Archive for July 10th, 2015

Exponential Growth Of The Unmentionable Parallel Exchange Rate

July 10, 2015

Since people are so scandalized by the recent surge in the unmentionable parallel rate, I decided to look at it on a logarithmic scale to see if the recent movement was out of the ordinary. Thus, I simply plotted that rate of how many Bolivars you need to buy a dollar if you can find one for sale and I must say I was truly surprised at what I found: Bs$2 The first thing that is surprising is how from August 2012 to February 2014 the process was simply exponential: It took about 16-17 months for the rate to change by one order of magnitude and I could draw the straight red dashed line quite easily through the rate for that period. Then, it turns out that the rate of growth slowed down for a period and then from about August 2014 to a month ago, the rate became, once again, exponential, you can see the green dashed line (which is also hand drawn) has roughly (even if it is less regular) the same slope as the red line. Then, recently, there was this increase, which is really small in the scale of things, and which simply wold be catching up to where it should be if there had not been a pause last year (Which was caused by expectations that the Government was ready to “do something” about the multiple exchange rate system)

What does it mean that it grows exponentially? Nothing profound, simply that the rate of growth (in this case 177%) is a constant. That is, for example, if you have $1000 and you get 7% interest, your money will more or less double in ten years, then double again in ten more and so on. Which implies that in ten years you have $2000, in twenty $4000 and in thirty $8000, grow exponentially, if you plot it logarithmically it will give you a straight line.  Thus the rate of growth above just says that the rate is a constant when the line has the same slope. Since so many factors drive this, it’s hard to say what is the main driver. If one looks at the growth in M2 in a linear scale for the same period as the graph above: sg2015071051314 you can see that the growth of M2 is like 65% per year in 2013 and 2014, with jumps in November every year (which gives you a one year rate of about 71% for M2). However, as you can see the slope has actually increased lately, but not above 100%, so that you would have to factor other things like scarcity of goods and foreign currency to explain the 177% “natural” rate of growth of the parallel rate.

What all of this does mean, is that if nothing changes in the way the economy is run, any absurd number someone may throw at you for the end of the year, may actually be quite “natural” and that recent changes are nothing out of the ordinary, even if scary.

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