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.

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32 Responses to “Venezuela: Inflation, speculation and irresponsibility”

  1. HalfEmpty Says:

    It would be difficult to hide a “flood” accidental or otherwise.

    One thing that vaguely annoys me is the lack of credit the electrical workers…. engineers, linemen, groundsmen and substation artificaters are getting. Any rational thinker would have thought the entire grid should logically be tits up. Those guys are doing a pretty fair job and likely have the ulcers to prove it.

  2. Snake Oil Baron Says:

    Somewhat off topic, if the small amount of rain that fell in the area which drains into the Guri dam actually did raise the water level any, it is now back down to its lowest level and dropping at 5 cm per day.

    http://english.eluniversal.com/2010/05/07/en_eco_esp_guri-dam-at-lowest-l_07A3867759.shtml

    I have been told that some tweets from Venezuelian energy workers claim that cavitation has started to become a real problem and rumors of Cuban engineers causing an accidental flood in one area of the facility have been floated. Does anyone have any confirmation about that?

  3. loroferoz Says:

    “Am I trying to justify it? Absolutely not. It’s theft, it’s making a mockery of Venezuela, it’s sabotaging the future of the country, and more. Their arguments to justify the country’s path are rarely rational (and even then, only in a limiated way). But their behavior is not irrational.”

    No, what is irrational is the behavior of the Venezuelans who supported and support chavismo. What is irrational is the past behavior of Venezuelans LONG BEFORE CHAVEZ who built the mechanisms which made this disaster possible, and who gave the excuses to Chavez to stifle all dissent.

    Whether it is a CEO of a company or a public official you want to pressure, you can plead, and maybe, maybe they will do things out of ethical motives. But some will not and you will need to exert pressure, steady and hard, to get a behavior that is fair. Some, might have to be exposed, disgraced and removed out of shame, if not jailed for crimes.

    The big difference is that in “capitalism” you seek personal benefit, but have to provide services and goods that are at the very least worth the pay, to the people who pay for it. Ah, and you have to have some standing among them, or else they will seek somebody else.

    And you are a private party, in no way shielded from litigation or penal accusation, with no way to stop someone from calling you what you are and showing your misdeeds to the world. And protesters might throw blood on YOUR FACE personally, with you having to smile over the whole thing, and maybe sue over the cost of your suit.

    Contrast that with government officials everywhere in the world, including the “freest” nations on Earth. Here in Venezuela, we have had (before Chavez, yes) and have thugs with the immunities accorded to government officials, which are unjust to begin with ANYWHERE. So go figure.

  4. An Interested Observer Says:

    m_astera, nothing in that description is irrational. There’s no effort to implement a rational economic policy, but seeking personal enrichment is quite rational when you realize that their advantage is probably only temporary. It might last until Chavez is out of power, or until they’re out of his favor, whichever comes first, so they get while the getting is good.

    Am I trying to justify it? Absolutely not. It’s theft, it’s making a mockery of Venezuela, it’s sabotaging the future of the country, and more. Their arguments to justify the country’s path are rarely rational (and even then, only in a limiated way). But their behavior is not irrational.

    But that’s exactly how Nicolaas needs to think – about a government that is not interested in sound policy, but one full of individuals who are seeking their own benefit, and pretty much as quickly as possible because their time might run out at any moment. Why should they do anything he suggests? I can’t think of a single reason.

  5. m_astera Says:

    Nicolaas, you have been mistaking Venezuela and its government as rational humans. Sorry, but that’s not the case.

    Venezuela’s government is and has been about oil money: Who controls and and who pockets it. For the last eleven years those who pocket it have been those playing Chavez games.

    Can you get this? We all know that a rational accounting system would work better. We all know that a rational government with leaders who cared about the people would do better. In the case of Venezuela, we do not have rational leaders who care about anything other than their own personal power and enrichment. And that goes for Rosales and crew as much as Chavez and crew. F***ing narcissistic sociopaths.

    Rather than giving us textbook remedies that we understand all too well, and assuming there are rational leaders, what say you about the actual situation?

  6. moses Says:

    Miguel:

    Slightly OT.

    Are they trying to block several internet pages ? Try to access this satellite Forum in Chile:

    FTA link:

    http://www.ftachile.com/foro/showthread.php?t=5107&page=79

    See discussion in ND:

    http://www.noticierodigital.com/forum/viewtopic.php?t=649242&postdays=0&postorder=asc&start=0

  7. Robert Says:

    Miguel

    You are a prophet, sadly.

    Thank you Juan Cristobal for the memory

  8. An Interested Observer Says:

    Maybe the market still works somewhere in Venezuela – I could believe that the price of Chivas went down because of increased demand.

    Either that, or the government is subsidizing it.

  9. Juan Cristobal Says:

    Miguel,

    Take a look at this

    http://blogs.investors.com/capitalhill/index.php/home/35-politics/1089-venezuela-no-1-in-default-risk

    Aside from the depressing fact that Venezuela’s risk of default is now greater than that of Argentina, Dubai, Greece, or any other country in the planet, there is the silver lining that they link to your blog.

