Waiting for the other red shoe to drop


The government has signalled pretty decisively the end of the Parallel Market as we know it, but it’s not clear what will take its place. The only thing everybody knows is that whatever "solution" they come up with will be anything but. From all we’ve heard so far, we are all convinced it will only serve to deepen the current economic mess.

In principle, the new system need not be a total catastrophe. The new market could leave the BCV in a fairly transparent "clearinghouse" roll – mostly just registering the transactions private parties choose to make. That could happen.

And my grandmother could sprout a handlebar and turn into a bicycle. 

The problem is easy to state. As anybody with even a passing acquaintance with Venezuela knows, bolivar prices track the parallel exchange rate, not the official rate. With rare, permanently scarce exceptions, if a good costs $1,000 abroad, it costs BsF 8,000 in Venezuela, not BsF 4,300.

In an economy based on exporting energy and importing everything else, this is not surprising. The thing to grasp is that, in these circumstances, the government’s ability to get a handle on inflation depends largely on its ability to keep the market rate from going through the roof.

Of course the parallel rate, like any other price, follows the laws of supply and demand: supply a lot of dollars, and the price of each dollar – in terms of bolivars – falls. Supply relatively few dollars, and each will cost more in terms of bolivars. By the same token, cut down on the supply of bolivars (a.k.a. monetary liquidity), and each bolivar will be relatively scarce and relatively valuable (in dollar terms). Expand liquidity, and each bolivar is worth less. Nothing econ undergrads don’t learn in their first week at school so far.

So bringing down the parallel rate is really not a big mystery. You either supply more dollars or you supply less bolivars. Or both. Simple.

Simple, that is…unless you can’t.

Say you’re not exporting as much oil as you’ve been saying, or not enough of the oil you’re exporting is bringing in cold hard cash, and so your dollar income isn’t what you’ve been claiming. Say the bond market thinks you’re the emerging market most likely to default in the next few years, and so you can’t really borrow many more dollars at a reasonable price, if at all. Then, the "supply more dollars" part of the equation gets pretty hairy.

Or say cutting the supply of bolivars – by cutting government spending – is unappealing because you’re already in a recession, and cutting liquidity is bound to get you mired deeper in the funk. Say you’re facing an election in a few months’ time and you know your vote tally depends crucially on how well people are doing financially then, such that deepening a recession now is likely to have unacceptable political costs.

Say you’ve spent a career demonizing spending adjustments as neoliberal ploys to plunder from the poor for the benefit of foreign capitalists. Say your boss is a spend-all, damn-the-torpedoes kinda guy.

Suddenly, the whole "supply less bolivars" bit gets pretty hairy, too.

Which is why the government’s chief "economists" are in such a pickle today. 

Expectations ahead of today’s BCV-Finance Ministry announcement are so dismally low because the government’s policy goals at this point are hopelessly incoherent. Basically, right now, the government wants everything and its opposite. It’s as though you were given a pound of flour, a pound of sugar and a pound of butter and tasked with creating a cake that is, at the same time, fat free, carbohydrate free, and deeply delicious. 

It can’t be done. The government’s inability to assimilate the tradeoffs involved in tackling Venezuela’s current Molotov cocktail of recession, inflation and scarcity is sealing its own fate.

Monkey, meet Rubik’s cube.

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