The Devil's Excrement

My good friend Maruja dedicates this video to Venezuela’s Political prisoners, those persecuted and those in exile

Venezuelans crowd the Simon Bolivar bridge in the border with Colombia waiting for its opening to go buy food and supplies there.

I have been fascinated by the events at the Venezuela-Colombia border for the last two weekends, as the Government decided to open a relief valve and let Venezuelans go over to Colombia for the day to shop. The scenes have been fascinating, but more importantly, the political, social and most of all, economic significance of what we have seen is simply riveting.

Start with the fact that the Government shut down the border a year ago in order to supposedly stop contraband from Venezuela to Colombia. An explanation which was simply grandstanding, as the contraband flows through the hundreds of unpaved paths (trochas) that criss-cross the  border under the watchful eye (and sponsorship) of the Venezuelan military. Thus it was simply a remarkably sight, as well as lesson to the Government, to see an estimated 135,000 Venezuelans cross the border this weekend alone, in order to purchase the food, medicines and supplies that they can no longer buy in their own country.

This is exactly the opposite of what the Government had shut down the border for.

But the more important lesson is how Colombia´s distribution system is so much more superior to the Venezuelan one by allowing markets to run things. Not only can Colombia feed Colombians, but border supermarkets did quite a good job in providing food for 135,000 Venezuelans overnight. Yes, they did run out of some stuff, which was not unexpected, but there was also a transportation strike which influenced the fact that some supermarkets actually run out.

And imagine how many Venezuelans had to feel to have to go to Colombia to buy that very Venezuelan product Harina Pan, which was not only fully stocked on the other side, but to the surprise of many that were not aware of it, it was actually made in Colombia and was made there by the Venezuelan company that the Chavista Government has demonized so much: Industrias Polar. Not only do markets work, but companies can move from one country to another looking for the best conditions to operate in. A lesson Maduro and his cronies simply will not understand.

Venezuelans buy Colombian’made Harina Pan in Colombia at roughly a dollar a package

And Colombia´s distribution system is better because it is orders of magnitude more efficient than Venezuela´s. Whether a product is imported or made there, companies can buy foreign currency and then proceed to deal with the their processes to deliver the product to the consumer. In contrast, the Venezuelan manufacturer has to deal with a supply chain, a control chain and a corruption chain.

Because at every step in Venezuela, from the request for foreign currency, to the request for certificates of having paid taxes, to a certificate of non-production in Venezuela, to requesting the foreign currency, to receiving approval, to having the stuff arrive, to have the stuff be brought out of the port, to have the stuff trucked to the factory of distribution point, etc, etc, etc.; at each of these steps there will be an official to get through, an office to stamp a seal or give approval, an official asking for money, a gestor (agent) that needs to be paid, a peaje (toll) to be complied with.

And each step adds costs and time to the process to the delivery of goods.

And it is not much different for the Government. Each ship of meat, grains or whatever needs to be accompanied by the approval of the appropriate General that decides how many Tons of each should be bought, which then jumps to the next step so that another General approves the payment. and once the boat arrives, it takes days to unload, to truck it out of the port and begin a distribution chain that has all of the same problems that the private one has, as stuff is deviated, stolen, smuggled out of the country and given to those that can pay money to to those in charge of the distribution system

But Chavismo refuses to see reality. Each time their Rube Goldbergeresque distribution and supply system fails to deliver, they decide to add a layer, assign a General to the new position and simply ignore economic reality and their own failure.

And the crowds going across the bridge were politically charged. An image for the rest of Venezuela and Venezuelans of over a hundred thousand people voting with their feet, taking their hard earned savings to buy their food in Colombia, food that not only they can´t buy in Venezuela, but that many were surprised as to how many items were actually cheaper on the other side of the border.

How can any Government use this image for its advantage? How can it possible erase it from people´minds come election time?

