Merentes's line in the sand gets washed away by the very first wave

Quico says: There's one thing monetary authorities need more than anything else: credibility. When a Central Bank chief commits to a policy goal, he has to make sure he has the tools at his disposal to really make it happen. In a world of rational expectations, the general belief in a Central Bank's ability to make its policy commitments stick is one of the most powerful determinants of a Central Bank's actual ability to make its policy commitments stick.

So how credible did Central Bank of Venezuela chief Nelson Merentes's target to keep the parallel rate below BsF.3.45 per dollar turn out to be? Ermmm...not very.

As you know, I'm not actually allowed to tell you the parallel rate today, but between you and me and 27 million other people, it rhymes with thive dolivars firty cents per bollar. That's nearly three times the 60% gap Merentes says it's the most he'll allow.

In other words, the market had one look at his announcement, had a good chuckle, and went right on doing what it'd been doing.

It's easy to laugh it all off, but this stunning monetary own goal could really undermine Merentes's hold on the economy down the road. Once the market starts to discount the Central Bank's announcements, the bank's ability to actually keep a handle on the macroeconomy starts to evaporate: cuz Merentes can do what he want to the macroeconomic aggregates he control, but if people don't believe he's going to really do what it takes to achieve his goals, the market will just keep eating his announcements for breakfast.

Update: A reader retorts that, to be fair, Merentes only said the bolivar would rally to Bs.3.45 by early December, not right away. That's true, as far as it goes, but irrelevant. If Merentes had any credibility, the bolivar would've rallied today.

To see why, ask yourself this: if you truly believed that the bolivar would rally to 3.45 by December, what would you do? Simple: you would rustle up as many dollars as possible and run, not walk, to the permuta market to buy bolivars at 5.40 while you still have the chance.

Then you'd sit pretty.

Come early December, you would take your bolivars and use them to buy dollars at BsF.3.45 a pop. Do that and you turn each October dollar into $1.56 in December - a better than 50% profit margin in just a couple of months.

I believe the technical term for that is "a killing".

Now, you're not the only one able to do that calculus. Anyone can. If the market had taken Merentes seriously, tons of people would've followed that reasoning and tons of money would've rushed to get in on the deal, lining up to buy up bolivars in the permuta market ASAP.

Via normal supply and demand - i.e., lots of dollars chasing relatively few bolivars - the rush itself would have driven up the value of the bolivar in the parallel market. In other words, we would've seen a mad scramble for bolivars in the permuta market, and that scramble would have continued until the gap between the expected value of holding bolivars and the expected value of holding dollars had been erased.

Which means that, if investors collectively had any confidence in the government bringing the permuta market to heel by December, we'd already have the evidence: the bolivar would've rallied to (near) 3.45:$ today.

That's rational expectations.

The fact that the bolivar rally stalled at 5.40:$ tells you all you need to know about how seriously the markets took Merentes. They laughed off his announcement, man.

Off Target

Quico says: The imbecilities of Venezuela's Foreign Exchange Control Regime just keep piling up one on top of another, accumulating in layers that some future archeologist of macroeconomic incompetence will have to peel back one at a time. The latest is Central Bank chief Nelson Merentes's announcement that the gap between the official dollar exchange and the parallel market - which, mind you, doesn't officially exist - shouldn't exceed 60%.

In effect, Merentes is announcing an upper target for the permuta rate, committing the central bank to keep the parallel rate below BsF.:$ 3.45. Trouble is, the permuta rate has been well above that, trading at a gap that's more like 150%.

But that's just the start because, idiotically, it's actually against the law for me to tell you exactly what the permuta rate is. That means that the single most important number in the debate on Venezuelan macroeconomics today is strictly verboten, off-limits...what's the word I'm looking for? Censored.

Now, think this through for a minute. Venezuela now has an official exchange rate. And an official target for the unofficial exchange rate. But we can't mention what the actual unofficial rate is. Which, effectively, means we're not allowed to know if we're meeting Merentes's target or not because - stay with me now - we now have public targets for secret variables!

And, come to think of it, we're now committed to defending an exchange rate we don't admit exists!

Apples and Oranges: A Parable of Distorsiolandia

Quico says: OK, time for a thought experiment/parable.

