January 9, 2004

Put it another way...

If the government does get its way, and the Central Bank does hand over the "millardito", what will the government do? It can't pay Venezuelan farmers in dollars, the dollar is not the currency here!

The government will have to use that billion dollars to buy a corresponding number of bolivars (Bs.1.6 trillion!) And what is the only institution the government is legally allowed to use to trade dollars for bolivars? Why, the Central Bank, of course!

So the government would turn right around and return the billion dollars to the Central Bank. In return, the Central Bank would have to "pay" for those dollars in Bolivars. The rub, of course, is that the central bank will have to print those Bs.1.6 trillion, just crank up the printing presses and go!

This is why the proposal is crazy, and hyperinflationary. The billion dollars will end up right where it started: in Central Bank reserves. But the same number of dollars will back 1.6 trillion new bolivars, bolivars created out of thin air.

So the "request" for a millardito is just a bit of smoke and mirrors: those reserves aren't going anywhere, not under the current control system. What the government is really saying is, "central bank! hermanazo! we're having a bit of a cash-flow problem...how about printing us up a fresh batch of Bs.1.6 trillion to spend?"

And when you run a currency like that...well, ask any Peruvian or Argentinian or Weimar German what happens...