The Devil's Excrement

(Version en espa�ol aqui)

Well, this picture is going to need some words and explanations as it is part of the difficult problem facing the authorities.

This picture is all composed of data from the Venezuelan Central Banks webpage, converted to US$ at the official exchange rate of Bs. 2,150 to the US$. The red curve represents the monetary liquidity (M2) composed of all of the bolivars in circulation, including all savings accounts, repos and CD’s at banks. The first thing to note is the rapid expansion of M2, which has gone from US$ 20 billion at the beginning of 2005 to US$ 55 billion at the end of 2006. This is an increase of 175% in two years and 69% for 2006.

This growth in the money supply is a problem for the Government. Too much money in circulation pressures inflation and, given the deeply negative interest rates (savings rates~4-6%, inflation 17%) it pressures the parallel exchange rate as people seek that market in order to protect their investment. Similarly, too much money in circulation within an exchange control system, also drives merchants to the parallel market.

Now, yesterday, I noted that the country’s debt was manageable. This is true, but the Central Bank can also go into debt independently of the Government. And it has big time! As M2 grew too much, the Venezuelan Central Bank began issuing CD’s (Certificate’s of Deposit) to local financial institutions in order to absorb part of the excess monetary liquidity or “sterilize” it in the jargon of monetary authorities. The orange curve shows the growth of these CD’s in time, they were almost non-existent in 2003 and now the stock has increased to the amazing amount of US$ 18.2 billion. Most of these CD’s are 30 days and receive an annualized rate of 10%. (Some receives only 6% but it is a small fraction).

In addition, banks have to place as reserves 30% of all their deposits, half of which gets paid interest. This is the green curve. The blue curve is what I call Abs in the graph for Absorption=CD’s+ Reserves, which currently stands at US$ 30 billion, since it represents all of the liquidity absorbed by the Government.

The problem for the authorities is that M2 has grown too much and the Central Bank cannot continue issuing CD’s at will. Why? Simple, because it may go bankrupt. You see, the Central Bank pays interest from the return it obtains from the country’s international reserves. Currently reserves are at US$ 36 billion and while it is not known how they are being invested, we know an important fraction (~25%) is in gold, which receives no interest. The remainders we are told is mostly invested in Euros, which means it get a return between 3.5-4%. If we are generous and say 4% (we could say 5% and the argument would not change), that means the Central Bank has income of about US% 1 billion from this.

But you see the problem? The Central Bank receives US$ 1 billion in interest but has to pay 10% on about US$ 18 billion, or US$ 1.8 billion plus about 10% on bank reserves which is an additional half a billion US$, for a total of US$ 2.3 billion.

And that is why the Central Bank can no longer increase its absorption operations; it is already losing too much money by issuing these CD’s. Last year, reserves were increased to 30% and the Central Bank has maintained roughly US$ 18 billion in CD’s, but it cannot issue more. The problem is that M2 keeps growing as the Government spends, spends and spends,

Why does this happen? Simple. Monetary liquidity comes from the Central Bank issuing Bolivars against the international reserves it has in US$. But some fool (the current Minister of Finance?) came up with the idea of giving part of the reserves to the Development Fund Fonden. Thus, international reserves have remained constant, while monetary liquidity has expanded dramatically in the last two years. Thus, if they had not taken the reserves from the Central Bank, it would be able to finance itself, but they have done it twice and Chavez intends to do it a third time to the tune of US$ 8.7 billion, leaving US$ 27.5 billion in reserves or less if oil stays where it is today.

Why doesn’t the Central Bank go bankrupt? Because so far they have used extremely creative accounting such as the Government paying back debts nobody remembered and allowing the Central Bank to have foreign exchange gains. But they know it cannot increase.

And that is one of the main reasons why the parallel exchange rate is under pressure. As the monetary liquidity has gone up, the absorption has remained constant and more money is in circulation looking to get out. Unfortunately, the Government does not have as many weapons to fight this, precisely because it created so much inorganic money.

Let’s see the options:

1) It can’t increase the stock of CD’s, the Central Bank would be in trouble
2) It could increase bank reserves, but that could create profit problems for some banks.
3) It could issue a dollar denominated bond to soak up liquidity. However, if a year ago a US$ 3 billion issue was 20% of the excess liquidity, today it would only be 12%. Thus, it would have to issue a US$ 6 billion bond to have an impact, which may be too large for current international markets. In any case, in a couple of months new liquidity would erase the effect.
4) It could devalue. This would devalue the country’s internal debt as well as the BCV’s CD’s making it easy to pay. It would give the Central Bank new foreign exchange gains. It would also relieve pressure in the parallel market and provide more Bolivars to the Government.
5) It could limit withdrawals in bank accounts, “Corralito” style.