And at the same time, the images were broadcast around the world, clearly demonstrating the opposite of what the Government contends: There is indeed a crisis in Venezuela and Venezuelans are not being fed by a fairly wealthy but inefficient and corrupt Government.

And as I watched the scenes, I could not help but wonder about the economic implications of the shopping spree outside the country. How much did each person spend? How did they pay? How much was it for personal consumption, how much for bachaqueo? How do the merchants turn the Bolivars into pesos or dollars?

I confess I don´t have all the answers. I do know that people paid largely in Bolivars. I also know human nature. I am sure that people that waited hours to cross that bridge did not do so just to spend Bs. 10,000 (US$10 at the parallel rate) or to find a single item like toilet paper or toothpaste.

Look at this man for example:

Man crosses back into Venezuela with a bike full of goods

The man may be an outlier (or a bachaquero), but he is certainly carrying a lot of goods in that bike. My guess is a few hundred dollars. But let´s assume it is much less on average. Let´s say the average Venezuelan carried US$100 in Bolivars across the border. This turns out to be US$ 13.5 million. Believe it or not, this is a large amount in Venezuela these days for the black market. Thus, I have no idea how the Colombian merchants could possible hope to convert this money back into Pesos or US$ swiftly. Moreover, I don´t see how they could have done so without the paralell rate of exchange increasing significantly.

But there has been little movement on the black market rate so far.

So, what gives? How did they do it? Because these border people are sophisticated when it comes to taking currency risks. They just don´t do it!

My guess at this time, absent any other theory, is that it may have been the Venezuelan Government that provided the hard currency. Since the Government planned the opening, prepared this sort of relief valve, it must have been aware of the possible pressure on the black market and excess liquidity and provided funds to the money exchangers at the border. This not only make sense, but lest you think that they are too dumb for that, remember that when it comes to guisos and graft, these guys are the best there is. I welcome any other alternate explanation.

Meanwhile, while this scenes were visibly reported, it is less well known that in Zulia State, just north of the pictures above, the Governor has promoted contraband from Colombia to Venezuela, purposedly looking the other way as the stuff is smuggled. Maracaibo and Zulia supermarkets are full of Colombian products at Colombian prices, a clear indication that at least some in Government have realized that allowing markets to work may be the best thing for Chavismo at this time.

Meanwhile, the Governor of Tachira State said that he would not open the border this week, giving him arbitrary power over the border, arguing he does not want to disturb the effort by both Governments to have a peaceful border. The reality is that the Colombian Foreign Minister said that the border will not be opened until it this becomes a permanent status. Nothing could be more logical than that.

For now, reopening the border will likely lead to much better supplies in Venezuela, but will certainly put pressure on the black market rate. As soon as the reopening is formally announced, many new businesses will set up on the other side of the border, where markets function and there is the rule of law.

Meanwhile, Maduro and his Government have been completely exposed as a total farce and failure. It is Colombia that can provide us with food and supplies. And Venezuelans are desperate enough to wait for hours to get to the other side…

While everyone was watching one “God” in Venezuela, Dios-dado, a different one seemed to ascend to power, Padrino (Godfather), as Maduro designated his Minister of Defense Vladimir Padrino, as his all power Czar of food supply and distribution. In Maduro´s words: “All the Ministers, all of the Institutions of Government will be under orders and in absolute subordination to the Great Supply Mission under the orders of the President and General Padrino Lopez”

I have been pondering over this ever since it happened, trying to understand what it really means. Not only did Maduro make the General his equal, but the General did not waste much time in making the statement that his objective was “To govern…”

A strange statement from a man that has been deeply involved with a “Government” that has ruled Venezuela for sixteen years, with the tight involvement of the Venezuelan military of which he has been a leader. Or did Padrino mean “To Govern well”, something which has definitely not happened since Chávez took power in 1999.

