The Devil's Excrement

Today Caracas’ newspaper Tal Cual describes the new perversion by the Chavez administration to maintain its control of public powers in Venezuela in its article “Assault on the Supreme Court”. A week ago I wrote an article entitled “A story of Pilferage (or is it rape?)” in which I described how Hugo Chavez was able to take control of all public powers by a series of maneuvers both legal and illegal throughout his Presidency. I described how the Supreme Court was selected single-handedly by him in 2000, but how time had eroded even the loyalty of roughly half the Justices in the Court. As described today in Tal Cual using the graphic above, which speaks for itself, Chavez and his advisors have come up with another perverse plan to increase their control. Essentially, they will take advantage of the fact that the 1999 Constitution does not specify (Art. 262-266) how many Supreme Court Justices there are. But the Constitution does speak about an Organic law for the Supreme Court, to be approved by the Assembly. Thus, the Assembly, taking advantage of this oversight (was it on purpose?), is attempting to pass this Organic Bill with an increase of the number of Justices from 20 to 30. Since the National Assembly is controlled by Chavez’ MVR, they will be able to pick and choose ten new justices at will. Perverse isn’t it?

The following letter has been circulating at the local German School in Caracas, from a parent (I have translated it liberally as usual)

Good Morning Gentleman

My name is Stefan Welch, I was born in Germany of British parents. I arrived in Venezuela two years ago through my company. The first two years I was not happy, I had difficulties making Venezuelan friends because they always seemed like they were mad, did not collaborate, selfish and they were not attentive when I asked for services or went to the supermarket etc. Before I had lived in Brazil for seven years and my friends considered me “tropicalized” and “adjusted to Latin life”. I did not understand why I could not adjust here.

This perception of Venezuelans has changed in the last six months exactly because of the opposite reason, for all the things that have happened and what is taking place now. People become more united by the day, more open and they have an incredible willpower to fight for their country that I had not seen before. What impresses me is the immense patience the Venezuelan people are showing with what is happening here. As I said before I am not Venezuelan and, sincerely, my education and culture would have made me lose my patience if all of this were happening in my country! As you know, rarely in European history has so much patience been shown, on the contrary, we had many ugly wars etc.

Even a President like you have here would have resigned by now so as not to reach these levels and if not, we Europeans would have done something more definitive. Is what our history teaches us.

The word COUNTRY was added to the vocabulary of Venezuelans, I want to tell you that this renewed love for your country is something contagious and it is already affecting me (and many other foreign friends that stayed here). I march nightly with people that live in my neighborhood, I have a home made drum made by a plastic jar of Montana paint (my fourth up to now, I have broken all the previous ones) and I also march in the large marches here in Caracas, despite the fact that my Embassy has recommended three times that I leave the country. I prefer to leave that airplane seat for those that sympathize with the Government. The wish to be present and participate in the new Venezuela is much larger; I am not afraid neither of the bombs, nor of the violent people, nor the military and least of all of your President!

I am as anxious to march towards Miraflores as many other Venezuelans.

Congratulations in particular to the brave and dignified Venezuelan women, to the ship Captains, to Juan Fernandez (my favorite candidate for President), to Carlos Ortega, to Carlos Fernandez, to Leopoldo Lopez, to Orlando Urdaneta, to Alfredo Pena and  to the participants of the negotiation table that have shown so much patience, not only with the Government but also with the OAS itself. Thanks for being here when your country needs you!

I hope we can get out of this as soon as possible, with the least possible blood, NI UN PASO ATRAS (Not a step back) -1000 steps forward and YES to the referendum. If the people need to pay for the referendum because its President prefers to spend the money on airplanes, gasolula (Imported gas from Brazil) and other things, know (since I can’t vote) I am willing to pay for 100 Venezuelans that may not have the financial ability to contribute- and independent of their political opinion and final vote.

Tonight, in a march in Vargas State, a candlelight march by the opposition was met by the chavistas, forcing the use of tear gas once again. The Chavistas shot at the marchers with real bullets a cop has been shot.

Since all PDVSA workers that work in comercialization of oil are on strike, have been fired or have been replaced by those in favor of the Government, PDVSA was forced to hire Pepex to sell oil for the company. Now, this is the announcement made at the Pepex website today, which appears to indiacte that PDVSA has no idea who its clients are, what financial obligations it has and what contracts it has signed. Way to go!