Not a pretty picture, no matter how you look at it. As I have said before, you can temporarily ignore the laws of economics, but it catches up with you. It is a phenomenon intimately related to the Devils’ Excrement and its corollaries.

This is a really bizarre story. Mision Sucre is one of the “misiones” created by the Government, whose objective is to help those with a high school degree to have access to higher education. I have questioned this program, because the Chavez administration seems to be making the same mistake every Government in the last, at least thirty years has made, to emphasize higher education over lower levels. But that is beside the point.

Last Sunday, at Chavez’ Sunday Reality Show, they invited a girl representing “Mision Sure” Knowing how well this shows are staged, I am sure that Mari Quintero must have been one of the better and more articulate students of Mision Sucre. Right before the girl came on Chavez spoke badly of the cooperative program, his brainchild, which clearly is not going well since the President himself is saying it. And then came Mari to show to us and , hopefully, the world, how these misiones are used mainly to indoctrinate, instead of teaching them anything useful or what the programs are supposed to do. This is the exchange between Chavez and Mari, which says it all, as told in El Nacional today:

It was all Mari Quinetro’s fault. The girl, representing Mision Sucre, was part of the Sunday program Alo, Presidente, which was held the day before yesterday from Cojedes State. As proof of his relaxed relationship with the people Chavez decided to interview her to know about her specialty. The young woman indicated that her course was on processing and conservation of fishing products.

“Tell me-said Chavez-, what you have learned? How does it work with fish? How long do they last in the belly? The fish is oviparous, no? And then, tell me, what you have learned?, the head of the State asked her.

Quintero, without doubting, responded to him: “Right now they are talking to us about socio-political education, about hegemony, value added and that type of terms”�.

The President, surprised, crossed-examined her: “And about the fish, what you have learned, then”�.

And the girl said to him: “We have not begun to learn about it”.

The chief executive insisted on learning how advanced the course was.

The student told him that they began on October 15th.

Chavez wanted to know when the practical aspects would begin. With a smile of irrefutable security, Quintero indicated: “It will have to be tomorrow”.

A conversation then followed between the President and the instructor of the young person, Ubaldo Puerta. He informed the speaker that at the beginning of the courses they offer, “a socio-political education related to socialism, the social education of the individual, cooperativism”

But he entered into a contradiction with the student, because while Puerta assured him that that part lasted 15 days, Quintero said that they had been receiving three months of instruction.

Later the Minister for the Popular Economy, Pedro Morejon, took part and he tried to clarify the panorama, but Chavez was implacable. He requested the syllabus which they were following to review it later, and returned to the young girl “Okey (OK, in Spanish), now, Mary, tell me: when they finish the course, what are you going to do”.

The student indicated that they would try to form a cooperative, although previously the President had criticized that form of organization.

“Aha, and you already are visualizing some project in which you are going to work “. This only generated an even more startling answer still: “No; but as soon as we begin the practical part, we will see what the cooperative will be about”.

It was at that point that Chavez decided to leave it at that. One assumes that Mari Quintero must have immersed herself finally today, in the world of the fish farming.

Somehow, I have always liked this sort of humor:

I am used to watching “Who wants to be a millionaire”, but I have never seen “It is bad to be rich”!

This is a very plain vanilla plot, but it needs to part of the collection  for reference. Last year  external debt went down as the Government concentrated on giving Argentina a hand, rather than improving our debt profile, which could have been done. External debt is still manageable at these levels as long as oil prices hold up. Internal debt has stabilized as it has gotten more difficult for the Government to place it unless it offers some type of dollar linkage as in the new so called TICC’s. As a percentage of GDP this are reasonable levels, except that at current yields (<7%) it is not clear that there would be appetite abroad for a Venezuelan issue larger than US$ 3 billion. A devaluation would lower internal debt significantly.