Welcome to Distorsiolandia, a land of simple rural folk where everyone works in agriculture. Distorsiolandia's economy is so simple, in fact, that the country has no money. It's not really necessary, because Distorsiolanos produce only two goods: apples and oranges. It's a tropical place, mind you, so there are a lot more oranges around than apples.

In fact, there are three times as many oranges as apples in Distorsiolandia. So its GDP looks something like:

Remember, we said there's no money in Distorsiolandia, but there is trade. As people barter apples for oranges, they soon settle on the terms of trade between them: one apple is worth three oranges.

In other words, the price of an apple is three oranges, and the price of an orange is one-third of an apple. Not having discovered money, Distorsiolanos have to quote the price of each product in terms of the other.

And those price, of course, match the relative scarcity between them.

One day, a radical revolutionary people's government comes to power in our fictional little country on the back of a radical redistributive discourse.

The revolutionaries rail against the way a parasitic elite has hoarded all the oranges, making them far too expensive for regular people to afford. So they decree that, from now on, the price of an orange will be controlled: for an orange, you can charge no more than one-quarter of an apple.

Which means that, instead of three oranges, an apple will buy you four.


People love oranges, so this decree makes the government very popular indeed. Lots of people who were happy to hold apples - back when an apple would only buy three oranges - now come forward to trade those apples for four oranges a pop.

But notice what the decree doesn't do: it doesn't change the underlying distribution of apples and oranges in the economy. You still have just three oranges around for every apple.

The relative scarcity of the two products hasn't changed: apples are still 3 times more scarce than oranges.

That means that, at the new price, the total stock of apples in the economy can buy more than the total stock of oranges. If everybody who has an apple tries to trade it for four oranges, you soon realize there are too many apples around chasing too few oranges. Soon enough, every orange has been sold off, but you still have people holding apples, wanting oranges, and finding nowhere to buy them.


What you end up with, in other words, is Orange Scarcity. At the government set price, there are simply too many apples chasing around too few oranges.

Now, notice what's happening here. There are oranges around. And there are apples around. There are people with apples who want oranges. And there are people with oranges who want apples. The only thing that's keeping the two apart is the government set price. Orange holders just sit there, holding their oranges, because they realize that, at that price, selling an orange only makes you poorer.

The revolutionary people's socialist government sees this and is outraged!

"Hoarding!" it cries, "speculators!"

Soon, the government is sending off soldiers with Kalashnikovs to round up people who are holding oranges and refusing to sell them for the controlled price. It makes them do a perp walk, holds them up to public contempt, blaming them in front of the cameras for the fact that people can't find any oranges in the shops! It never for one moment occurs to them that, at the price they've set, there simply aren't enough oranges to satisfy all the apple-holders in the system!

What happens next is also clear enough. If sellers aren't allowed to hold oranges and buyers can't find anyone to sell to them at 0.25 apples, soon enough somebody will decide to sell oranges on the down-low, for 0.33 apples a piece.

Of course, you're not allowed to do this openly, so you have to sneak around. A black market for oranges crops up. Soon, the government cracks down, threatening permuta orange sellers with jail and - here's the precious part - actually blaming them for the rise in the price of oranges!

So the government faces down the distortions created by one policy intervention - fixing the price of oranges - with another intervention: jailing black-market orange-mongers. But that second intervention itself creates a distortion. By making orange-selling riskier, it ensures black-market oranges will sell at an even more inflated price, since orange-mongers will now demand a risk-premium for participating in this dangerous illegal activity. So instead of 0.33 apples, they may demand 0.4, or even half an apple for an orange. By now, orange-buyers are out of options: they're bound to pony up.

And how will the government face up to the distortions created by the policy it implemented to confront the distortions created by the previous policy it had implemented?

You guessed it! By implementing yet another policy that brings with it yet another distortion!

Will they take over the Orange processing and distribution system? Will they threaten orange farmers with jails if they don't plant enough oranges? Who can tell? The sky is the limit!

Welcome to Distorsiolandia, where the solution to the problems created by one distortion is always...another distortion!

Lost in the thicket of laws and regulations that this kind of thinking generates is a simple insight: no bureaucratic dictate can change the fact that if there are three oranges out there for every apple and you force people to hand-over four oranges for an apple, oranges are gonna run out as sure as night follows day.

What's scary is that that thought, simple as it is, will cause a chavista's head to implode. When these people say they're against capitalism, what they really mean is that they're against arithmetic.

