to answer for the vicious cycles they start, the distortions they create, and the general impoverishment they produce.
Chavez is the hallucinating kind. The kind that believes the private sector can be done away with. He is much worse, because he is quite loose on the reality connection bit. No doubt he has started vicious cycles and set in motion patterns of imitation that are dangerous, even deadly to people (losing your life vs. losing your savings), and that the consequences will be horrible and will take care of him. Such are madmen.
May 9, 2010 at 10:27 am
I just love the idiotic statements chavez makes like this one from today:
“The bourgeoisie are very involved in the running of the economy. I warn them: we are not going to be pushed around … We make an effort to raise salaries … then immediately the capitalists raise everything, food, transport, clothes. They’re trying to cause problems and we won’t allow it.”
So he does not see causal effect of cost increase and price increases? When the BS is at 8 and import food prices go up thanks to cadivi inability to deliver dollars, he expects prices to not go up?
The same article says he is expecting a list of speculators to go after by Monday. If I made my living in the exchange market, I’d be on a plane today.
http://www.reuters.com/article/idUSN0916849820100509?type=marketsNews
May 9, 2010 at 8:58 am
I forgot to state above that salaries, wages, rentals, etc are also constant real value non-monetary items. To stabilize the real or non-monetary economy their nominal values also have to be updated monthly with the inflation rate – to keep their real values the same – or with the parallel rate if Venezuela should enter into galloping or rampant hyperinflation with inflation increasing 5 to 10 % per day.
May 9, 2010 at 8:21 am
Arturo you again completely missed the point of Miguel’s comment.
Your reading comprehension is really bad & getting worse.
Probably from a lack of a proper education.
May 9, 2010 at 6:45 am
loroferoz is right,
“Some are people who calculate that by the time everything blows up catastrophically, they will be happily retired or dead (“in the long run we are all dead”)….However, sometimes events move faster…”
Which is why I have always advocated speeding things up. ENCOURAGE Hugo to take more, do more, (destroy more) – the sooner the better. Why?
Because then you can begin rebuilding your country. Until then, EVERYTHING is a crapshoot, unless you hold your assets OUTSIDE of the country. Even then, if you are physically still inside Venezuela, your very life is in danger. That’s why another of my consistent suggestions has been to flee, a la Miami’s Cubans.
May 9, 2010 at 6:36 am
“the Greek crisis is much smaller than the Venezuelan one. ” – This sort of statement proves what an imbecile you really are.
May 9, 2010 at 3:50 am
Andres F, I know my comments are long.
The simple answer to stability in Venezuela´s non-monetary economy is:
Reject the stable measuring unit assumption.
I don´t have to say anything else, but, not many people will grasp the answer from that short statement.
May 9, 2010 at 3:45 am
m_astera
Yes, I agree that your skills and knowledge are very valuable.
I am trying to show people who will never even think of leaving their country that the unknown enemy in their economy is accountants´ stable measuring unit assumption, i.e. our 700 year old generally accepted traditional Historical Cost Accounting model now even authorized in International Financial Reporting Standards which 21 years ago stated in the Framework, Par 104 (a):
“Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power.”
Financial capital maintenance in nominal monetary units is a complete fantasy: it is impossible to maintain the real value of financial capital constant in nominal monetary units per se.
Luckily the second part of Par 104 (a) contains the only and perfect remedy for the unnecessary destruction caused by accountants implementing their very destructive stable measuring unit assumption during inflation and hyperinflation: it states:
“or units of constant purchasing power.”
May 9, 2010 at 3:35 am
Andres F, when you click on my name here on this blog you will go to my international blog. Here is the link to the South Afican version: they are both virtually the same.
http://blogs.fin24.com/realvalueaccounting
May 9, 2010 at 3:31 am
Mike E, I agree that some police and the armed forces should be armed.
May 9, 2010 at 3:28 am
HalfEmpty, I prefer red wine 🙂
May 9, 2010 at 3:27 am
Antonio, as I understand you it is NOT legal to hold US Dollars in Bank accounts in Venezuela. Is that correct?
Regarding properties: I know there is a risk of expropriation, but, that is the political risk a company takes: if a company decides to stay in Venezuela, then it must assume that risk. If it is not prepared for that risk, it must leave Venezuela.
In Zimbabwe the central bank printed pretty pictures on paper and called it money in the form of pieces of paper designated as 100 Trillion ZimDollars. In that way they wiped out all the real value of their money: there is no ZimDollar today.
In the end there were only non-monetary items in the country – no money. USDollars are non-monetary items in a hyperinflationary economy.
Companies had to start their accounting over, valuing their capital as the $ values of their properties and other assets.
May 9, 2010 at 12:05 am
Despite holding gold, silver, and various other trade goods, I realize that anything physical like that can be lost. I think a person’s most valuable possessions are their skills and knowledge.
May 8, 2010 at 10:09 pm
Nicolaas, your comments are interesting, but very long. At least that’s my perception.
I would suggest, writing them in a separate blog and link your blog here as a comment.
