November 18, 2009

The Collected Wit and Wisdom of Nelson Merentes

Quico says: One day after Venezuela officially went into recession with a harsh 4.5% decline in 3rd quarter GDP amid alarming signs of stagflation, let us pause to reflect on the wisdom of the man in charge of the nation's money, Central Bank chief Nelson Merentes.

January 14, 2009:
"In Venezuela there is no and there shall be no recession because the world financial crisis has had no impact on the Venezuelan economy."

"If the financial crisis lasts some five or six years, Venezuela could be affected and suffer its consequences."

31st August, 2009:

(on third quarter growth) "We won't end up very high up, we'll come in just above zero. Nonetheless, I believe we'll come out in positive territory."

"There was an inflection point, upward, and that means that it's going to be better than in the second quarter, but so far we don't know how far that point will go."

November 12th, 2009:

(on how to spur economic growth) "It's like economic accupuncture, where you have to touch the launching points so as to guarantee lift off."

"...the country is reaching a point of deflation."

Well, lets count our lucky stars we dodged that deflation bullet, at least...

I think a recession on this scale would be a big deal anywhere. But in a normal country, you could just spend your way out of the hole. Run the Keynesian playbook, the way the Americans and Europeans have been doing. You pile up a lot of debt doing that, yes, but it tends to work.

Thing is, the US and the EU could do that because they went into the crisis with their macroeconomic houses more or less in order: low inflation, credible central banks, no massive imbalances lurking just beneath the surface ready to sabotage any attempt to run the Keynesian playbook.

Venezuela, on the other hand, is going into its recession with core inflation running at 36%: i.e., facing a clearly stagflationary scenario. That means that any attempt to run the Keynesian playbook will yield not growth but, instead, more inflation.

In any event, the government doesn't really have that option because even with oil flirting with $80 a barrel they can't find enough money - or enough people crazy enough to lend them money - to try to inflate their way out of the crisis.

So, instead of countercyclical demand management, Chávez's 2010 budget calls for a brutal 33% spending cut in real terms, suggesting that, instead of Keynes's, the playbook they're really looking to run is Paul Volcker's: wringing the inflationary expectations out of the economy through a series of spending cuts, in the middle of a recession!

Just to dwell on the ironies involved here, notice that this means Chavismo is going to get forced to apply precisely the kind of harsh, pro-cyclical fiscal policy that chavistas have spent a decade criticizing the IMF for forcing countries like Argentina to apply!

Pause to take stock of what this means: what we're looking at here is Chávez making a recession deeper, on purpose, to get rid of inflation! And all on his own innitiative, not because some IMF apparatchik forced him to! Fin de mundo!

In fact - and this here is my candidate for least likely sentence ever written in the English language - on one point I do agree with Jorge Giordani, Paul Volcker, Nelson Merentes, Milton Friedman, Alí Rodríguez, Margaret Thatcher, Hugo Chávez and Ronald Reagan: purposefully cutting aggregate demand even though you're in the middle of a recession is the right fiscal response to Stagflation.

"Right", that is, in the same way that amputation is the "right" medical response after you've shot yourself in the foot, dallied for a week trying various voodoo remedies, and allowed gangrene to develop.

[Hat tip: LV]