The Head of the Electoral Hall of the National Assembly said today that the decision to suspend the referendum had political motives as the decision violates fundamental rights of the Constitution, violates the rights to a defense and does not recognize the right of the citizens to participate in elctoral processes. Calling the decision to recuse him “temerary and unjust” and called for teh Constitutional Hall to evaluate it “with rigor”. The Justice also said that the Hall had gone beyond its mandate when it decided to order that no electoral process may take place, which was not requested by those that asked for the injunction. He said the sentence shuts down any possibility of an electoral solution.

Inside the Pictures section I placed new photos of what the National Guard did two weeks ago in Valencia. I have uglier ones, but these give the idea.

I wanted to talk about the possible effects of exchange controls, people always think they are milder that they eventually end up being. Then I received this (in Spanish) from Roberto Rigobon, a Venezuelan who is a Professor at the Sloan School at MIT. He defintely can do it better and is more qualified.

What’s the big deal with foreign exchange controls?

By Roberto Rigobon

MIT

I do not understand why we Venezuelans have to get so worked up about foreign exchange controls. After all, since when do they last more than three months?

It is customary for authorities to say:” In the past the controls were not implemented correctly, we- who know how to control- will do it well”. I understand that today’s authorities are different. But a great friend once told me something that is absolutely true: “Countries that impose capital controls always claim they are different, -but surprisingly, they look identical at the end-they all collapse in the same way”
 
Foreign exchange controls is only a reflection of the ignorance of the economic authorities to handle a situation that is escaping their hands. It is exactly what a scolded kid does when he throws a temper tantrum on the floor. Since when is this an act that deserves our minimal attention? The question is not if the exchange control will last, it is knowing what will happen during and after it.

Today the Venezuelan Government is desperate for financing, and its only alternative is the Central Bank and the domestic financial system. I know that the Central Bank law says that it is prohibited to lend to the Government, but this was not really designed to be followed. It will be one of a gazillion laws that has been violated. And to be sincere, it is not as if the reputation of the Government will be drastically damaged for such an event-it has done worse things.

Thus the Government will expropriate the savers and the Venezuelan Central Bank. The typical mechanism is: the Government goes into debt through the financial system-issuing bonds that banks are forced to purchase. Whether it is because the Central Bank increases legal reserves and allows them to use such instruments as part of reserves, or simply because they open a desk where you can discount them at a sufficiently juicy price. In this transaction two things occur: The implicit indebtedness of the Government increases so much, both in the Central Bank and in the banking system- and since the monetary base increases, in a country with free mobility of capital, there is capital flight and reserves fall.

Let’s look at this in more detail. Forcing the banking system to accept Government bonds implies that savers have implicitly lent money to the Government. Of course, nobody sane would lend money to this Government if they knew what they were doing. In these circumstances, before depositing in the banking system, account holders would take their money out. Ah!! But that is what capital controls are good for-to stop savers, that do not want to lend the Government money and that have excess liquidity, from having any recourse.

Unfortunately, for the Government, capital flight can only be stopped for a limited time-in general, very limited (three to six months maximum). What ends up happening is that Governments are forced to freeze bank accounts-which implies a massive devaluation and expropriation of the account holders.

Now, expropriating account holders has never been a good idea. This has happened a few times in Latin America in 1989 and 2002 in Argentina, in 1990 in Brazil, in 2000 in Ecuador (To mention only a few) By the way, in each of these occasions (i) depositors lost between 60 and 70 percent of their savings, (ii) the Governments devalued the currency at least a factor of three (let’s see, today it is at Bs 1800 per US$, mmmmm….Bs. 5400 could be a good number, if history repeats), (iii) and even more important, each Government ended up leaving through the back door because the economy turned unmanageable-I don’t want to think what will happen in Venezuela where things are already unmanageable
 

Foreign exchange controls are not the problem, they are the symptom of the inability, of the ignorance, of the incredulity, and of the arrogance of those Governments that think they know more than savers. And certainly the savers do not have a graduate degree in economics, nor a Ph.D. from Chicago, but dummies they are not.

Only someone with one neuron (which it obviously needs to breathe) will think that controls are an alternative for the Venezuelan situation. Thus, to the mono-neuronic economists that thought of this terrible idea, tighten your belts because what is coming is a stampede.

Some quotes with comments on things Hugo Chavez said this weekend during his vacation in Porto Alegre, Brazil:

On economics:

-What is happening in Venezuela is only an advance of the great battles that we will have this century which are beginning, between neoliberalism and alternative currents which are surging, because the venezuelan is an alternative to neoliberalism.

Well, Venezuela was never or ever  much of a “neoliberal” country to begin with. The State controls everything and owns most of the wealth. As an example, Venezuela has very few gas stations because the number is decided by the PDVSA. The exchange rate has always been determined by the Government, which seldom has allowed the rate to float. Finally, what is the economic alternative that is being developed? Economic Amateurism?

