Archive for August 8th, 2011

Clueless in Caracas: A Tale of Two Ministers

August 8, 2011

It’s easy to be concerned about Iris Varela being Minister for Prisons, what she says is easy to understand and as Quico says very dangerous. But in part, it is because the extreme nature of her statements is so non-sensical and in language easy to understand that makes her her now infamous statements shocking:

1) 40% of the prison populations should legally be out in the streets.

2) If a Judge does not release a prisoner, I call the President of the Supreme Court.

3) Ordered that no new prisoners be admitted in any jail in Venezuela.

All three of these violate the rule of law, common sense and are easy to understand by anyone who has some inkling as to how societies function.

But is Ms. Varela any more dangerous than Jorge Giordani who has been the “economic” brain of the revolution since 1998? (Minister of Planning 1998-2002, Central Bank Board member 2001-today, Minister of Planning 2004-today, Minister of Finance 2010-today, member of the Board of PDVSA 2011-)

Take for example what Giordani said after issuing the recent Global 2031 bond:

-We are removing Bs. 18 billion from the liquidity or 40% of it. (This is supposed to be one of the “good” things of issuing the bond)

First, it is 40% of excess liquidity, not liquidity, the latter stands at Bs. 354 billion. In fact, liquidity (M2, the amount of money in circulation) has gone up by 17% so far in 2011 (or has been allowed to increase by that much), which is the main cause for inflation. But even worse, Bs. 18 billion takes total liquidity back to what was present in the system on June 15th., only six weeks ago.  That is, the amount of liquidity that this US$ 4.2 billion (!) bond removes from the economy just takes us back six weeks to the money created by this Government. Wouldn’t have been easier not to print that money?

But Giordani does not seem to understand the role of liquidity in the system. When Chavez got to power, there were some Bs. F. 10 billion in circulation. Today there are Bs. F. 350 billion in circulation. This is Giordani’s Baby, one way or the other he has been around at each step of this monstrous creation of money.

Now, just so you get an idea, the Venezuelan economy in those same twelve years that Chavez has been in power has grown a total of 31.4% in real terms, but the amount of Bolivars out in the streets has gone up by 3,900% in absolute terms. Do you see the problem? It’s the new money creating the inflation, too many new Bolivars chasing just 31% more goods. It is not a chicken and egg problem, you control the number of Bolivars, you control inflation. Ask Paul Volcker, who stopped inflation cold in the US in the early 80’s.

In fact, let’s compare it to the US during the same period. GDP in the US has increased by 35%, slightly more than Venezuela, but monetary liquidity has increased by only a factor of 2, or 100%. And you probably have heard about the “problem” in the US with all that new money that was thrown around in QE1 and QE2 to stimulate the economy. Well, Giordani has done a factor of 35 more in money printing, thus the lower inflation in the US. But note, Venezuela had its main product for export, oil, increase by a factor of 10 in price during that period, and the US economy managed to grow more in that period, despite the fact that there was a huge financial and housing crisis.

So much for capitalism being dead, Hugo!

And to complete Giordani’s trifecta of danger, there is the infamous “excess” international reserves concept, in which every year “excess” US$ in the Central Bank (as defined by the Government) are transferred to Chavez’ petty cash fund the Fonden. So far, US$ 67 billion have been transferred out of the reserves.

In 1998 when Chavez got to power, there were US$ 14.2 billion in international reserves. Oil was around US$ 12 per barrel.

Today? Today there are US$ 29.2 billion in reserves, but oil is topping U$90-100 per barrel.

Put another way, in 1998 there were Bs. 0.53 for each dollar in the Central Bank in international reserves and the exchange rate was Bs. 0.574 per US$. If all Bs. were converted into dollars, there would still be dollars in the Central Bank.

Today there are Bs. 12.12 per US$, but the exchange rate is Bs. 4.3 per US$. If all Bs. were converted into $, the reserves would be wiped out and there would still be almost Bs. 240 billion around.

But imagine if the US$ 67 billion transferred to Fonden were part of the Central Bank’s reserves. Venezuela would have US$ 97 billion in reserves or there would be Bs. 3.4 per US$ in reserves, if all Bs. were converted to $, there would be plenty of dollars left.

Thus, Giordani has been in charge of a no-growth, inflationary economy for twelve years and at every step it has been his policy making that has screwed up things.

Amazingly, he is still in charge! And very dangerous!

What would you prefer twelve years of Iris with the crime rate doubling or tripling again or another 1,200% of inflation?

You Pick!