January 23, 2009

51 years on from that one, fleeting, dizzying flash of no-bullshit national unity

Quico says: If I told you that, in the wake of a sham referendum aimed at keeping the president in power forever, Venezuelans of all kinds - left and right, rich and poor, military and civilian, catholic and communist, pro-US and anti - could rise up after a decade of autocracy and come together, all of a sudden, in one great big joyful spasm of revulsion against dictatorship, dedication to democracy, unity of purpose, optimism, freedom and hope...would you believe me?

It wouldn't be the first time. All the crap that came afterwards - and, believe me, there was a lot of crap afterwards - has dimmed our historical consciousness of it to the vanishing point, but today of all days we owe it to ourselves to remember: it did happen.

It comes as no surprise that those who profit from division feel threatened by the very prospect of national unity. And so they've spared no expense to try to scrub that moment out of our school's history books and our collective memory, recalling it, if at all, only to distort it.

And yet, it happened. Nothing they can do will change that, or the menace that it holds for them. Because if it happened once, it can happen again.

January 21, 2009

Minc(i)ed Facts

Quico says: A couple of readers have pointed me to this remarkable Information Ministry press release, which one of them surmises must be an implicit response to my two recent posts on Central Bank Reserves. As he puts it, "there's no other reason I can think of for this note, which is unlike any I've seen before."

There's too much vacuous nonsense in it to translate the whole thing, but I feel honor bound to pick apart a couple of the more egregious instances of sheer gibberish.

Most irksomely, the press release parrots the meaningless concept of an "optimal level of foreign currency reserves", which immediately flags it as a work of rank hackistry. For the Nth time, calling any absolute level of reserves "optimal" is simply meaningless. It's a bit like confidently declaring that 2 kg. is the "Optimal Level of Harina Pan reserves."

Is 2 kg. the optimal level of Harina Pan reserves? Erm...that depends. For me it is: it takes me months to go through that much. How about for an arepera? Is 2 kg. the optimal level of Harina Pan reserves for an arepera?

The adequacy of any level of reserves depends entirely on how fast you go through them. Somehow, though, the government defines its optimal level of foreign currency reserves without any reference of the level of obligations those reserves have to cover. I mean, a claim like that can't even rise to the level of being wrong. It just means nothing, like saying "my electricity bill likes pink sonatas."

Shockingly, though, that isn't even the worst of it. The worst of it is the third and fourth paragraphs, where Minci informs us that:
It is the difference between the price of the Venezuelan oil export basket and the target price established in the National budget that feeds Macroeconomic Stabilization Fund FEM, formerly known as FIEM.

Each quarter, BCV and PDVSA review the price, and if it is equal or greater than the last five years the funds are deposited in the aforementioned fund.
...without betraying any hint of understanding that those two savings rules are entirely different! Minci wants us to believe that FEM follows two distinct savings rules at the same time.

Now, it's true that if the budget targets were set deliberately for that purpose, those two savings rules could match. But I checked, and they don't.

Let me walk you through it. The 2009 budget was calculated with a target oil price of $60/barrel. According to the first rule, if that target is hit precisely, there would be no change to FEM's balance this year. Except, if that target is hit precisely, the average price of Venezuelan oil over the 2004-2009 period will have been $63/barrel, which, according to the second rule, would trigger a withdrawal from FEM!

By contrast, in 2008 the budget's target oil price was $35/barrel. If we'd hit that target, implying no change to FEM according to the first rule, that would have made the average price for 2003-2008 some $47, which would've triggered a deposit according to the second rule. In the event, Venezuelan oil exports averaged $88/barrel in 2008, which was $30 higher than the five year average, but was $53 higher than the budget target.

You get the picture. It's one rule or the other, but not both...

In the event, though, it's neither. Had they been followed, either of the two rules would have resulted in accumulated savings worth tens of billions of dollars by now. Rule #1 implies that FEM should've accumulated some $56 billion in 2008 alone. My back-of-the-envelope estimate for where FEM's balance would be if they'd followed rule #2 since 1998 puts the total at well over $100 billion. But, as the very same Minci press release admits, the balance in FEM right now is just a tad lower than that: $828 million, to be precise.

Which must be some kind of record, even for Minci: in the space of just two sentences these guys managed to make two truth claims that are not only mutually incompatible but are both spectacularly disproved by a third claim contained in the same document!

Seriously, who writes this stuff?

January 20, 2009

Any questions?

Obama says: "To those leaders around the globe who seek to sow conflict, or blame their society's ills on the West — know that your people will judge you on what you can build, not what you destroy. To those who cling to power through corruption and deceit and the silencing of dissent, know that you are on the wrong side of history; but that we will extend a hand if you are willing to unclench your fist."

No. 1 reason why term limits are a good thing

Six of one, half a dozen of the other

Quico says: Yesterday's post was one I'd been meaning to get off my chest for a long time. It felt good to put it out there. Still, there's no pleasing some people, so I wasn't surprised that Greg Wilpert, of Venezuelanalysis fame, wrote in to tut-tut my Magnum Postus.