May 8, 2010 at 8:45 pm
I would hold precious metal, as in: .38 Special, .357 Magnum, .40 S&W and the like, plus of course some hardware to go with it.
Did somebody say it was illegal to possess this kind of stuff?
Ok, then just throw up your arms, roll over, play dead or something and wait until the kingdom of the “mar de la felicidad” comes.
May 8, 2010 at 6:16 pm
I hold fish-hooks, whiskey and penicillin and am prepared for anything, even the status-quo.
May 8, 2010 at 5:19 pm
Nicolaas, at least it is not legal holds dollars in Bank accounts in Venezuela.
One conclusion is absolute right, the best way to protect you from inflation is change BsF. faster to $, Euros or gold. If you need cast in Venezuela convert to BsF from $, Euros or gold, better in parallel market.
Hold properties in Venezuela is a risk because dictator says: expropriate!!! to whatever stone or dust that hits his shoes. And he pays sometime in the future.
May 8, 2010 at 3:57 pm
The above is Constant Purchasing Power Accounting (CPPA) during hyperinflation and Constant ITEM Purchasing Power Accounting (CIPPA) during low inflation. CPPA is required during hyperinflation in IAS 29 Financial Reporting in Hyperinflationary Economies and CIPPA is authorized in International Financial Reporting Standards during low inflation in the Framework, Par 104 (a) twenty one years ago in 1989 which states: “Financial capital maintenance can be measured in nominal monetary units (traditional Historical Cost Accounting that all accountants in Venezuela implement) or units of constant purchasing power” which is CIPPA as it appears in the Wikipedia article Constant Purchasing Power Accounting.
http://en.wikipedia.org/wiki/Constant_Purchasing_Power_Accounting
May 8, 2010 at 3:44 pm
You can protect yourself against real loss in a hyperinflationary economy by avoiding automatic real value destruction by the two enemies in the economy. The first enemy you know very well. The second enemy you do not know. The second enemy is camouflaged by general acceptance and authorization in International Financial Reporting Standards; so, you do not know that the second enemy is automatically destroying your wealt: during low inflation, but, obviously much, much faster during hyperinflation.
The first enemy is inflation or hyperinflation, which is simply inflation at a much, much higher rate. What I state about hyperinflation, applies to low inflation too. Hyperinflation can only automatically destroy the real value of Bolivars OVER TIME: nothing, nothing else. So, keep no Bolivars OVER TIME and you lose no real value. As simple as that.
Put your wealth in non-monetary items that will keep pace with the parallel rate as well as with inflation. The best non-monetary items to buy in Venezuela are actual US Dollars. I don´t know whether it is legal to hold US Dollars in Venezuela. I am not promoting anything that is illegal in Venezuela.
There are not just two basic economic items in the economy as it is generally accepted, namely monetary and non-monetary items. There are three fundamentally different basic items in the economy.
(1) Monetary items, e.g. Bolivar notes and coins and loans in Bolivars;
(2) Variable real value non-monetary items, e.g. land, buildings, machines, cars, raw material stock, finished goods stock, US Dollars, etc.; Variale items´ prices are ideally set in the free market, e.g. at the parallel rate or at the other market rates in Venezuela. If you work at the 4.3 rate then you have to update these prices a the monthly inflation rate. If you work at th parallel rate then you have to continuously update these values at the parallel rate – if that is legal in Venezuela. I do not promote anything that is illegal in Venezuela.
(3) Constant real value non-monetary items, e.g. issued share capital, retained profits, capital reserves, debtors, creditors, taxes payable, taxes receivable, royalties payable, royalties receivable, dividends payable, dividends receivable, etc. Constant items have to be updated monthly at the inflation rate if you work at the 4.3 rate and at the parallel rate if you work at the parallel rate. I don´t know if it is legal to update at the parallel rate in Venezuela. I do not promote anything that is illegal in Venezuela.
The second invisible, untouchable enemy is the stable measuring unit assumption: Venezulan accountants assume there is no hyperinflation at all and they do not update cost prices, raw material stock prices, companies´ capital, companies´ retained profits, companies´ capital reserves, debtors, creditors, taxes payable, taxes receivable, salaries payable, salaries receivable, etc. The whole world have been doing this for the last 700 years. So, no-one realizes that accountants are unknowingly destroying that portion of their shareholders´ equity in companies that is never backed by revaluable fixed property under the Historical Cost Accounting model.
So, to avoid automatic real value destruction in monetary items, you must not hold Bolivars over time.
If you cannot keep your wealth in USD then you have to keep your wealth in products whose prices keep pace with the parallel rate as well as inflation. The best is land and buildings. Otherwise products whose prices are updated in terms of the parallel rate – if that is legal.
If you have your wealth only in products whose prices are updated in the market in Venezuela at the parallel rate, neither an increase in the parallel rate nor devaluation will affect you. Your prices (wealth) are automatically updated at the parallel rate. You can never lose any real value.
