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.
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!
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
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
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
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:
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!
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,
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.
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.
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.