So, the all mighty, all-powerful, Hugo Chavez said this yesterday:

“ Where are the mayors, governors what happened? (…) It’s a fraud, a deceit. This incenses me. I request forceful action by the Office of the public prosecutor, by the Judicial Power and the Comptroller (…) the date of delivery (in Tucupita) was February of this year and they have barely advanced 28%. At that rate they never will finish and if this continues thus governors and mayors, ministers, if this followed then all we would have within years would be a cemetery of things that we began to do and they were not finished and we were so vagabond that we saw it and we allowed it. I respect much the autonomy of the municipal power but I am the head of the State (…) But there is a Constitution. If we have to begin to scrape mayors, we will begin to scrape mayors, if we have to begin to remove governors, we will begin to remove governors. Lady President of the National Assembly, I want to review the Constitution because they are positions with popular election, it is necessary to respect them, but there are causes, and they must be in the law, for their suspension, their removal or whatever. It cannot be that this is happening. This produces a lot of pain in me, it hurts the heart, it hurts my soul. More pains come to me. Motherland, socialism or death over everything”

Well Hugo, this simply shows why your Government simply does not work. First of all, you do not even understand the law. This has been happening for your eight years in power, the sugar plants don’t get finished, CVG Telecom does not work, Caracas is filthy, bridges fall down, roads are never built, Vargas State is as it was in 2000, all of this mostly because the people you choose (most of his Mayors and Governors were hand pickedby you among your fellow and loyal incompetent military officers) have never run even the military canteen.

The second thing you don’t not understand is that the only way to “scrape” a Governor or Mayor is for him/her to finish the term, be recalled by the people, at the midpoint of the term, have them die on the job or have a firm sentence of fraud against him/her. There is no other reason, much like so many other things you plan or say, just wishing it wouldn’t make it so. Thus, you might be the Head of State, but you cannot scrape other people elected to hold office. And your wishes are not the law or supposed to be the law.

Third, what you are complaining about is the consequence of throwing money at problems without having expert people look at it. Knowledge, not ignorance, is power. The shrimp farmers in Delta Amacuro were given about $300,000 to start the company, farm, infrastructure and all and they probably would not recognize a shrimp larvae even if they saw one. I find it hard to believe (And I know nothing about the subject) that you can start a shrimp farm with US$300,000. These Chavistas probably figured the same thing out and decide to just split the money and split themselves, and long live the revolution!

Finally, the Prosecutor, the Comptroller and the like have been too busy persecuting your enemies, under your orders to do that job, so that even if these Mayors and Governors had committed an illegality they have not been under your buddies’ radar since they are just trying to wipe out competent and efficient people like Leopoldo Lopez and Enrique Mendoza from the political map, so that your buddies can take their offices.

The problem at the end is that, as Alberto Barrera said, you think that when you are talking BS for six or seven hours each Sunday, you are working. You are not. You are doing politics. Work would have been understanding what these projects are or choosing the right people to run them. Work would have been removing street vendors seven years ago, one year after your first allowed them to invade all public spaces and not now. Work would have been to understand and study how cooperatives work best and not to complain yesterday that the textile coop has not started working, but the workers use the pool at the factory every day. Work would have been being aware that your own buddies running the Government were increasing their salaries by a factor of ten during the last ten years in the name of the revolution. Work would have been having a plan eight years ago and not eight years of useless experimentation and your “I thought of this yesterday”, day after day, week after week.

What do you expect Mr. Chavez? You seem to enjoy the perks of power, your fancy suits, the watches, the trips, your Airbus, which cost US$ 80 million. Well, these people at the textile factory have no productive job, they see the pool, and they use it. They like to enjoy these little perks too. It’s called human nature.

And that human nature is the one you fail to understand, people don’t want to sacrifice, they don’t want to be all equal, they want to improve their lives, they want to do better. They want the coop to make more money for them, not less. They can barely scrape up a living, let alone sharing the gains with the community. They don’t want socialism or death, you didn’t even ask them!

And yes, if there is no work and the pool is there, they also want to be able to use it. Why not?

While I read the magazine “Zeta” every week, I tend not to like the Editorials by its Editor/owner Rafael Poleo, but I enjoyed quite a bit this week’s editorial, even if I don’t agree with everything it says and thought you might enjoy it too, so here it goes.

Only Bush can save Chavez by Rafael Poleo in Zeta.

Hugo Chavez is not the first president to whom I allow myself to give observations on his budget which in the course of the year will coincide with the facts. With my friend Jaime Lusinchi, who seeing in perspective was the best president of his generation – it is enough to remember that he lowered the national debt considerably with an oil income six times smaller than the present one-I would have a collision every year because, as I used to tell him, with my Casio pocket calculator of the size of a credit card and powered by solar energy and which was supposed to be used only to go to the supermarket, I would calculate national income and expenditures better than his Minister of Finance.

