Arreaza in Outright Self-Parody Mode

Deep in thought, generating some alarmingly dim wattage...
Deep in thought, generating some alarmingly dim wattage…

Today, there are 1 trillion bolivars in circulation in Venezuela. A year ago, there were Bs.583 billion. That, right there, is pretty much all you need to know to understand why inflation is increasingly out of control. You can’t grow the money supply by 71% and expect prices to just sit tight.

Now, unless you use the Gold Standard (or run an Ecuadorean style dollarized economy), there’s really no way for the state to shirk responsibility for this. In states where the Central Bank is genuinely independent, government actors might say it’s not their bit of the state that’s at fault, but in a chavista system that has gone way out of its way to reaffirm the BCV’s subordination to the Executive Branch, even that avenue is closed.

To be clear: all of the policy instruments that determine the money supply are under the tight, direct control of the revolution. It’s the damn BCV Chairman’s John Hancock that’s on the damn bills. It’s PDVSA and CVG and the government whose demand that the Central Bank monetize their overspend creates most of the extra liquidity now sloshing around fueling price hikes. These things are not ambiguous.

And yet, here’s Vice-president Jorge Arreaza opining on the liquidity situation,

Este jueves el Vicepresidente Ejecutivo, Jorge Arreaza, señaló que factores económicos han inyectado liquidez deliberadamente a la economía, a fin de generar presiones que sirvan como arma de la supuesta guerra económica que adelantan los empresarios contra el país.

Yup, you read that right: even the liquidity spike is a CIA conspiracy!

Then he adds this cherry-on-top…

Dijo que ya están identificados y que próximamente el Presidente Nicolás Maduro dará a conocer sus nombres.

Why wait? I got yer names right here, pal:

  • Nelson
  • Edmée
  • Eudomar
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      • Exactly.

        Just as importantly, where is the voice that is believable by the masses within Venezuela, to say it isn’t so?

        If my message is being communicated to 70%-90% of the citizenry and any other view is only available to 1-2%, I can pretty much say what I want, no? Who could possibly contradict me with both credibility and sufficient resources.

    • A bank, owned by the capitalist enemies, could print zillions in counterfeit bonos (DPN). Then they would maliciosly use them as collateral for a BCV loan to the bank. A tipical central bank operation, but used as a weapon in the capitalist’s war against platanote.

    • They can cause a spike in liquidity by letting the government confiscate their companies and ruin them them. Because of this the government has been forced to substitute internal production with imports, which uses Central Bank reserves, forcing them to print new money to be able to pay salaries to the thousands of new government employees. You see, it all makes sense! It is the private sector’s fault.

    • Commercial banks can increase money supply by expanding credit. When banks give loans, bank deposits and, consequently, the money supply increase. Banks can maximize the creation of commercial bank money by having no excess reserves. SInce there are required reserves, there is a limit to how much money banks can create.

      • Correct.

        However, within the financial systems, there’s a number of ways of going beyond the required reserves and still putting money out there on the table. By going OBS with credit facilities, a bank can maintain its “reserves” while increasing leverage/lending and generally escaping oversight by the regulatory bodies. While going OBS has gone into disfavor in recent years and is watched much more carefully (ever since Bear Stearns), it still does happen quite a bit. It is still relatively common for large banks to have off balance sheet derivatives that they use as leverage for lending, since this is thought to mitigate risk to the financial institutions. (It usually doesn’t. since they consider it theirs and have the whole loss-aversion mentality.)

        Incidentally, Mr. Toro, the 10% number you once asked about, with regard to required reserves, was a standard agreed upon by the global financial community some years back in the Basel agreements (they are on number 3 now, since 2011.). Absolute minimum capitalization was set at 8% while an optimal capitalization rate was set at 10%.

        In a well-regulated and tightly monitored financial system, it is more difficult, but by no means impossible, to pump money beyond the reserves into the system. Given the wild west settings that is Venezuela currently, it should be relatively easy to do so.

        I don’t think this is the case however, as the lending would require a number of spectacularly large parties/counterparties to utilize those gray credit markets and while the banks are likely sizeable enough, I don’t believe there are sufficiently large private companies/pension funds/etc. to do so any longer. That said, it would be entirely possible for certain state entities to do so and keep them off the balance sheet…which is food for thought despite having the CB at their disposal.

  1. The thing is that these comments spew out of the mouths of all the ministers for one purpose.

    To divert the Chavista minority from the realities of TRUTH.

    No one else believes them.
    They need these lies to survive.
    Without them they would have to accept responsibility for destroying the country.

  2. This particular threat seems to be directed at businessmen. I am betting that Lorenzo Mendoza of Impresas Polar is on Maduro’s list, along with the rest of the “usual suspects”.

    • I think Lorenzo Mendoza’s earlier presentation to the government buffoons made it clear that he and Empresas Polar pretty much run circles around these guys. Without either, the country would have nothing.