[Hat-tip for the "distorsiolandia" thing: AA, which, come to think of it, I'm not even sure if she reads the blog...]

The view from your window: Olanthe

Olanthe, Kansas, USA. 6:25 PM.

Send us the View from Your Window: caracaschronicles at fastmail dot fm, or nageljuan at gmail dot com.

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"I'll have a second serving of crazy please"

Juan Cristóbal says: - We've discussed the insanity of the government's recent bond extravaganza here and here. The great Miguel summarizes the whole carnival here.

What does the government do?

Why, announce there will be more bonds to come!

Yup, that's right. More debt, more arbitrage, more corruption. Just what the doctor ordered.

I guess this proves Alí Rodríguez does not read this blog...

(Hat tip: Capablanca)

This socialism thing is hard!

Juan Cristóbal says: -

"It's hard to build socialism in this country."

Wise words coming from the mouth of chavista apparatchik Aristóbulo Istúriz.

Socialism is hard, he claims, because "state employees" want to be "shareholders." Instead of building socialism, they are prey to their old habits, fighting for personal vindication, focused on trying to get a bigger share of the state-owned-enterprise pie.

Istúriz then comes to a fateful conclusion: "If we don't change consciences, there will be no revolution."

Sigh. Ten years on and they are still wondering where their revolution is.

Of course consciences haven't changed. The government's model to sustaining power has been to enhance the expected value of rent-seeking while endlessly repeating that rent-seeking is bad.

Bad, that is, for everyone else except the guys on top. With this logic, is it surprising people aren't buying this "Bolivarian socialism" gimmick?

Take health care. The government's health system is a disaster, and all they can think of is "re-launching" what hasn't worked in the first place. The crisis has reached such proportions that Chávez himself acknowledges up to 50% of Barrio Adentro modules are abandoned. Is it any wonder the government's allies are worried about next year's elections?

Earth to Aristóbulo: if you really want state employees earning less than half the cost of the basic food basket to stop squabbling over oil rents, why don't you start by sending a team of auditors to go ask some real questions about how exactly it is that Ricardo Fernández Barruecos got to be worth $1.6 billion dollars even before he got control of Banco Canarias, BanPro, Bolívar Banco and Banco Confederado? Or ask Wilmer Ruperti to take you on that big yacht of his and ask him, in between sips of '78 Romanée Conti, to tell you where he thinks the Revolution went off the rails.

These whopping internal contradictions are one of the reasons why they're finding it so hard to control the working class, one that refuses to be brainwashed when the evidence of the regime's corruption is all around them.

People aren't stupid. They were sold "socialism" but once the petro-feast dried up, all they were left with was crime, official apathy, a stalling economy and the unmitigated rise of a new crony-capitalist class. Even the few things they accomplished ended up in the trash heap of negligence amidst an orgy of rent-grabbing. Before creating the Ministry of Popular Power for Conscience Modification, can we clarify whose conscience it is that needs reprogramming?

Come to think of it, Istúriz's words are not all that wise. It's not socialism that's hard - what's hard is getting people not to notice the hare the government is handing them ... is meowing.

The Bonos Soberanos Scam for Dummies

Quico says: Oh goody...an excellent excuse to make some powerpoint slides!













































And just keep in mind, while this is happening, the government is shutting down panaderías and auto parts store for - I shit you not - "excessive profits".

Plop!

Chavista porn

Juan Cristóbal says: - Our chavista readers complain that all our blog does is talk smack about the government nonstop. That's a fair criticism, so I decided to throw them a bone.

Here is a video of your revolution in action. A farm is being taken over, no ifs, ands or buts. The pristine procedures and the group of red-shirted "facilitators" should make your heart flutter. And Willian Lara's supporting role should get him a nomination. Asi... asi... asi es que se gobierna.

Selling bonds, selling our future

Juan Cristóbal says: In what the government is hailing as a positive development, the Chávez administration has just "sold" $5 billion worth of bonds in order to ease pressure on the black market exchange rate. The auction was hailed as a huge success - reports indicate demand for the papers was more than twice what was available, the black market rate is going down, and everyone is happy.

Funny, because when you really think about it, the only thing the government was "selling" was our future.

It's all in the wording. By framing this as a "sale," the government makes it appear as if it's just doing a bit of business.