In particular, he had a bone to pick with this slide, telling me he'd checked with sources in the Finance Ministry and found out it's all wrong, invalidating my whole argument:

Greg knows for sure that the government's plans are not to re-convert Fonden's dollars back into bolivars. Their intention, instead, is to spend them abroad, as dollars, (for instance, using them to pay for imported food or for all those backlogged nationalizations).

Greg may well be right about this. I don't doubt he is, actually. What he hasn't grasped, though, is that even if he is right, that does precisely nothing to invalidate my argument.

To understand why, take a bolivar bill out of your pocket and look at it closely. Notice how it says your bolivars are "Pagaderos al portador en las oficinas del Banco" ("payable to the bearer at the bank's offices")? Ever wonder what that actually means?

It's a funny thing. Turns out that, while the bolivars in your pocket are an asset to you, they're a liability from the point of view of the Central Bank. That may be an unfamiliar thought, but hell, it says so right there on the bill!

In an accounting sense,
Bolivars are a promise of payment, something the BCV owes you. Notionally, at least, you're supposed to be able to take your bolivars back to the Central Bank and trade them for something else of worth - gold, say, or its current day equivalent: dollars.

We're not be used to thinking of it in this way, but it's a fact, and it has consequences. It means that, like any corporation, the Central Bank of Venezuela has assets and liabilities. Activos y pasivos. Stuff it owns and stuff it owes. In other words, it has a balance sheet.
And in that balance sheet, the bolivars in your pocket show up as its biggest liability, while the dollars BCV holds in international reserves make up the bulk of the assets.

With that in mind, lets get back to Greg's objection.

Yesterday, I wrote that The Great "Excess Reserves" Swindle works by increasing the Central Bank's liabilities (the number of bolivars in circulation) without any corresponding increase in its assets (dollars in reserves).

Greg's devastating retort was that, quite to the contrary, the government's plan is to decrease the Central Bank's assets (its reserve dollars), without any corresponding reduction in its liabilities
(the number of bolivars in circulation).

As you can see, that's totally different...


What Greg fails to see is that, either way, the government is out to get something for nothing. A free lunch.

Think about it: if a mere mortal like you or me wants to get his hands on some Reserve Dollars, BCV isn't just going to give them away to us. We have to pay for them. Specifically, we have to fork over some
hard-earned bolivars in exchange for those dollars. Why does Central Bank insist that we pay for our dollars? In order to preserve its balance sheet. When you buy dollars, the bank's reserve assets fall, so it needs its bolivar liabilities to fall proportionately if it's to preserve its value. So we hand over our bolivars, get our dollars, and the bank is worth neither more nor less at the end of the process than it was at the beginning.

A different set of rules applies when it's the government looking for dollars. In effect, Chávez contrived to give himself the power to get BCV to cough up dollars in return for nothing at all. All he has to do is intone the magic words "excess reserves", as though they were some kind of santería spell with the power to make central bankers take leave of their senses!

I mean, if Greg is right, what we're looking at isn't even a swindle; it's more like outright bank robbery. Cuz, hell, if I waltz in to the BCV's offices mumbling something about "excess reserves" and demanding they give me a huge number of dollars, my best case scenario involves a
straitjacket...but El Rodeo is probably the more likely outcome.

The crux of the Swindle is that BCV's takes a massive hit on its balance sheet. Because if there's one thing you'll never be able to get away from it's the simple accounting identity:

Whether the hit comes in the form of BCV owning fewer dollars or owing more bolivars is neither here nor there.

Which brings us to another of those "conventional absurdities" you hear around town all the time. People will say "hey, BCV has $40 billion in reserves, that's a really solid level!" as though such a thing had any meaning whatsoever. "Solid" in relation to what?!

From the point of view of the Central Bank', what's important is neither how many dollars it has in reserves, nor how many bolivars are out circulating through the economy. What's important is the ratio between the two.

That's one of those deceptively simple-seeming principles you may be tempted to skim over. Don't. Grasp this point and you'll already understand more about Venezuelan macroeconomics than Greg Wilpert, Alí Rodríguez and Mark Weisbrot put together!

Because, o
nce you see it, you'll understand why the effect on inflation is exactly the same whether Fonden takes its dollars on a shopping spree to Miami or whether it trades them in for thin-air bolivars at home.

In the end, there ain't no such thing as a free lunch. Somebody always pays. And in this case, that somebody is you, me and anyone else who happens to be holding bolivars. Because as BCV's balance sheet deteriorates, the value of its debt falls...the twist being that BCV is a funny old creature whose debt happens to take the shape of banknotes residing in the pocketbook of "el portador" - a.k.a. you! - and that, when the value of its debt falls, we conventionally call that "inflation."

Understanding that the debate would go this way, Miguel had the foresight to send me a spreadsheet showing that all-important ratio between bolivars in circulation and reserve dollars over the last few years. This is a key indicator of the Central Bank's financial health, the figure that synthesizes this whole assets-to-liabilities relationship we've been talking about all through this post. And the picture that emerges is not pretty:
Click to enlarge

In effect, up until 2006 BCV had more than $1 worth of reserves to cover every Bs.F circulating out in the Venezuelan economy. After the 12 millarditos get handed over, the bank will have one dollar in reserves for every Bs.F 2.89 circulating. Optimal indeed!

