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.

19 Responses to “Exponential Growth Of The Unmentionable Parallel Exchange Rate”

  1. isabel salazar Says:

    Por favor continúa publicando este chart
    Please continue to update this chart together with the AREPA one

  2. Roger Says:

    Earlier in the week Yahoo ran a piece that Polar Beer and others would soon not be able to to produce beer due to the lack of grains.
    To me this is the sign of the end! What’s next Belmont’s! Even in the 90’s, I had to suffer from many “no hays” including no BurgerKing, no hot water and no Lomito but, never no Polar! Polar like its also pilsen cousin, San Miguel in the Philippines, is the nectar of the gods. You can’t keep the crillios happy without cerveza! Im sure there is a spanish song but, this will have to do. https://www.youtube.com/watch?v=8E0aZ387M_I

  3. Ira Says:

    I don’t know who Pablo Perez is, but I already love him.

  4. karl Says:

    MO, have you tried dividing the M2 by the amount of actual liquid reserves, that is, cash in hand? It seems to me that the perception of scarcity of reserves is the main culprit as risk increases in the economy. As capital behaves in a risk adverse way, it prompts all that liquidity to chase available $ increasing the premium for $ in the open market.

  5. Island Canuck Says:

    Miguel, how much money does Venezuela have available in the FMI?

    They withrew another $1.5 billion earlier this week.

    Is this a loan or what?

  6. notiven Says:

    Nice good article to raise the level of discussion.

    Let me tell you what I did with a couple of variables and see what you can do with the idea.

    Many moons ago while still an economics student ( and working at BCV BTW ) I did a regression analysis comparing M2 growth and inflation but not using / not comparing month to month but using priors months. My thesis was that growth in M2 does not show up in the price index right away So I did M2@Time zero ( M2To) and compared to Prices @ time zero ( PTo); Then I went back a month, M2T-1 and compared it with PTo, then M2-2 and PTo

    The conclusion is that there was a correlation between growth in M2 and Inflation and the best correlation of all was the one for 9 months, in other words, there existed a lag between M2 and inflation specially 9 months after the move in M2.


  7. Mas que exponencial Octavio, eso que hoy vemos, dibuja a perfeccion la forma c;lasica de una hipewrinflacion, hiperbolica. En el seminal paper de Cagan, (1956) se puede notar la clasica forma de la hiperinflacion, y que muestra la inestabilidad y no convergencia de la oferta monetaria ante una demanda por saldos reales que cae una vez que el consumidor aprende que la moneda dejo de ser deposito de valor, y que como medio de pago tampoco supera los bienes que paga, empujando a la gente a acumular bienes que consiga, para intercambiarlos por los que consigan otros (ej bachaqueros) a precios de hipperinflacion,. una vez que el poder de compra -del dinero- se envilezca, es un circulo vicioso hiperboliico. Ver mi articulo sobre la hiperinfalcion en Venezuela en http://www.alexanderguierrero,com

  8. Rob Says:

    2,4,8,16,32,64,128,256 etc plotted linearly will produce an exponential curve, and a worrying one at that too. Plotted logarithmically you will get straightish lines. The latter is about rate of change and this case bs/$ it is constant and that is a straight line.
    Working backwards all you can say is the exchange rate is exponential….512,1024,2048,4096……. And the constant defines the form of the linear chart.
    Bottom line is that something has to give.

  9. Anonimous Says:

    The graph seems quite logical. If the given parameters are full production of new paper money (maximum production at all times). Uniform increase of M1. Static amount of National reserves. This explains the constant exponential growth. The spikes can be attributed to debt expenditures and decrease in National reserves. If it is true that the National reserves are precipitously dropping; the spikes will become more common, and the growth of inflation more rapid, and the growth will cease to be uniformly exponential.

  10. TV Says:

    Basically things are bad and getting worse quickly, but they’re not getting worse ever more quickly. Yet, anyway, oil plummeted again.

    It’s really sad when that’s the best thing that can be said about the state of Venezuela.

  11. Maybe it’s the lack of dollars caused by falling oil sale volumes, having to buy diluent, and oil price falling over the last 12 months?

  12. Pedro Fenjves Says:

    Awesome Miguel. Love it.


  13. Paul Esqueda Says:

    The exchange rate of the Venezuelan currency is following Moore’s Law. Though Chavistas-Maduristas seem to be more aligned with the Greek tragedy, they do have a Silicon Valley touch 😉

  14. bhood11bhood11 Says:

    As you say, there will be many factors affecting the rate of change in the exchange rate. Surely a big factor is, in addition to “normal” supply and demand driven by commerce, a sense of panic: people feeling that it is worth almost any price to get rid of the bolivars they don’t actually need to do the present week’s shopping.

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