  3. Why so shocked people? They also said that the trilogy of the lord of the rings is in fault of everything the government should be responsible for, so this falls on the same category.

    Also when Chavez was alive, he never was “told” or knew of “bad” things, remember? Always the victim.

    They use that so to say that they belong to the people, that they are outsiders trying to fight the dragon, shall we say Smaug, since we are about trilogies and stuff. As long as people keep voting for people like this instead for voting for competent people, we will be doomed for eternity.

    • btw worth to mention that the lack of acceptance of responsibility is a characteristic of certain psychiatric mental disorders…

  4. I am monitoring the parallel rate quite closely and it is getting more disturbing every day.
    In ONE WEEK the euro parallel rate went up from 62 to 77… that is a 24% increase in ONE WEEK. This is HYPERINFLATION territory!
    I think the people should brace for impact once the ‘We are not as rich as we thought we were’ song starts to sing after 8D..

    • Don’t follow the Euro, follow the US$.
      The Euro has been up & down the last week against the US$.
      Following the US$ is the standard that we all use here.

      The Bolivar is still falling like a stone.

      Could someone please explain why the numbers at dolartoday never balance.

      If you take today’s rate of the Colombian peso against the US$ it’s 1902 Pesos to US$1.
      In Cúcuta they are paying 33 pesos (down from 35 pesos yesterday) for Bs.1
      Dividing one into the other you get Bs.57,63 to US$1
      & yet they are quoting Bs.58,79??

      They must be including transaction fees or something.

      • Not transaction fees per se, but in the thing is that exchange offices won’t sell dollars at the representative rate but rather at a slightly higher prices to make a profit. According to this site, exchange offices in Bogota are selling dollars for as high as 1990 COP. My family tells me that cash dollars have increased in price and that they have become a bit harder to find, meanwhile the rate I get by withdrawing dollars abroad from my Colombian account has remained much more stable. Beyond the fact that the government has been pushed to take measures to devalue the peso (by exporters) I have no idea why this is the case (as I’m pretty much clueless about economics beyond my personal finance), and whether craziness in Venezuela is creating extra demand for dollars in Colombia.

        The thing about the parallel dollar is that it’s hard to measure accurately since you get noise added from the behaviour of the peso and the supply of dollars in Colombia/Cúcuta

    • Now 59,42
      Thanks for the explanation El Cachaco.
      Makes it really difficult to set a rate here in Margarita.
      With the disappearance of foreign tourism there are few cash dollars floating around.

      This is like a large truck without brakes coming down a mountain and gaining speed by the minute.
      Things are getting totally out of hand.
      Everything we buy here that has a touch of importation to it is being increased every week. Even stuff that has no foreign aspect at all is rising rapidly.
      Our famous Cacique rum is now Bs.120 a bottle up from Bs.51 in January.
      Bacon, hot dogs, etc have risen 150% since January & these are produced here.
      It applies to most things.

      Real inflation this year will be well over 100%.

  5. In the comments section following the El Universal piece mentioned in Francisco’s blog there are three pieces by a Mr Alejandro Uribe which purports to offer an explanation of how private interests can enhance the inflationary impact of the increased liquidity by the use of Bs loans to buy paralell currency and or as result of the custom of businessmen to raise their prices to the public in tandem with any rise in the value of the paralell forex even where they recieve CADIVI forex at the official rate. He also mentions the need to avoid repeating the govts recent ‘mistake’ in devaluing the Bs. Is this for real?? can someone more knowledgeable than myself address Mr Uribes arguments ?? Even if they dont explain the core reason for the inflation which the country is experiencing now ( tied to the BCV’s printing of money) , are the practices he mentions compounding the existing problem ??

    • He seems to be describing nothing beyond fractional reserve banking – – half (and badly) digested by someone with an alarmist streak.

      Yes, the bulk of the money in Venezuela (and everywhere else) is actually created by commercial banks through the lending process. The point is that it’s created under conditions set out by, and closely regulated by, the Central Bank.

      Think of it this way: if the commercial banks HADN’T created extra cash by lending the money that reached them after the government monetized the debt, do you doubt Arreaza would be accusing them of hoarding cash? (But then, with inflation already running at 50%, and looking to rise further, what kind of lunatic hoards cash??!)

      What Arreaza is doing, in the end, is not unlike what Maduro does when he alleges an economic war in play because economic actors are responding to the incentive structures placed in front of them in a profit maximizing way. He’s taking the very easily predictable -inescapable, really – consequences of government policy and treating them as a conspiracy.

  6. “Our famous Cacique rum is now Bs.120 a bottle up from Bs.51 in January.” In terms of the parallel dollar, that would be about $2.00 per bottle. I think, it would sell in the U.S. for about $30! What does that mean?

    • It would be around $2 if you had $$ & could exchange them for the black market rate.
      Unfortunately most of us who live in Venezuela earn Bolivars so a price increase of 135% gets our attention.