But while many saw this as a resolution of the power struggle between civilians and the Venezuelan military, one has to see it first as a victory of General Padrino Lopez over General Marco Torres, a more subtle Cszar over Venezuela’s Food distribution and Supply for quite a while, who also presided over the finances of the country during the same time.In fact, Maduro  did not say what the naming of Padrino Lopez implies for Torres’ Ministry for Feeding, as well as his total, albeit remote control, over both the Ministry of Finance and the Venezuelan Central Bank.

But Padrino may have moved too soon for his own good. He clearly believes in the “model” that the Government can buy and distribute all of the food for the country and eliminate shortages while holding inflation back. Which means that he has no clue, like his predecessors, that it is not the distribution model, but the economic model that needs to be changed. And since there seems to be no economists in the Cabinet, nor in Padrino’s team, Padrino’s effort will meet the same failure that Marco Torres’ did. And there is plenty of time before the end of the year for the same infighting  to point out that Padrino’s all-powerful mission has been a total total and complete failure: Shortages will increase and inflation will not abate.

Because as was reported today, from the same Government that took the the Simadi/Dicom rate to close to Bs. 700 per dollar, somebody has now realized that this was a mistake and the plan now, without telling or consulting the Cabinet, is to now lower that rate.

This may simply be General Torres trying to show he still has some power.

What’s next? Changing the exchange rate’s name again? How about Godmadi or Godcom? (In Spansih: Diosmadi or Dioscom)

As I noted two posts ago, this rate is irrelevant to the scheme of things, as it is the Bs. 10 per US$ rate that needs to be urgently modified. Someone should ask these “Supply-Side-experts”, including Torres and Padrino, why not simply give away the food for free and eliminate shortages, after all, the difference between Bs. and Bs. 600 (Or Bs. 1000) is so large, that making it zero for distribution purposes will make no difference.

Meanwhile Maduro  wants to extend his Emergency Economic Powers, despite the fact that under the previous two, both not approved by the National Assembly, shortages grew, international reserves went down, inflation increased sharply and the country’s oil production dropped by more than 10%.

Thus, this battle of the multiple Gods in Venezuela, seems more like a brawl among empty headed buddies at a bar, to decide who will play better billiards when they are no longer drunk.

And the winner may be somebody else…

I was in Caracas two weeks ago, but kept traveling afterwards, thus I am late in reporting the price increase of the June arepa, which by now does not surprise anybody. Despite the Government’s efforts to limit monetary liquidity, as a way of stopping the parallel dollar, you can see from the graph above that the slope is essentially the same.

The price of the arepa rose from Bs. 1,400 to Bs. 1,600, a 14.7% increase in four weeks, comparable per month to increases in recent months. The one year increase was 400%, roughly in line with values since December.

One interesting fact was that I actually go to two different arepa places and this one has been the most expensive one since I began keeping tabs in late 2014. Not this time, as the same arepa de queso de mano cost much more at the second location. This to me indicates the difficulty people have in setting prices, a characteristic of hyperinflation. I noticed this also in restaurants. By now, supermarkets are crowded at all times. I was told that the supermarket I have been going to since I was like 17 will be shutting down. The owners are simply scared now to handle crowds or risk looting.

The disconnect between Maduro and those that surround him is simply staggering. The party of the “people” no lonegr recognizes who the “people” are. Or what they want…

In the beginning ,,,

Chavismo tried to expropriate land and agricultural companies. It did not work…

It then tried to get into the production business. It failed…

Then came exchange controls. One lower rate for essentials, another higher rate for non-essentials. A third parallel, and legal rate, the swap rate, sprouted spontaneously.

Except the difference between the first two rates became wider in time, the subsidies became gigantic (including dumb subsidies for travel abroad) and the third rate soared.

Thus, the Government made the third rate illegal. Which did not stop it, it simply became the black market rate, which continued to go up…

Price controls were then introduced…

In parallel, the Government became importer of goods at the lowest rate, expropriated whole industries and began to distribute products without the private sector. Shortages began.