  10. Floyd Looney Says:

    Up here in the US we are wondering when our debt bomb will go off, now that we have super spenders in charge. We have China and Japan deseperately trying to buy our debt but they can’t continue to do so.

    When the US goes Greek, we’re taking a bunch of other countries with us.


  11. It could happen. But, not necessarily, at this low of hyperinflation – which is a relatively low level of hyperinflation.

    If Chavez starts printing BsF like mad and hyperinflation increases to thousands and hundred thousands and millions of per cent per annum, then Dollarization is almost certain – unless a complete political change comes about.

  12. loroferoz Says:

    “The Venezuelan population should get to realize that only sound economic policies create the economy that allows fiat money to be created in the proper way.”

    “Unless we change to dollars, nobody will trust our politicians after 26 years of continous and irresponsible devaluations.”

    That’s bound to happen. Venezuelans have every reason to have NO faith in any fiat currency issued by the Venezuelan government. Government bonds are taken on outrageous interest rates with outrageous insurance.

    Dollarization of the economy will come about as soon as exchange controls stop functioning.

    It will be corrosively ironic. The very mention of the fact will inflict pain at the very soul of true red revolutionaries:

    “The Empire’s” capitalist economy and banking system, their (imperialist) government and Federal Reserve are and will be far more trustworthy to the eyes of Venezuelans (and money don’t lie) than Hugo Chavez’s Revolution could ever hope to be.

    They will have to make a jump into a whole new universe of pure denial to deal with it.


  13. […] Venezuela: Inflation, speculation and irresponsibility […]


  14. As Marie Antoinette used to say: “Let them drink Chivas 18!”

  15. Antonio Says:

    I do not think that the nomenclature of Chavez Regime have any reason to be responsible for the economic mess they make.

    After all, they (nomenclature) have their wallet full of dollars, because they came to power to steal, nothing more, mission accomplish.

    This is one of the biggest frauds in history, like in others African countries.

    When thieves breaks out to a place, they do not have obligation the left the place clean and in order.

    The crazy Venezuelan people that support their thieves, after more of 10 years, is more responsible. After all, they left to nomenclature take their money, properties and resourses of this dying country. And the opposition is responsible because they made serious mistake when Chavez left temporary the power like 8 years ago, and now they look very bad.

  16. Kepler Says:

    Island Canuck,

    I did not check out what’s wrong with the code, but you can do a “save as” and save the jpg in your disk and then try to zoom in a wee bit. The resolution is rather small, though, so it will become fuzzy rather soon.

  17. moctavio Says:

    No idea why that happens…

  18. island canuck Says:

    Miguel:

    When you click on the chart you get a 404 “page not found”

  19. Deanna Says:

    “Why did Hugo let Nobrega ‘go’?” I know this is OT, but whatever happened to Vielma Mora, whom I considered probably one of the more efficient Chavistas? Does anyone know where he is after David Cabello took over his job?

  20. Kepler Says:

    “Five years or so ago (these are appx. numbers) M2 was 20 billion dollars, reserves 17 billion. Today reserves are 27 billion M2 is 90 billion, but there has been no equivalent growth in the economy.”
    Wao. That says it all.

    Why did Hugo let Nobrega “go”?

    Going to Feynman, little detail (even if just that, just a tiny detail): he told both in a book and in that documentary about the time he borrowed as a child a book on calculus from the local library. Had he been born in Valencia, with over 1 million inhabitants, he would have been able to visit one real public library, the Feo La Cruz (called after a granddad of the local caudillos in Carabobo), but probably not borrow the book.
    Half a million inhabitants in the South have no real public library.

    Still, I am sure there are more bottles of whisky there than books on calculus or electricity or biology.

    And going to the list: Canuck’s list is very relevant for Margarita, as a tourist destination and all. Still: I wonder if we can find other index lists for normal products as documented by some reliable NGO. Any idea?


  21. Accounting in units of constant purchasing power is the same as Dollarizing the non-monetary economy (of a country or a single company) – like Brazil did for 30 years.

  22. moctavio Says:

    Unless we change to dollars, nobody will trust our politicians after 26 years of continous and irresponsible devaluations.


  23. Yes, I agree. That is what happens in practice, but, the Venezuelan population must not get used to the idea that that is how a modern economy works.

    In Zimbabwe they got used to the wrong idea that they could create wealth by printing 100 Trillion Dollar notes – as they wish – and exchange them for real USD in the black market. They did that for a while and then wiped out all the real value of the ZimDollar like that.

    The Venezuelan population should get to realize that only sound economic policies create the economy that allows fiat money to be created in the proper way.

    The point I really want to make is that fiat money is backed by all the underlying value systems in an economy: even to the extent that a country does not actually need foreign exchange reserves: look at the US: they can and do create USD and pay their imports with that.

    An appropriate level of foreign exchange reserves is part of sound economic policies, but, it should not be the only factor determining the real value of the local currency.

    What a country needs are sound economic policies. Part of those sound economic policies would then be the creation of the correct level of fiat money supply.

