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...

January 8, 2004

Note on the latest deranged Chavez plan…

The president's plainly unconstitutional request for the Central Bank to hand over “just one little billion” in foreign reserves lays bare, yet again, his economic obscurantism, not to mention his criminal tendencies. I mean, this is no longer just about stupid policy: this is actually theft.

Yes, yes, I know...I shouldn't even blog about it. These types of topics tend to make a sure cure for insomnia. It's the kind of story only bankers and economists seem to get worked up about: discussing the details heatedly in a kind of secret code only they understand. Most people can't start to make heads or tails of what's at stake.

But it's important, really important: fantastic sums are at stake. We're talking about the outright theft of a sum roughly 70 times larger than the $16 million Carlos Andres Perez was impeached for misappropriating!

For the non-economically minded, I'll try to make it as painless as possible:

Imagine an economy where the currency is the wristwatch.* Twice a month, you're paid your salary in a certain number of watches. You go to the store, do your groceries, and at the check-out counter you hand over some of your watches to pay. The system has been in place for so long that it's seen as natural by everyone in the society.

However, there are some fairly obvious drawbacks: people are forced to walk around with little bundles of watches to spend, and making change is hard – what good is 0.25 of a watch?

Seeing these difficulties, a bright young technocrat proposes an idea. Why not set up a central repository for the watches - call it the Watch Bank - and have that new institution issue a voucher for each watch a citizen decided to store there. Citizens would consign their watches, and thereafter use the more convenient vouchers for day to day transactions.

Vouchers could be issued for multiple watches, coins worth fractions of a watch could be made available to help with making change, the voucher system would be far more convenient for everyone involved. And, of course, at any time any citizen could back to the Watch Bank and redeem his vouchers for the number of watches they stand for.

Impressed, the government implements this proposal, and the new voucher economy is launched. People like the new system much better: it’s just much less of a hassle than carrying all those watches around all the time.

In time, the country’s constitution is altered to make the role of the Watch Bank more explicit. The Bank, clearly, must be a public sector, not-for-profit institution. Trust in the Bank’s vouchers will become the cornerstone of the financial system’s stability, so preserving their value will be established as the Watch Bank's main goal. Our hypothetical constitution might read (in an Art. 318), “the fundamental purpose of the Watch Bank of Venezuela is to achieve price stability and preserve the value, in Venezuela and abroad, of its vouchers.”

In particular, the constitutional framers will explicitly seek to shield the Bank – and its watches - from the grubby designs of the politicians in power. Some article of their constitution (say, oh, Art. 320, just to throw out a number), might read, “the Watch Bank of Venezuela shall not be subordinated to orders from the executive branch, and shall not aid or finance fiscal deficits.”

The reason is intuitively evident: the watches the Bank holds are not the Bank's property – they are the voucher holders’ property. The watches belong to the voucher holders - this is why every Watch Bank voucher is stamped with the words "pagable en las oficinas del banco" - payable at the bank's offices.

If the Bank suddenly decides to start giving away those watches to the government - or anyone else - some citizens will find themselves holding vouchers for watches that the Watch Bank no longer holds.

At first, say, the Bank holds 100 watches. If it has 100 outstanding vouchers in the economy, the system is obviously solid: plenty of watches to go around.

But what happens if, say, the government forces the Bank to hand over 20 of the watches? Well, then the bank will be left holding just 80 watches, but - big but - there are still 100 vouchers for watches swimming around the economy. If all 100 voucher-holders decide to all go to the Bank at the same time and ask for their watches back, there's gonna be a problem.

If you have 100 vouchers, but just 80 watches in the Bank, what is the real value of each of those 100 vouchers? Is one voucher still really worth one watch? Of course not. For all practical purposes, the vouchers have been devalued. The assets they stand for have been stripped. If those 100 vouchers can only buy 80 watches, each voucher is now really only worth 0.8 of a watch. 20% of their value has vanished.

It’s been stolen.

Substitute dollars for watches, Bolivars for vouchers, and Central Bank for Watch Bank, and this is pretty much the situation we have in Venezuela right now. In demanding the Central Bank hand over a substantial chunk of its foreign reserves to the government, the President is proposing, in the most public way possible, the theft of a billion dollars from the holders of Venezuelan currency. It’s little wonder the current Central Bank directors will not even consider the request: if they went along with this lunacy, they’d open themselves up to massive criminal charges in any future government.

Honest now, I want to hear from a Chavista on this one. Please explain this one to me…because I see this kind of thing and it becomes harder and harder for me to fathom how anyone who’s not on the take can continue to support a government that launches public campaigns to piss all over its own constitution in order to steal from its own citizens.

I mean, some significant line is being crossed here. This isn’t even just bad policy anymore: it’s outright thievery.

*apologies to Alex Dalmady for shamelessly ripping off his analogy…

January 7, 2004

The bonfire of the government's rhetoric...

Pointing out inconsistencies between Chavez's rhetoric and his government's actions is like shooting fish in a barrel. Still, sometimes it's fun to shoot fish in a barrel.

