Archive for February 27th, 2013

Chavismo Holds Rally To Remember The “Caracazo”

February 27, 2013

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Today Chavismo held a rally to remember the “Caracazo” as a “Patriotic Rebellion”. Even Chavez’ daughter Rosa Virginia took part of the strange festivity. They were the usual cries against the right and the oligarchy by the Government that after 14 years has not compensated the victims from that and the following days. The curious thing is that most of those that led the repression that day, are an intrinsic part of the Government today, while the only organization that has persistently defended the rights of those that died that day, Cofavic, is not even recognized and even despised by the Chávez Government.It is another perverse and macabre twist of history by Chavismo, their plot to upstage democracy and take over power absorbs history at its convenience, manipulating, making it its own and part of some fake feat that never took place. It is all as empty and vacuus as fourteen years of this weird revolution, whether you call it Chavismo, XXIst. Century Socialism or Bolivarianism. It’s a manipulative shell of cribbed ideas, none solid.None original. All empty.

The Government wants to turn that day into some sort of pre-revolutionary epic, but the truth and the reality say otherwise. Perhaps nobody like José Ignacio Cabrujas to tell us about it:

On February 27, Venezuela experienced an ethical collapse that left many people stunned, it was an explosion of which nothing profound has been written about, it warrants an analysis, it is an explosion resulting in looting, but it is not revolutionary looting , there are no slogans, it is a dramatic plundering, people attacked stores amidst delirious joy, there was no tragedy when the process began. I have kept the image of a cheerful Caraqueño carrying half a cow on his shoulder, but it was not an emaciated guy looking for bread, it was a Venezuelan “funny man”, that smiley face carrying half a cow  corresponds to a very particular ethic, if the President is a crook, I am too, if the state lies, I do too, if power in Venezuela is composed of an upper echelon of bullies, what law prevents me from entering the butcher shop and taking half a cow? Is it being sneaky? No, it’s drama, it’s a great human conflict, it is a grand ceremony. That game day that ends with a monstrous outcome, cruel, the laughter ends in blood, it is the most Venezuelan day that I have lived, it had never been interpreted as much by our history for  what is happening to us, it is the day we were sublime and perverse, much like we were for a good part of our history. Our historical icons have always announced that dilemma.”
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Perhaps the paragraph above was prescient of Cabrujas, it also describes quite well Chavez’ revolution…

Speculation, Devaluation and Idiotic Policies In Venezuela

February 27, 2013

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The Government claims that the “adjustment”, the euphemism it uses for the devaluation was due to the “speculative “attack by the oligarchy” on the Venezuelan currency. (Maduro dixit) This is actually a good line to sell to the “people”, who are unlikely to understand that in the presence of exchange controls like those present in Venezuela, it is a bit difficult to mount any sort of attack on a currency that is fixed in price and illegal to trade otherwise.

Many people ask me whether the value of the unmentionable dollar is right, will go up, will go down, etc. Given that it is illegal to mention what its value is, the discussion is not easy, as I do not want to temp the powers that be. But I can talk about monetary matters, without mentioning “that dollar” to try to give you an indication whether things are out of line or not.

The Venezuelan Central Bank long ago stopped managing the amount of money in circulation, the so called M2. In the end, if you increase M2 without control, there is inflation and you distort the economy if monetary liquidity increases faster than the availability of goods (How fast the money moves around or changes hands is also important). And in the end, that is why the Government has had to devalue repeatedly, because it has increased monetary liquidity at an average pace of 44% per year.

One way to measure this effect, is to compare M2, the total number of Bolivars in circulation, to international reserves. This is the so called implicit exchange rate, which tells you at what value you would have to convert all Bolivars into dollars, if you decided to dollarize the economy.

When Chavez got to power M2 was Bs. 10 billion and there were more than US$ 10 billion in international reserves. Today, M2 stands at Bs. 700 billion. That is, there is seventy times more Bolivars in circulation than there were in February 1999. But Venezuela does not produce 70 times more stuff, nor does it have 70 times more international reserves. That is why there has been so much inflation. Nor have international reserves increases much. In fact, they have barely doubled, despite the biggest oil windfall in the country’s history.

Let’s first look at M2, the raw number of Bolivars in circulation and how they have increased since 2005:

M2That is money printing at its best, an almost of factor of 15 increase in seven years . To be precise, monetary liquidity has increased by 1400%(By comparison, since the 2008 financial crisis M2in the US has gone up by 23%, which is a lot too). During the same period, Venezuelan international reserves have barely changed, the economy has grown by 32% and the price of the Venezuelan oil basket has increased by 236% (I also placed an arrow on when the Government stopped the swap market in 2010, M2 has increased by a factor of 3.4 since then)

Obviously, something has to give. You create so many Bolivars, you don’t produce more goods, you import more and you are in distortionville: High inflation, devaluation and shortages. Note the comparison between the increase of the price of oil (236%) and that of the economy (32%). This guys have done little in terms of sowing the oil.

Now let’s look at M2/Reserves in the same period. You have more Bolivars, reserves should increase at least in some proportion.

ImpExcept they did not. The implicit rate has gone from being less than Bs. 2 per US$ in reserves to being Bs. 25 per US$ in reserves. Note the arrow when the Government stopped the swap market in 2010. At the time M2/reserves was near Bs. 8, around the last value traded in the swap market.

Finally, another way to look at this, is to look at the implicit rate divided by the official rate of exchange as a way of comparison:

ImpofiThe dashed vertical lines are the four devaluations since January 2005. The arrow, is when the swap market was shut down. As you can see, in the 2010 and 2011 devaluations, the ratio of the Implicit/Official was pushing 4 when it was adjusted down. This time, when the Government devalued to Bs. 6.3 per US$, the ratio went down only to this value, an indication that the official rate is still overvalued compared to this indicator of the implicit rate. Thus, at Bs. 6.3 it is still cheap to buy anything imported at that rate.

With respect to the question that people always ask, the second graph should give you  a guide. Think about what the rate was when it was legal and what the implicit value was then and think about where it is today. With SITME eliminated, more buyers will have to go to the unmentionable market, so there will be even more pressure now.

What this all shows is that speculation has nothing to do with the devaluations and the shortages. It is simple an idiotic and ignorant policy by Giordani et al., which does not appear will be changed in the short or medium term.

But he is still smiling…