Profit controls were then introduced…even larger shortages became daily events, as inflation soared…

By then, the official rate stood at Bs. 10 per US$, the second rate at Bs. 200 per US$ and the black market rate around US$ 1,000.

Just imagine getting your hands on anything imported at Bs. 10, export to Colombia or sell it to those desperate for acquiring for it. We are talking profits of 10,000%…

If you sell it locally, profits are less, but there is less work, Bachaquerismo became a profession. Arbitrage at its best!

This was the picture three or four months ago when the Maduro Government supposedly decided to do “something” about the distorted Venezuelan economy.

This would be the picture for the exchange rates at the time:

If you want to “get” the size of the distortions, think about this picture: At Bs. 10 per US$ monetary liquidity (M2) is about US$ 500 billion, a large amount for the Venezuelan economy. At Bs. 1,000 per US$ it is barely US$ 5 billion, peanuts for an economy of a couple of hundred billion dollars of GDP.

It does not take a genius to realize that the first rate, Bs. 10 per US$ is simply too low and should be moved first closer to the second rate which is “only” twenty times larger.

Instead the Government, in its ignorance, decided to:

1. Create a “new” rate called Dicom which would start at the level of the second rate (Bs. 200 per US$) which was called Simadi. New regulations would be issued within thirty days
2. Keep the lower rate of Bs. 10 per US$
3. Slide the second rate towards the third rate
4. Adjust controlled prices on a large number of essential items
5. Quietly (Very quietly!) forget about profit controls
6. Restrict excess liquidity in the financial system to lower the black rate

Today we thus have:

                  Mostly Government                             Little Volume                  Limited by liquidity

The result is that today, the Government has moved prices up, fueled inflation, barely affected the black rate and done little about shortages. It “adjusted” the Venezuelan economy, without the benefits of an adjustment.

And the Government, for example, has yet to issue the Dicom regulations. That’s how efficient they are!

Why can’t the Government solve the problem with shortages or just improve supplies?

Easy, at Bs. 10 the main importer and distributor is the Government, some importers of essential goods are given some dollars, but it is a small fraction of the overall amount.

The Government is not only inefficient, but there is wholesale corruption, over-charging and a lot of the stuff imported is taken to Colombia and other bordering countries.

And the private sector can do very little to help, because it has been minimized, it has become for lack of a better word, miniscule. There were over 600,000 employers in Venezuela in 1998, there are around 260,000 now.

That’s how bad it has been decimated…

But to understand why shortages can not be reduced by the private sector let me give you an example: Assume for a second, that you are a private meat importer/distributor. A meat cargo ship carries somewhere around 15,000 Tons of meat. (About a two day supply for the whole country). Depending on the type of meat, this would cost around US$ 25 million to US$ 35 million to import.

Let’s say it costs US$ 30 million, simply as an example.

There is NOT A SINGLE COMPANY IN VENEZUELA that has enough Bolivars in the bank to pay for this ship at the Dicom rate of Bs. 600 per US$., as this would be Bs. 18 billion. (0.36% of M2)

In fact, not a single private or public bank could lend any company this amount, as the largest banks have capital of about Bs. 50 billion and they are not allowed to lend more than 10% of their capital to a single customer (Which mostly don’t do anyway, it is just too risky, suppose the Government nationalizes that company). It would take a syndicated loan of all banks to bring a ship that carries all of two days of meat for the whole country.

Get the picture?: Even if the Government gave a company dollars to import meat at the Dicom rate, no company could pay for a single ship (two days supply). This applies to wheat, corn, rice and many of the basic staples needed for the population. And the Government is not willing to give foreign currency at any other rate to the private sector. It reserves the Bs. 10 rate for itself

This simply shows how hyper-distorted the Venezuelan economy is today.

At Bs. 600, the largest private bank in the country has capital of around US$ 90 million, ridiculous for the size of the economy. No company can receive dollars at the Dicom rate and bring any sizable import that would make a difference.