Chavez’ numbers for the year are equally false. Being a politician who is as much of a liar as a “Romana de Palo”* , it is quite possible that Chavez is a contributor to the deceit. But one also must consider that that gypsy never added up anything in his life, even his personal expenses. So that if Jaime, who as Head of the Parliamentary Caucus of the party in Government had, for several years, to review the National Budget and to handle its discussion by a Legislative Power which was both power and was legislative, was lied to by his Minister of Finance, who at least passed for a decent person, Chavez, who has no clue as to how you eat that stuff and whose Economic Cabinet is composed of a bunch of crooks from the Fourth Republic, it is much easier for them to wrap themselves around him, so that the Chiefs of the official finances can continue doing their deals, behind the President’s back. More so, if our nut ejects from his surroundings the serious and capable revolutionaries, like doctor Maza Zavala, who by the way was one of the most solid critics of public finances in the days of Lusinchi.

Hugo’s budget for 2007 dreams of an income of 52 billion dollars. Let us bypass the fact that no Latin American President has ever had so much money. Let’s reduce ourselves to the fact that the price of oil has been cut by 30% in the last six months despite the winter in the North. It does not seem likely that in this 2007 it will reach the 65 dollars per barrel that would be needed so that the income reaches the predicted level of expenses. In fact, for this year it is expected to be a little more than 50 dollars on average. That would mean about 35,000 million dollars for Venezuela – it is not easy to pinpoint it, because, that is the other problem, the Government also lies about the volume of extracted oil, exaggerating it to disguise the inefficiency into which PDVSA has fallen. In sum, he lacks about 15 billion dollars. The taxes that they steal from us are not sufficient, which is why Tax Superintendent Vielma Mora walks around like a dog with worms, looking for ways to squeeze some more out of those Venezuelans who still make an effort to produce, including modest workers. But even with that it is not enough. That is why they will increase the price of gasoline, a good that is monopolistically produced and sold by the Government.

In this matter of gasoline there is a particularity which is indicative of the ignorance which about such vital matter may be housed in the big body of the barines, a baby bull fed by the bonanza that we lived in the Fourth Republic. Chaez has ordered the “revolutionary”, that one with the little voice that manages oil, that the increase of the price of gasoline must be done without inflation. Economic experts worldwide, socialist and neoliberal, must be keeping an eye for the formula that the “revolutionary” will invent to realize such a miracle. Because the price of fuel inevitably affects that of transportation, and as everything must be transported, all costs go up and therefore prices. If Chavez’ oil manager does the miracle, we must withdraw the request for the canonization of Jose Gregorio Hernandez, which is not moving forward because his miracles have failed to materialize, and request the one of this civil servant.

Things get even worse because of the fact that the mythical budget forgets a very fat budget item. It may be that they can’t figure out what to call it. I propose to name it “Pimps of the President”. Of these, the ones with the biggest appetites are two: the skinny Kirchner and the serial assassin from Havana, the one that shits from the belly. The one from Havana does not have budgetary problems. He spends and the Venezuelans provide what is missing. It is an open faucet that runs in a single direction. The cross-eyed guy from Buenos Aires does not have it equally easy, but he defends himself blackmailing the young bull from Barinas: whenever there is a meeting of Mercosur, he raises the price of his friendship. Any day now, we need to send him 2 billion dollars, payable with the increase of the price of gasoline. And a bigger one is coming soon, because the Supreme Court decided that those Argentineans whose dollars were taken away from, when the “Corralito” took place, will have their money returned. In my opinion, I don’t know if if in yours, that decision was agreed on between the Justices and Kirchner. The court ruled in favor of the Argentine account holders, knowing full well that in Caracas there is a pitcher that will deliver. Argentine citizens will receive 5 billion dollars that will reactivate the economy of that country, while here the rough times go on an on and we will borrow abroad because, as we have seen, oil is no longer esufficient. What balls!

I have always said “In Venezuela there are no good nor bad governments, but good or bad prices of oil”. Chavez shattered this axiom. His case proves that there can be a bad Government with good prices of oil. But some people are born with luck. His enemies always save Chavez. Carmona saved him once, another time somebody in the Coordinadora who for now I am not going to name did it, and more recently the triad Petkoff-Rosales-Borges. This year the man that can save him is Bush, invading Iran. We can’t foresee any other way for oil prices to increase to the level of what is needed for the big spender that we have here. So that you see that in matters of politics things are not what they seem. Hugo Rafael and his court of pimps must be praying so that the cowboy from Washington moves forward to sweep out the Iranian that they publicly endorse. Because in this life each of us takes care only of its own.