When you trade you have to update your costs – at the inflation rate if you deal at 4.3 and at the parallel rate if you trade at the parallel rate. You obviously update you selling prices all the time too – if that is legal.
Your accountant has to update all your constant items in your business – capital, retained profits, capital reserves, trade debtors, trade creditors, provisions, taxes payable, taxes receivable, all non-monetary item payable and all non-monetary item payables either at the inflation rate – if you use the 4.3 rate or at the parallel rate if you use the parallel rate if that is allowed.
I do not know whether it is legal to update your values at the parallel rate in Venezuela. I do not promote anything that is illegal in Venezuela.
When you update all your variable and constant items as above, you also have to calculate the net monetary gain or loss from holding Bolivars in order to make your books balance.
May 8, 2010 at 2:19 pm
“I am amazed to see the same people that pursue anti-business policies that repress the private sector also be the same people who spend lavishly, as if they do not understand where the tax revenue is suppose to come from. Then they are always shocked when the revenue isn’t there.”
People who are not precisely known for a commitment to observation or analysis of reality, economics, or even simple arithmetics.
Some are people ideologically committed to destroying the private sector because they take it on faith that the public sector will more than cover for this. No flair for observation at all, just for hallucination.
Some are people who calculate that by the time everything blows up catastrophically, they will be happily retired or dead (“in the long run we are all dead”). This is your typical politician on Keynes. However, sometimes events move faster, because individuals and organizations will imitate the irresponsible conduct they see in the government if it seems beneficial, producing (ugly) results earlier than expected.
Some people vote the immediate impulse of their guts, greed as it were. Economics they do not bother with, but entitlement they take to heart, even that which is just a foggy promise. Can’t blame poor and desperate people at that, but also can’t consider that they are right. Of course, Greeks are not poor or desperate.
May 8, 2010 at 1:11 pm
But hey, there are 200 people answering twitter for His Majesty!
This is going to surpase Zimbawe…
May 8, 2010 at 12:06 pm
The Greek crisis has nothing to do with capitalism and everything to do with socialism. The problem in Greece is that the public sector spent too much and promised too much and the time to pay the piper has come.
High taxes and heavy regulations have driven the private sector away from Greece (like California) and now they find that there is no revenue to cover their extravagant spending. You see without the private sector, the government sector has nothing to leech off of.
Greece, like Zimbabwe and the USSR and everywhere else, is a government failure.
I am not sure how giving Greece a $145 billion loan “bailout” at 18% interest is suppose to help them. They are too deep in debt now, they’ll just be deeper in debt after being “bailed out”. The only people really being bailed out are the bond holders, government is simply one giant ponzi scheme.
Sadly the United States government is headed the same way. You can see California not even slowing down as they head for the cliff, they feel the federal government will have no choice but to “bail them out”. Not that the federal government has shown any spending restraint at all.
I am amazed to see the same people that pursue anti-business policies that repress the private sector also be the same people who spend lavishly, as if they do not understand where the tax revenue is suppose to come from. Then they are always shocked when the revenue isn’t there.
California’s high taxes and regulation have driven something like 30,000 employers from the state, there are farmers who would leave if their crops would grow elsewhere, and they are shocked now that revenue has fallen $3.6 billion short in April, even with higher taxes.
May 8, 2010 at 11:13 am
Long before Chavez became prominent, people told me there was a crisis in Europe, that inflation soared there. That was before, and some time into the government of Caldera, and I thought WOULD WE! would we wish in Latin America to have crises like those of Europe, that inflation here “soared” like that of Europe.
Now this joke of a government, sitting on it’s ass on a mattress full of money , PDVSA, that it did not create, and that it is emptying unconscionably, picks the international news with a tweezer to make us believe there is a crisis in Europe, that capitalism is to blame and so on.
The reality of citizens of any European country does not include prices of everything doubling every two years, nor scarcity of basic staples. Nor it does include infrastructure that looks like it was bombed and health services that are down and out. Or violent crime and death in every corner.
This reincarnation of Benzino Napoloni wants us to believe that a reality that is akin to that of Europe in 1945 is somehow comparable to the reality of today’s Europe.
The situation drives me into cognitive dissonance. Benzino (Hugo) is shouting with all his lungs that he is in a Revolution that is “radicalizing” every day and preparing for “war” every minute now. It is a paradoxical figure he makes: the wannabe dictator acting like your run of the mill populist president. He is purportedly tearing the whole building down, and at the same time assuring every fool who will listen to him that the shelves will be stocked and that nobody will suffer scarcity, that nobody need be stressed. They have called him bipolar, but this is schizophrenic.
May 8, 2010 at 11:06 am
Another triumph of this Robolution is the rampant increase of cases in Dengue, Malaria and Chagas disease.
May 8, 2010 at 10:41 am
MO, I think this is your best post.
Usually, because I made the buys in food marketplaces, food’s inflation always double the government inflation index.
And there will be some hardheads that maintain the idea that the inflation, the devaluation, etc., are cause by speculators.