Archive for May 9th, 2010

Venezuela: Inflation, speculation and irresponsibility

May 9, 2010

Reader Island Canuck from Margarita sends this very interesting table in which he has kept tabs on prices at the Sigo store in the tax free island of a bunch of items. Clearly it is not your mother’s CPI, it has lots of luxury items, but it gives an insight into not only how much prices have moved upward, but also on availability. Curiously, 100% Oraneg Juice, the biggest gainer at 84.6%, is not available and the o% gainer Real carupano rum, is also not available.

Meanwhile, Chavez has refused to accept, as usual, any responsibility for the problems. It is all the oligarchs and the speculators. He plans to smash speculation. Yeah, sure, if he shuts down the swap market, what will happen is that the parallel rate will become black, it will go to Bs. 15 per dollars and shortages will be huge. He now thinks that even if he burns all international reserves the swap rate will not go down. True, if he freely sells all dollars in exchange for all Bolivars in the economy, the equivalent rate would be Bs.  8.5 per dollars, which is simply a result of his irresponsible transfer of international reserves to spend as he wishes, while printing more and more Bolivars without any backing in the Central Bank. It’s call economics, not speculation.

And if he tries to persecute those that trade foreign currency swaps, it will be just like persecuting the meat industry, there will be no dollars to sell, the price will go up, there will be no dollars for imports, there will be no imports. It is also called economics.

The problem in the end is that the Government and the Central Bank don’t have enough dollars to satisfy all of the needs. This article in today’s El Universal explains it very clearly: The Government has less foreign currency, reserves are going down and PDVSA is selling less foreign currency to the Venezuelan Central Bank. In some sense, by giving PDVSA autonomy in how much it gives or not to the Central Bank, the monetary authority has less ability to fight the rise in the swap market, even as oil prices go up (and PDVSA needs more). But the Central Bank also has been trying do to in a baffling manner, selling bonds that are useless in pushing the swap rate down.

The Government can issue debt to push the swap rate down, but that mechanism, like Greece issuing new debt to pay the old one, will one day stop working and all they do is lower the swap rate temporarily.

In the end, it is irresponsible policies that have taken us to where we are and there is clearly no intention by Chavez to assume any responsibility. He has no EU to help him and he will not spend less, the end will clearly be a disaster as the new inflation levels show.

Chavez needs an economsit that KNOWS economics, Merentes is a Mathematician with no background in finance, Giordani is an Urban Planner, they are both ideologues and it is ideology that has taken us to where we are today. It will not get them out of this Gordian knot in which they find themselves.

And we will sink with them.