* The llaneros of my generation, who did not go around in “cuadratrak” but on mules, got to know the Romanas (balances invented in ancient Rome) constructed from wood (palo) which we used to weigh the cattle. Of course, those devices, which were homemade, were not very exact. They lied. From which that archaic expression comes, “A bigger liar than a Romana e’palo”, used by this old reporter to describe the behavior of politicians like Hugo Rafael.

This weekend I was going to write about the expropriation of the “Aeropuerto Caracas” by the Governor of Miranda State, in order to promote “popular tourism”, according to the decision by the Legislative Assembly of that State. This decision is a surprise. Other than to exert control over people, there can’t be any justification for it, more so, when Miranda State has two other airports that belong to the State and that have been supposedly part of plans to expand them and increase their importance in the last two years. In fact, the Governor of Miranda State even appeared in Chavez’ program Alo Presidente early in 2006 to talk about this grandiose plan.

Aeropuerto Caracas is a concession to an association and both commercial and private flights use it daily. It no longer has international flights because they were prohibited by this Government two years ago, when the Caracas airport was closed to airplane traffic (a decision which is violated daily, when at least a dozen Government planes take off and land in the La Carlota airport of Caracas).Aeropuerto Caracas also includes hangars in private land around it and it is as yet unclear if this is part or not of the nationalization. It is run well, maintained well and run efficiently and Government airplanes pay no fees for its use.

If I was surprised by this decision, today I am amazed by it, as I learn that in a contigous State, exactly the opposite is being done. Indeed, Governor Acosta Carles has given the concession of the Puerto Cabello International Airport for 50 years, under terms that can only be called extremely sweet, as the company getting the concession will not have to pay anything to the Government for the first 11 years.

As if this were not enough, the person signing the contract in representation of the company happens to be General Victor Cruz Weffer, a Chavez buddy and supposedly a revolutionary, whose tenure as Head of the Bolivar 2,000 program was marked by irregularities, scandal and corruption, but nothing ever came of it.

Thus, it is clear that this revolution is a farce: While the Government expropriates, nationalizes and takes over majority of companies, land, airports, joint ventures and the like from their rightful or contractual owners, it does exactly the opposite to its friends and supporters, giving new meaning to the terms bolibourgeois and robolution.

Last Tuesday, mycologist Gioconda Cunto de San Blas, was incorporated as a numbered member of the Venezuelan Academy of Physical Sciences, Mathematics and Natural Sciences, a fact that I pointed out earlier in a “good news” post. Dr. San Blas is the first woman to become such a member of the Academy. I was unable to attend, but Dr. San Blas sent me a link to her presentation, as well as the text accompanying it, which I will attempt to upload and link to later.

I thought it was worth translating her words in slides 39 and 40 of her presentation, which in Gioconda-‘s customary principled style, speaks out for women in science, freedom of speech and against the attempt by Chavez’ revolution to redefine with ignorance the concept of what science is or should be. These words alone should tell you, why Dr. San Blas deserved to be a member of the Academy, not only because of her distinguished scientific career, but because of the certainty that she will not only fight, but she will never be silenced. At times like this, Venezuela and the Academy require more women and men like Dr. San Blas. Indirectly, Dr. San Blas is referring to the case of Claudio Mendoza referred to earlier, where the ugly clouds of fascism and intolerance have become a reality in recent days.

Dr. San Blas’ words:

“My incorporation comes signed with the commitment to support my fellow academics in achieving greater visibility, directed towards the incorporation of new female members in the Academy, in the certainty that all of us will be up to the new challenges that are posed by a society evolving as fast as the present one. I make my own, the words of Ir�ne Curie, not only a Nobel prize winner – as we already saw- but a distinguished fighter for the rights of the women, who said at some occasion: �I am not one of those that think that a woman scientist can lose interest in her role as a woman, in either her private life or in her public one�. It is in that interest for the public cause, which is nothing but the meaning of the word Republic, that I am concerned about the dark clouds that are looming against the indispensable and enriching freedoms of expression and lecturing, a fog that slowly, but without pause, seems to be penetrating these academic and university corners, to prevent that there may freely arise from them, diverse ideas and thoughts, to be freely contrasted with aid of only reason. We are already being threatened explicitly and without scruples from the highest spheres of power with a future conflict with the centers of knowledge. We talk about the necessity to make science pertinent, that is to say, that which is oriented towards the immediate needs of the country, as long as the cold experimental data are not politically impertinent, that is to say, opposed to the content of official speech and under the assumption, denied by the facts, that researchers have been working with their backs turned against our national reality and that it is only now, that we will dedicate our efforts to it. We are being told today about popular science, to be generated by supposedly spontaneous creators without any academic training, in apparent contrast to formal science. But they deceptively obviate, that the latter is the only one capable able of creating universal valid knowledge, starting from criteria rigorously verified and poured off throughout centuries of experimentation, that all the modern advances, from electricity to fertilizers, from aeronautics to computers, from vaccines and medicines to cellular phones, that today improve our possibilities for comfort, have not been products of an improbable popular science, but of the indispensable and rigorous formal science made by scientists of high professional qualification and transmitted to the people in the form of applied technologies. We now want to quickly educate thousands of scientists and technologists without the appropriate maturity of knowledge, so that they help in the construction of a modern country, denying the high level contributions that in the last 49 years have helped, even if in insufficient form, in that direction. But one thing is true; they want scientists who will silence their own opinions about the specialized subjects that are their own, whenever they may brush up with political interests that it is not convenient to stir up from academic and university podiums. In short, with veiled threats and others which are not so veiled, it seems that times have arrived in which every one will have to reframe his/her position with respect to the State. If this ever happened, we can only hope that such individual decisions do not take us in the future to deserve a collective condemnation similar (although, without a doubt, in a different context) to which General Telford Taylor, in the trials of Nuremberg, launched towards the German academics, when he reprimanded them for their lack of decision to oppose Nazi pseudo-science: �� They are the men who absolutely failed their country and their profession, that did not show any courage, nor wisdom, nor any vestige of moral character�.�

Amen

(Versi�n en espa�ol aqui)

Politicians are certainly a different breed. They can lie, pretend to be stupid, be stupid as well as cynical and they keep a straight and even a smiling face all along. This applies to all politicians in Venezuela from IVth the Vth. Republics, this is nothing new and not exclusive to the Chavez Government, but the spectacle of the last few days with respect to the parallel market and exchange controls has certainly been one of the most pathetic ones I have ever seen.

The first thing that is amazing about politicians, and I repeat this applies to those in the past as well as the present, is their naivet� in believing that if there is a problem you just legislate and magically it will go away. Venezuela has had a judicial system which is almost inoperative and corrupt, for years. Despite this, the emphasis in Venezuela by politicians is always on creating new laws, rather than the enforcement of them. You can just go to any street light in Caracas and watch to see how irrelevant laws can be for both the authorities and the citizens.

But a better example is corruption. Venezuela has one of the most strict and modern ant-corruption laws in the world, the �Ley de Salvarguarda del Patrimonio Publico� which was approved in the early 80�s. Despite this, and the fact that there has always been huge levels of corruption and that corruption is rampant today, only one person in history has ever been jailed under this Law and he was let go.

In February 2003, the Chavez administration established exchange controls in Venezuela. Exchange controls have always proven to be a losing proposition for Venezuelan and Latin American Governments, due to the lack of discipline in spending as well as the many distortions they create. They can be short-term tools, but very, very seldom have they been used that way in Latin America and certainly never in Venezuela. In fact, each and every one of the controls imposed in Venezuela has lasted too long and ended up badly and the current one does not seem to be any different as distortions have surfaced and by now this is the longest lasting exchange control in the country�s history by far.

To begin with, when the Chavez Government imposed exchange controls in February 2003, all it did was to limit access to Government foreign currency. While it forbid operations with foreign currencies, there was no legislation that forbid it, thus, you could not do it, but if you did, there was no punishment for it.

But additionally, the decrees did not and could not forbid certain type of transaction such as the conversion of local shares of companies to those that trade abroad, essentially creating a possible mechanism for getting money out or bringing it in. A second possibility was to do a �swap�, simply purchasing a bond in Bolivars and swapping it for one in US$ once again converting from one currency to another.

Soon after the exchange controls were imposed, the Government introduced a Bill in the Assembly in April 2003 to declare certain operations with foreign currency illegal, but the Bill was curiously not approved until October 2005 and then explicitly allowing both the share conversion and the swaps, by saying that all capital market securities were exempt from that Bill.

At the same time, a parallel legal market to trade foreign currency developed, which used both the conversion of shares and swaps. As this market became more organized, its volumes expanded. Since the net flow is out, pressure on the parallel exchange rate got stronger and the value in this parallel market for the dollar increased. At this point, some clever Wall St. adviser to the Government (Yes, they use them!) suggested to the Government in July 2004 that one way to reduce this pressure would be to issue a Venezuelan Sovereign bond in dollars, but sell it to local investors in Bolivars, as a legal and one time shot for getting money out and at a cheaper price than the parallel market.