"Sale" is a word filled with positive connotations. When you have a "yard sale", you're being frugal, getting rid of some excess knick-knacks and bringing in some extra cash. When a business "sells" more, it's doing well. Sales are good - good for buyers, good for sellers.

Except selling bonds isn't like selling stuff at a garage sale. When you "sell" a bond, you're really issuing an IOU. All you're selling is a claim on the government's future revenues, a share of everyone's future taxes, a right of ownership on future oil revenue streams - yours, and your kids'.

Now, I'm not opposed to new debt in principle. New debt can be good - if you use it for things that create value in the long term, like improve our roads, building schools or advancing technology. Those are all assets that will presumably lift the country's potential GDP and raise productivity, and all of them may justify going into debt.

But that's not what is going on here. Most of this money will go to pay for current government spending, things like salaries, subsidies, and military purchases. The money will end up in the hands of people who will, sooner or later, want to convert it into dollars and take it out of the country - either through the permuta market, or indirectly, by buying imported stuff that does not help the country's productivity, and has to be financed with dollars. And the bonds themselves are convertible into US dollars, which means the buyers will sell them in New York for cold, hard greenbacks.

This supposed "sale" is, in reality, a massive uptake of debt for the sake of the powerful. The government is borrowing so the rich, the almost-rich and the well-connected can buy cheaper dollars, hold on to them, and perhaps sell them in the domestic market when the economy deteriorates further. The government is taking on debt to appease speculators, most of whom are in the upper classes, and not a few of which are in the Chávez-spawned parasitic crony-capitalist cohort popularly known as the Boli-bourgeoisie.

This being Venezuela, the bond "sale" was about as transparent as a burqa. The government's attempt to explain the details was a disaster and resulted in brokers illegally creating money supply in order to get in on the game. The allocation of the bonds was anything but transparent.

Instead of hailing the government's latest "sale of bonds," we should call things what they are. The government didn't sell anything. Chávez is borrowing in the name of all to pay for capital flight by a few.

I don't think it sounds so pretty when you frame it that way.

Chávez numbers tank just when it matters the least

Quico says: Teodoro Petkoff spills the beans today on Chávez's god-awful poll numbers these days. In the latest IVAD (Seijas) poll, Chávez gets whooped by two-to-one margins on all kinds of domestic issues (the electoral law, private property, whether he's a threat to democracy) and by closer to three-to-one margins on most foreign policy questions (how he's dealing with Colombia, with the US, etc.)

All this from a Seijas poll, mind you - we're talking about the government's in-house "serious" pollster, who's had a pronounced pro-government lean in the past.

The August poll even has Chávez losing in the generic "would you vote for Chávez or for another candidate?" question, which - forget about 50% - now puts Chávez below 40%.

Read all about it here

What's ironic is that all this happens as Venezuela enters a period when poll numbers really don't matter any more. Back in the "hybrid regime" days, when our authoritarianism was at least competitive, these poll numbers would've been a real problem for the government.

These days? Hell, the guy just got through telling us how Gaddafi is to Libya as Bolívar was to Venezuela! He's well past caring.

The view from your window: Cabudare

Cabudare, Estado Lara, Venezuela. 8:30 AM.

Send us the View from Your Window: caracaschronicles at fastmail dot fm, or nageljuan at gmail dot com.

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Only in Venezuela, part 58,271,943

Quico says: The thicket is everywhere:

It seemed like a minor bureaucratic change at the time: in March 2008, the government led by president Hugo Chávez downgraded the import status of books. Once listed as “essential goods”, all imported books would now require government certification, either demonstrating they were not produced domestically, or else not produced domestically in sufficient numbers. In practice, this means that for all titles they want to import, publishers or distributors have to submit an application describing the books in question and request that a share of foreign currency be allocated for their import. (In Venezuela, the government regulates the use of foreign currency for imports.) These applications are then reviewed by a government bureaucrat, who has the power to decide how many copies will be imported.

The decisions the government has made over the year that the law has been in force seems somewhat arbitrary. For example, the international bestseller The Secret could reasonably be expected to sell ten thousand copies or more, yet only several hundred were approved. What’s more, publishers must then wait six months to reapply to import additional copies — by which time demand may have dropped.

[Hat tip: CL.]

The View from Your Window: Concón

Concón, Chile: 6:45 p.m.

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