Five years ago, Chavez built his economic vision around an angry diatribe against surreptitious attempts to privatize the nation's oil industry.

Today, the Chavez government surreptitiously sells off Venezuelan oil assets abroad under cover of darkness, with no public consultation or debate whatsoever.

Five years ago, Chavez roused crowds by denouncing the opaque business practices and outright corruption in the public oil sector.

Today, Chavez agrees a no-tender, one-on-one sell-off of a key state oil asset to none other than a Russian oligarch-led conglomerate, Alpha, which initially made its billions by bribing Russian officials to walk away with billions in dollars in assets paid at a tiny fraction of their value - the infamous 90s sweetheart privatization deals.

Five years ago, Chavez laid out a vision of radical democracy, grassroot people power, with direct voters' participation in key decisions.

Today, Chavez makes every key government decision in isolation, and his government is fighting tooth and nail against a very broad-based call for a recall vote, one of the very people-power reforms he championed as recently as two years ago.

Five years ago, the government denounced the economic enslavement of the foreign debt burden, and started to only borrow in bolivars, instead of going to international credit markets to borrow dollars. Economists of every stripe warned that they would soon tap out Venezuela's banks, crowding out local borrowers, and would end up being forced to borrow larger and larger sums of shorter and shorter term bonds at higher and higher interest rates from more and more exposed banks.

Today, the government implicitly admits that the critics were right all along. The government announces, finally, a $1 billion bond placement in New York, as part of a massive restructuring plan to swap bolivar denominated bonds with long term dollar denominated bonds - i.e., what critics had demanded all along. As usual, it's too late: the local debt has already more than sextupled in bolivar terms, and tripled in dollar terms, leaving the nation many millions of dollars worse off than it would be if the government had followed independent advice all along. And the new dollar bonds are no bed of roses: yielding over 10% (in $$$! - country-risk, is the relevant euphemism) the bonds are a massively expensive way for Venezuela to borrow...though still less suicidally non-sustainable than the crazy borrow-only-in-bolivars strategy.

Five years ago, Chavez slammed the old regime for the judicial "tribus" and the absence of truly independent legal institutions.

Today, the government unilaterally shuts down politically-uncomfortable apellate courts, creating a massive constitutional vacuum, and now proposes, through a plainly illegal maneouver, to pack the Supreme Tribunal with 10-12 additional (Chavista) judges, to ensure the Tribunal's tractability. Coming at the political moment it comes, the move is widely feared by the opposition who see it as part of a broader plan to strike down the recall referendum petition through a court decision with the Made in Miraflores seal.

And, the jewel:
Five years ago, Chavez was still celebrating his coup-plotting days, spending successive February 4ths - the anniversary of his bloody attempted coup in 1992 - as though they were national holidays. After April 2002, and in a truly Orwellian inversion, he switches and starts calling ALL of his opponents - from the catholic church to the far right to the far left to the far center - "golpistas", coup plotters, as the ultimate political epithet.

Today, having established the word coup-plotter as the worst political insult, and after having repeatedly grumbled about the U.S.'s supposed role in the April 11th coup - what that role might have been was, of course, never specified - reports emerge that the US believes Chavez directly financed the protests that brought down president Sanchez de Lozada in Bolivia - in fact, financing a coup!

So is this a government of the left, the right, or what? Is that even a meaningful question when you're faced with this kind of absurdist excess?

As Manuel Caballero once said, Chavez is neither a communist, nor a leninist, nor an anarchist nor a trotskyite nor a castrista nor a fascist nor a reactionary nor a militarist; Chavez is a chavista.

Snippet of conversation with my Malaysian prof...

Him: But how much democracy is there, exactly, in Venezuela? I mean, the situation there is not like in Malaysia, is it, where the opposition are not allowed anywhere near a TV camera, and elections are "blacked out" if the governing party don't get over 2/3rds of the vote?

Me: Well, it's a far different thing. In Malaysia you have an actual authoritarian regime, full stop. In Venezuela, the problem is that we have some kind of tropicalized dadaist fantasy instead of a government. Your problem is bigger, no doubt, but ours is much more entertaining.

January 6, 2004

Contrast and compare:

(or, case study on what happens when your vote is secret, but your signature ain't...)

Item 1:
Article 145 of the Venezuelan Constitution: Civil servants are at the service of the state, not of any political partiality. Their hiring and dismissal shall not be determined by their political affiliation or orientation[...]

Item 2:
26 fired for participating in signature gathering drive. Opposition lawyer Tulio Alvarez has taken on the cases of 26 civil servants, "tenured" employees at the Planning Ministry, who have been unceremoniously fired for participating in the signature gathering drive for a Recall Referendum. "They are not respecting the Civil Service tenure, nor the right to stable work, and the only way those affected can raise their voice is to go to the Administrative Courts, but any decisions those courts take can only be appealed to the Corte Primera (First Administrative Court,) which is currently closed."

[Remember that the government unilaterally ordered the Corte Primera shut down after its magistrates handed down a string of rulings deemed insufficiently revolutionary. The Corte Primera has yet to be replaced with anything.]