And it worked! It worked so well, that the Government did this many times, relieving the pressure in the parallel market and keeping that second rate down. Basically, these issues remove or �sterilize� monetary liquidity, thus there are fewer Bolivars available for buying dollars.

Then the Development Fund Fonden was created by law and given part of the international reserves with the mandate that it could only spend it in foreign currency. Another clever fellow then suggested that Fonden could buy bonds from Argentina, which could not place them directly in the international markets and turn around and sell them to local banks, which would then sell the dollars in the local parallel market. This then accomplished three things at once: It helped Argentina politically (good for Chavez!), it allowed Fonden to get local currency without violating the law and finally, it provided US$ to the parallel market, thus the Government was directly intervening in the parallel market to keep that rate down.

But there was a fourth reason to make this interesting: it became a racket in which only certain “friendly” and paying institutions would get the bonds, with both sides making a bundle. Remarkably, except in Tal Cual or here, you read very little about this huge corruption racket in the media.

The government sold in this manner some US$ 3.6 billion in Argentinean bonds in the parallel market and later it came up with another scheme using structured notes that accomplished almost the same purpose.

The problem was, that 2006 was an electoral year and the Government refused to devalue the currency and spent like crazy to keep its popularity. Thus, monetary liquidity increased by more than 70% in 2006, while reserves barely went up by 16% creating extraordinary pressure on the parallel market, which I predicted would go up, only up! While the parallel currency stood at Bs. 2700 to the US$ in August, it jumped to Bs. 3,000 by November, Bs. 3,400 by Christmas and is currently around Bs. 4,100 to the US$.

Which brings us to our story.

After weeks of saying this is irrelevant, because the parallel market is too small, the Government is clearly concerned by now. The main reason is that the parallel market is not that small and merchants mark prices up using the parallel rate. To makes things worse, since December the Government has not provided any foreign currency to the market and interest rates are so negative that people want to buy foreign currency to preserve their savings.

So yesterday, the National Assembly held a hearing to discuss the issue. The first thing they talked about was the fact that after they wrote the law, they somehow did no put anyone in charge of enforcing it. The police apparently has not been told to do it and the Tax Office says it has not tools to fight it. So, the law is only as good as the paper it was written on, because nobody even thought of connecting the dots from law to enforcement. Some Government!

The second thing they discussed yesterday was the fact that the parallel rate should not be where it is, that it is all �speculation� as CADIVI, the Foreign Exchange Control Office is giving plenty of dollars to all importers. Well, this may be true, but not all imports are given dollars to begin with and right after the election, 3,500 items were placed in a special list, which requires that you provide a certification that a specific item on that list is not manufactured in Venezuela.

But more importantly, it has been quiet a while since the Government has given many companies foreign currency at the official rate to repatriate dividends, which is making these companies nervous as the currency depreciates either in the parallel market or simply because inflations closed 2006 at 17
%, the highest in Latin America and they fear a devaluation or two this year.

And that in itself creates a problem. The Government has been promoting an artificial drop in interest rates, with a 90 day Treasury Bill rate currently below 4%, below the equivalent rate in the US$, while inflation is running at 17%, well above the US CPI. Thus, savings rates in Venezuela are deeply negative, which makes people want to�.buy foreign currency.

And that is where the so-called �speculation� comes from.

But they blamed the �opposition� and the �speculators”, but obviously, it never occurred to them to blame the incoherent and stupid economic policies of the Government. Incredibly they will continue the �show� in the next few days asking a bunch of people to come to the National Assembly to be �interrogated�. Among them, the Assembly will invite the President of Banco Venezolano de Credito to inquire why it occurred to him to go to the Supreme Court to ask that they nullify some of the articles in the Exchange Control illegalities Bill. Once again, it did not occur to the illustrious Deputies that Mr. Garcia Mendoza, one of the few outspoken men in the private sector, thought somebody�s rights were being violated by the Law or that the law had too many discretional penalties, which is really what that suit is all about. Or even that he had the right to go to Court if he thought something was illegal. That’s what teh rule of law is all about. But they will harass him anyway.

But today, it even got more bizarre when the new Head of the Finance Committee of the National Assembly as well as none other that Deputy Amoroso, the same man that proposed the first foreign exchange bill, said they wanted to investigate �where� the dollars to the parallel market are coming from, as if the US$ 3.6 billion in Argentinean bonds came out of nowhere, together with some US$ 6 billion in structured notes. In fact, the problem is that the Government has not sold anything since about Dec. 10th. leading to the sharp rise of the last few days and not all of the spurious reasons they want to come up with. Maybe they should investigate themselves or stop grandstanding.