The economy is simply trapped in the hands of an incompetent, inefficient and corrupt Government that has tried to control everything.

The whole thing is so distorted, you practically have to start from scratch to fix things…Eliminate all the rules, controls, regulations, start over…

By now, news about shortages, hunger and protests in Venezuela have become quite fashionable in the international press. It is a crisis that is difficult to understand: How did such a wealthy country get into such a state that it can’t even feed it’s people? How could the one time appealing Chávez revolution stray from its supposedly heroic course? What went wrong in Venezuela?

For those of us chronicling the fake revolution, this is no surprise. We have been recording the inefficiencies, the corruption, the waste and the incompetence of Chavez and his cronies, to say nothing of the hare brained policies and controls of the last seventeen years.

Despite this, people want to be simplistic about what is going on in Venezuela. They think it can be understood simply as the “fall in oil prices” or “Things went wrong after Chávez died”, ignoring the fact that the origins of the crisis, as well as its most symptoms, such as shortages and inflation, began appearing in Venezuela long before Chávez died and way before the the downturn in oil prices began in July 2014.

The biggest myth is that the fall in oil prices is at the root of the current problems. Nothing can be further from the truth. As shown in the graph below from Econoanalitica, the Venezuelan economy was in trouble long before that:

As oil prices hovered around US$ 100 per barrel in 2012, the Venezuelan economy began sputtering under the weight of irresponsible policies and ever increasing Government controls. In the first quarter of 2013,  when Chávez died, oil was at a hundred, but the Venezuelan economy could barely manage less than 1% growth in GDP. And by the first quarter of 2014, with oil still above US$ 90 per barrel, the economy began contracting by 5-6%.

And long before the fall in oil prices, inflation, which was already running high, began soaring:

jumping from 21% in 2012, to 40.6% in 2013 and increasing to 62.2% in 2014 as oil prices finally began their decline. No direct effect of the oil price drop there either.

And as oil prices began dropping in the summer of 2014, scarcity levels had already reached absurd levels, as shown in this graph:

As by the time oil prices began dropping, Venezuela (the plot is only for Caracas) was showing shortages for 50% of the items considered to be basic.

Of course oil prices exacerbated the situation, increasing it to the near 90% levels seen today, but the root causes were sowed during many years by the absurd policies, widespread controls and increasing domination of the Government in the Venzuelan economy.

So, PLEASE, don’t blame the drop in oil prices for Maduro’s and Venezuela’s problems. You don’t see the same thing happening in say, Ecuador, an oil-dependent country with an equally populist Government, but where policies have not had the level of improvisation and ignorance that Venezuela has had.

What happened and is happening in Venezuela has its roots in policies that began in 2002-2003, when Hugo Chávez decided to involve the Government in producing foodstuffs, as well as controlling prices and the rate of exchange. The Government got involved initially in sugar, farming and milk production and distribution. Grandiose projects were started, most of which were never finished and produce very little today. Today, even some of the more emblematic products in which the Government got involved, are mostly imported with heavily subsidized dollars. Thus, not only was the Government a failure in producing these products, but it also destroyed the ability of the private sector to compete, as it began limiting their access to foreign currency, while importing products at the lowest possible available rate of exchange.

Since this was not working, the Government began then controlling prices, later extended to controlling profits of companies, a true recipe for disaster. And as the Government did this, it spent more on importing less, as the inefficiency and corruption, as well as over-pricing, began dominating the whole food chain from importing to distribution, leading to where we are today.

And as the Government did this, it created ever increasing and intertwined distortions, most of which are not only still in place, but are part of a complex and convoluted economy, which will be discussed in Part II, and which needs to be fully overhauled from scratch in order for the Venezuelan economy to begin a new path to normalcy.

But in the end, the fall of oil prices had little to do with most of it, in the same way the rise of oil prices did not create the value or the wealth that it should have.