"OK," you say, "but I still don't see it...how can I be sure that that really has an impact on inflation?" To answer that question, I overlaid Miguel's Bs.F-per-reserve-$ data onto the monthly inflation numbers for the last three years.

Now, there are definitely some lags in the data. Big spikes in inflation seem to come several months after the ratio of Bolivars-to-reserve-dollars jumps to a higher level. These processes take some time to work themselves out.

Still, even in this form, you can certainly see the pattern:
The thing is, monthly inflation data is "noisy". It's cyclical and seasonal and sprinkled with outliers.

To bring out the underlying trend, I thought I'd try a couple of things: first, for any given week, I calculated the average monthly rate of inflation for the preceding 16 weeks. That ought to smooth out the outliers. Then, to adjust for the lags that retrospective averaging generates - as well as for the underlying lag between cause-and-effect - I shifted the entire inflation series back by 28 weeks.

My jaw pretty much hit the floor when I saw how close the resulting fit is...
That chart, right there, really ought to put the question to rest.

Make no mistake about it. All this tomfoolery with the reserves is going to cost us. Maybe not this month, maybe not next month, but before the year is out, we're all going to pay for this.

January 19, 2009

For Chávez, Obama = Bush

Quico says: My new post is up on The Huffington Post.

January 18, 2009

The Great "Excess Reserves" Swindle

Quico says: The idea that the Central Bank's International Reserves are a kind of "rainy day fund" where the government puts away some of its dollars so it can spend them later is what Steven Pinker calls a "conventional absurdity": something everybody vaguely "knows" and nobody much questions...but happens to be utterly, demonstrably absurd.

Think about it. How often have you heard people say words to the effect that, while the global economic downturn will create some problems for Venezuela this year,
"A budgetary crisis is very unlikely, since the government has more than 50bn $ of international reserves it can draw upon in a crisis."
This kind of thing sounds so natural, so straightforward, we hardly slow down to ask whether it makes any sense at all. But lets be clear: treating central bank's international reserves as government savings is an economic non-sequitur, a simple blunder that betrays a basic misunderstanding of what currency reserves are, of what their underlying economic sense is.

A worthwhile rule of thumb is that when you hear a supposed expert conflate reserves with savings, you know for sure you're dealing with a a hack.

And now, with Chávez vowing to "spend" $12 billion worth of "excess reserves" this year, the fallacy of currency-reserves-as-rainy-day-fund is only becoming more relevant and much more dangerous.

The issues get pretty abstract, though, so I think the best way to explain the basic fallacy is with some pretty slides (adapted from a similar post from a while back).

Here's how it works:

Download the PowerPoint here.

Descarga el PowerPoint en español aquí.

The key thing to grasp is this: the mere fact that a dollar is sitting in BCV's international reserves account is not a sign that the government is "hanging on to it" for later. Just the opposite: it's a sign that the government has already traded that dollar in for bolivars...bolivars that it has, most likely, already spent!

In other words, it makes more sense to think of international reserves as a kind of fossil record of past government spending than as an indicator of its future spending capacity.

The "a-ha!" moment, for most people, comes when they fully grasp the Central Bank's unique role as an interface between Venezuela's "bolivar economy" and the international "dollar economy". Once that penny drops, you can see clearly why PDVSA's petrodollars have to show up in BCV reserves before the government can spend them: only BCV can transmogrify dollar earnings into the kind of currency the government actually spends.

If you remember nothing else about this post, remember this: when you hear someone talk as though international reserves were government savings, reach for your wallet. You're being swindled.

The gibberish you hear about Fonden and "excess reserves", in particular, is just a way to cover up a kind of asymmetrical devaluation. Why asymmetrical? Because the government is double counting its own dollars, but it sure isn't about to double count your dollars!

Think about it. BCV will trade the government's petrodollars for bolivars as many times as Chávez wants. But if you're a private company that exports widgets, the Central Bank is not likely to be amused if you walk up to them and say "hey BCV, here's this dollar I got for selling widgets abroad, please trade it into bolivars for me...twice!"

Or, to take an already ridiculous analogy all the way, what do you think would happen if you walked up to the Central Bank and said "hey BCV, remember that widge-o-dollar I gave you in exchange for Bs.F 2.15 a year ago? Yes? Well I've been thinking, and I've decided you already have more dollars than you really need, so, erm, gimme my dollar back!" and then snatched your dollar, walked out, and came back three minutes later, big grin on your face, saying, "hey BCV, it's me again. Listen...um...funny thing: seems I have this shiny new dollar in my pocket. How about giving me Bs.F 2.15 for it?"

If that sounds totally absurd to you, that's because it is. But, when you get down to brass tacks, last week Chávez announced that he's planning to pull precisely this swindle twelve billion times over this year!