The truth is that they are caught in another corollary of the Devils� Excrement: The Politician�s Trap, which I defined in this blog last September:

�But it may more properly be named the Politician�s Trap, because it allows them to postpone important decisions in order to boost their short term popularity, but somehow it always ends up blowing up on their faces, with dire consequences which are always paid first by the people via devaluations, unemployment and inflation.�

And it is a trap, because damn if you do it and damn if you don�t. If they allow the rate to devalue it fires up inflation, if you hold it back, the decision will have to come later down the line at an even higher exchange rate, fueling inflation even more.

And thus, they all wish it will go away, but it won�t, they are trapped by their foolish economic policies, which violated basic principles of economics, which can be done, but only for so long. It has now come to haunt them and there is just no easy way out.

The proposals are the usual, the first, change the law to maybe even make the parallel market illegal, which will push the rate even higher, the second one is more bizarre or fascist, but so typical of their mindset: Ban the media from publishing where the parallel rate is at, as a way of limiting speculation. Of course, you may have El Nacional, El Universal, or even RCTV, stop publishing the parallel rate, but can they really stop internet media like Veneconomia or this US-based website from doing it?

I doubt it, so that maybe the Politician�s Trap should be renamed and called the Fool�s Trap, but I could get into trouble for that under the muzzle law, I would be insulting the so-called “majesty” of Parliament. Or some equally strange concept like that.

CANTV was first privatized in 1992. As a first step, the Government sold 40% of the company to a GTE-led consortium (GTE was later bought by Verizon) at an implied price for the whole company of US$ 4.2 billion. GTE was given a monopoly in fixed lines until 2,000 and CANTV did not have a cellular concession at the time and slightly less than 2.0 million fixed lines.

In 1996, the Caldera Government decided to float some of the remaining shares of CANTV in the local stock market and listing it in the NYSE. A bit more than 40% of the company was sold at an implied total price of US$ 3.8 billion.

Today at the close the total value of CANTV stood at US$ 1.3 billion, thus disproving Chavez’ statement that it was sold “cheap”. In fact, investment by CANTV alone is worth three four times that. On the contrary, if the Government took it over near this price it would be the Government that would be making a great deal by selling high and buying it back cheap. On top of that CANTV, in its Movilnet subsidiary, has about 6 million cellular subscribers, something that did not exist in 1992.

As a Government company, CANTV was simply terrible. You could only get through in one out of every three phone calls, it would take years to get a telephone and the company lost money. Here is a description by a reporter from the US who lived here then.

Why was this the case? Easy, politics, corruption and Government regulation. First, being President of CANTV was a juicy political position to which many incompetent people were named. (There were some good ones too!). Two, the company was badly run, there was corruption, too many employees, equipment diversity and decision-making was simply too slow. The company not only lost money, but it did not invest sufficiently to keep the service technically up to the required levels.

Of course, the Government argues that it will run it well. Hard to believe and if you are skeptical, remember three years ago Chavez created a telecom company to compete with CANTV called CVG Telecom. After 270 million dollars and four or five Presidents CVG Telecom is not close to even begin competing with CANTV. What can make anyone think that CANTV will be run efficiently and without politics. Being its President or on its Board will become one of the most desired by politicians.

Everyone has his/her horror story about the Government owned CANTV. I have many too, but just as an anecdote, on February 4th. 1992, the night Chavez staged his first coup, my first instinct on hraring the news was to connect by modem to the then nascent Internet. There was a network of Venezuelans called Atarraya (hosted at MIT) and I connected and started telling people what was happening, what was being said and the many rumors that were reaching me. I started at about 1 AM and because I was not sure if I would be able to connect again, I stayed connected all night essentially providing a “live” text broadcast of the news. This was not a cheap proposition, more so given that I did not live in Caracas and the call was considered a national long distance call. In the morning, Chavez surrendered, news died down and I decided it was time to go to sleep at about 8 AM and finally disconnected the call. Ten minutes later someone called me to tell me something that I deemed important enough to tell the people in Atarraya, I tried to connect for half an hour and between the bad CANTV network and all the gossipy Venezuelans on the phone it was impossible, I gave up after an hour.

Maybe somehow my blog was born that day, even if it started ten years later…and I certainly don’t want service to get that bad ever again…