-Exchange Controls are indefinite

There is an honest one! However, he should have told his Minister of Finance who said they would be on for only six months or the Central Bank Director who said they would be on only for as long as oil production was down. (Maybe that is indefinite!)

-He is considering applying a tax to “speculative capital”, explicitly mentioning the so called “Tobin tax”.

Well, there is very little speculative capital in Venezuela. The Stock Market has been dead since Chavez has been in power and there is a debit tax for each financial transaction of any size of 1%, which makes speculation quite difficult, if not impossible.  Second the Tobin tax proposal was to establish a worldwide cross-currency transaction tax to reduce speculation in markets that trade billions with trades that last seconds. Reportedly Chavez is considering the tax to be 10% versus 0.1%-1% of the Tobin tax proposal. If such a tax is established, the black and gray markets will be the real winners. You can buy stocks or bonds in local currency that trade in NY in dollars, thus this becomes a synthetic exchange mechanism. (It has been on since last Wenesday, only hours after the exchange market was suspended). Then there are the tehories that speculators reduce volatility, but I will not get into that.

-We will establish price controls

Don’t need to comment on that one.

On politics (page A-2, El Nacional):

-The only alternative to get me out is a recall referendum. The solution to the crisis is not elections now..this violates the Constitution

Not quite. As a matter of fact it is legal for him to resign and one of the two Carter porposals is an amendment which is very expedient if 15% of the voters petition it, there could be elections in June via this mechanism and defuse the crisis.

-I put away my rifle…but I keep it and if the oligarchas do not accept changes in peace, like Che Guevara said, noises of combat and machine gun fire will thunder.

Nice guy, what a democrat!

-I may close some TV stations

Ditto

When Hugo Chavez accepted the idea from Brazil’s President to create a “Grupo de Amigos” to help in the negotiations with the opposition, what he thought he was doing was finding a respectable way of by-passing the pesky Secretary Genral of the OAS, Cesar Gaviria. In this way, a group of diplomtas friendly to his “revolucion” with a sprinkle of respresentatives from respectable countries, would come to Caracas and replace Gaviria in brokering the negotiations. But it was not to be, when Chavez showed up for the inauguration of the new President of Ecuador, what he found was that a Group of Amigos had already been formed without his input and, not only were they not as friendly as he expected, but appeared to be a Club de Amigos of Cesar Gaviria and not of Hugo Chavez. Chavez pannicked, went to talk to Koffi Ana at the UN, but made no progress. Then he went to talk to Lula Da Silva who not only refused to expand the group, but when Chavez said it may be expanded in the future, Brazil’s Foreign Minister Amorin simply replied “Only God knows the future”.

What Chavez did not know is how similar groups have functioned in Nicaragua and El Salvador. But now he does. After the Friday meeting in Washington, the “amigos” picked the Brazilian Foreign Minister Amorin, probably the “friendliest” Government to Chavez’ as their Coordinator. Amorin announced that the Vice-Ministers of all six countries would be in Caracas by today or tomorrow, much like what happened in in the Central American cases. Moreover, Amorin said that this was an urgent problem, not of months, but of a week at most. Thus, The Vice-Chancellors will arrive, together with the teams of advisors, negotiators and diplomats to apply a full court press on the Venezuelan Government. This is not the friendship that Hugo Chavez was looking for. He wanted to gain time, only time. This ahs been Chavez’ strategy all long since he began losing his popularity, gain time, divide the opposition, change subjects and begin gaining time again.

The question is what will happen when he starts feeling the international pressure right in his own backyard. To some, he will negotiate, to others he will just leave the negotiations and declare himself above the law. In either case, both scenarios appear to indicate that a resolution of the crisis is close at hand. In the first case, there will be peace. In the second, is anybody’s guess. But we shall soon find out.

Francisco Toro writes today about Chavez’ plan to shut out the media and has this paragraph that I thought was quite eloquent:

Of course, the government has become so thuggish that that’s not particularly hard. The proliferation of amateur videos showing chavista activists attacking opposition gatherings, often shooting guns into opposition crowds, is the most striking example. Those videos are for real, as are the reams of self-destructive presidential statements, the burping generals, the footage of soldiers beating on opposition activsts, or any of the long list of moronic own-goals the government has been scoring in plain view of the TV cameras. You don’t need some sort of sophisticated media dirty tricks lab to make the government look thuggish on TV, as the chavistas would have it. No, you just have to put a camera in front of them and hit record.

As I tell everyone that is so critical of the opposition, there is no equivalent footage that you can blame on the opposition……