    The inflation rate will indicate whether the level is correct or not: the higher inflation, the bigger the error in the level of fiat money creation.

  24. jau Says:

    a few years ago we needed a couple of well placed bullets to end this nightmare, today we are in the middle of a economic, moral and social disaster that has no end in sight.

    generations of Venezuelans will suffer the concecuences of this crazy and resentful president for years to come, still people hope to end this chapter democratically.

    we are doomed

  25. moctavio Says:

    Nicholas:

    When the sole provider of $ is PDVSA and when PDVSA gets 4.3 Bolivars for each dollar it gives out, then the concept of fiat currency is no longer valid. M2 here grows and reserves dont, people have no confidence in the currency. Five years or so ago (these are appx. numbers) M2 was 20 billion dollars, reserves 17 billion. Today reserves are 27 billion M2 is 90 billion, but there has been no equivalent growth in the economy.

    The parallel or the real floating rate in Venezuela has always followed closely M2/Reserves because policies are not “normal”. Here you need backing, because oil fluctuates, if oil were to drop to $60 per barrel, the country would run out of reserves and we would have a huge currency crisis. Spikes in M2/Reserves always lead to currency crisis. What the Government did in January lowered the spike, but it is still at a historical high with no confidence around.

    This is no normal economy, the rules of economics have been distorted and suspended for quite a while. I follow the M2/Reserves ruel and it works quite well.


  26. Miguel,

    You state:

    “while printing more and more Bolivars without any backing in the Central Bank.”

    The BsF is a fiat currency. It is created or should be created via fractional reserve banking in the economy. The BsF is not supposed to be backed by anything in the Central Bank. The Euro and the $ and the Yuan and the Yen and the Australian Dollar and the Swedish Krona are not backed by EQUIVALENT amounts of foreign exchange in those countries´central banks.

    Fiat currencies are created out of thin air: out of nothing.

    A fiat currency is backed by all the underlying value systems in an economy or currency region like the European Monetary Union.

    These underlying value systems are, for example, but not limited to:

    Good governance
    Sound economic policies
    Sound monetary policies
    Sound industrial policies
    Sound manufacturing policies
    Sound legal system
    Sound police system
    Sound education system
    Sound healt system
    Sound foreign policies
    Sound banking system

    That is

    Sound everything.

    A country does not actually need foreign exchange to import anything.

    When a country has most of the above, other countries accept its money: for example the US and Europe and China and Sweden, etc.

    Having some foreign exchange reserves is part of sound economics, but, it does not have to be equal to the local currency.

    What you are saying is in fact the following: Venezuela´s economy has no real value: so, the BsF has to be backed by foreign reserves. That is not actually correct. The Venezuelan economy has a certain value and that value is part of all the many, many factors that determine the parallel rate which is the real rate of exchange in Venezuela.

  27. moctavio Says:

    Richard Feynman! That brings memories, a true hero for me. His Lectures are in youtube BTW.

    Well, it has two reasons:

    The most basic one is that there is lot of demand and the Government is the one with the dollars.

    The second one is that the Government has created so many Bolivars compared to reserves that it cant satisfy demand.

    Had the Government not siphoned off reserves, it would have no problem, it could satisfy the market.

  28. m_astera Says:

    Thanks for replying to my post, Miguel. I don’t know Tobias Nobrega.

    Economically, my understanding is that of an intelligent eleven year old. A fifth grader. When someone can explain things so they make sense to an intelligent fifth grader, they start to make sense to me. I learned that from Richard Feynman.

    When it doesn’t make sense to my eleven year old understanding, I start to suspect subterfuge or obfuscation. Games with bonds are just such.

    A simple explanation of economics would be that there is a product, that is in demand, that certain people have in or can produce in abundance beyond their local needs, and that there are people elsewhere who will trade other things for.

    Please correct me where I am wrong.

  29. moctavio Says:

    When Chavez brought in Tobias Nobrega in 2003, he had a true economist running the show and while Nobrega’s ethics may be questionable, he did things well. In fact, he introduced such artifices like Bolivar-Dollar bonds which had a role to play at the time, but nothing “new” has been done since he left, because no economists that understand cause and effect have been involved.

    Merentes and Giordani have wasted half a billion dollars in the zero coupon bond strategy. It is said easily: Half a billion dollars, many countries would love to have half a billion dollars to waste, few do. If these guys new some basic economics they would have never considered that strategy.

  30. m_astera Says:

    “Chavez needs an economsit that KNOWS economics”

    Perhaps. Perhaps he needs a prefrontal lobotomy, the kind they used to do back in the 1950s, the icepick through the soft tissue above the eye, stick it in and stir things around a bit. Tends to make them docile and harmless.

  31. Luis Peña Says:

    The sad thing here, is that the measures that need to be taken to made our economy a stable one, are the ones that were taken before this government and were so unpopular. But that allowed for a a few years of stability that this government used to consolidate its process

  32. NicaCat Says:

    Hmmm…Gordian knot – Giordani…what is making me think the two are entwined???


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