      I doubt very much that the black market rate will be affected much by a devaluation that we are all expecting.

      The rate is high because there are insufficient $$ in the market to meet the demand. The rate will keep going up until that problem is solved.

      As the price of oil continues to fall & production does not increase the shortage will continue. 100 by Christmas anyone?

      • Well, it’s the same for housing… at least when looking at Los Classificados en EL UNIVERSAL para Casas en Nueva Esparta, Margarita, when you divide the price for big nice houses by the black market exchange rate are priced ridiculously low! Are these houses really available?

      • Gordo, many prices are behind the curve with real estate agents advertising prices that were set 6 months or a year ago.
        When you actually try & buy the property the price in Bs. has risen even considering that the seller doesn’t think in black market terms but just considers inflation.

        The market overall in Margarita is severely depressed because they have eliminated the foreign buyer from the market. If you don’t have a cedula you can’t sign papers at the notary office. That generally means no hard currency sales – everything in Bs. to Venezuelan buyers. That puts an upward push on the prices set in Bolivars due to the ridiculously low interest rates paid by the banks for deposits (12 to 14%) compared to the 100%+ inflation we’ve had this year.

        Anyone trying to sell a property is pretty well screwed,

  7. Yes, the Govt. is going to “secar la liquidez” according to Arreaza, in the months of November-December, with a November 10% minimum wage/pensiones/et. al hike, the payment of 2-3 months aguinaldos/bono anual to Government employees/pensioners/et. al., and with December Municipal elections. But, it’s not just the Govt. that doesn’t understand economics–the EU of Thursday, Oct. 31, front page lead headline titled, “$22 Millardos Ingresan Al Fisco Tras La Devaluacion”–i. e., by devaluing to 6.3, Bs.140 millardos additional entered Venezuela’s coffers, which, at 6.3, means $22 billion did–i. e., the more they devalue the $ into increasingly worthless Bs., the more $ enter the coffers. Voodoo economics at all levels. No wonder that Hausmann/Naim were banished to the backwaters of Harvard/Washington.

    • It’s hard to know what the EU writers are thinking, but I suspect they just follow the government line to avoid trouble. I find no other way to explain their straight-faced report of an “underground apparition”.

      • About EU, you’re very possibly right, but, if so, this just underlines the truth of the new (MLK) FT CC masthead quote that we, with the exception of most on this Blog, are part of the problem.

  8. In some heterodox theories of monetary economics you could defend Arreaza’s argument. Needless to say these heterodox macroeconomic theories receive as much attention from mainstream economists as does Marxist economics, i.e., none. Actually, various heterodox theories (there are more than one) build from and acknowledge a significant Marxist influence (who’d have thought?). I will not spell out their argument for them, just say that it is, of course, crap.

  9. Once inflation becomes chronic it creates a mentality in people where they feel compelled to spend all the money they have as soon as it enters their pockets because they see it as a race to use it before it losses more of its purchasing power . If your are a merchant, because you dont know how much it will cost you to replace your existing inventory, you are forced to raise the price of you merchandize not to make more money, but simply to remain in business. Everyone becomes engaged in a frenzied buying spree compounded by the hoarding behaviour created by the uncertainty of not being able to find what you need next time you need to buy it . Inflation takes a force of its own that feeds on itself in a spiral that constantly aggravates its effects. Currently you cant buy homes , you cant buy cars, you cant buy land , you cant invests in a business (with any certainty as to its profitability), you cant save so you feel pushed to spend all your money in consumer goods and in the purchase of clandestine dollar the only thing protected from the eroding effects of runaway inflation. Inflation is a tide of irrational expending that sweeps everything before it. Because the govt heavily subsidizes most everything the impact on its resources becomes worse and worse as it tries to keep the flow of subsidized goods available . Irrational economic policies in the long run have irrational disastrous outcomes!!. 15 years of economic mismanagement and crazed policies have created an inflationary trap ( perfect fiancial storm) which has the regime and venezuelans in a vise that cannot be broken except through draconean decrees which politically the regime will find very difficult to take .!!

    • Part of me wishes Chavez lived just to see him face the utter collapse his policies and ineptitude at actually governing brought upon the country, oppo nini and chavista alike.

  10. As a macroeconomics and currency noob one thing I’d like to see explained is the difference between a currency peg such as used by a lot of countries and the type of currency controls applied in Venezuela. Is the difference just window dressing? Also, other countries such as China impose currency controls – evidently the dimensions of the chinese economy give it leeway to finance such a practice. Can anyone shed some light on these questions in basic terms? Is the problem with implementation (for instance the extent of corruption?)

    • Gro,
      I am a zero in economics, but there are a couple of things I know about the Chinese:
      1) the renminbi is kept undervalued by the Chinese government, to promote exports. That is quite the opposite of what Chavismo is doing. There is a margin in which the currency can actually float, but in any case the government still keeps it UNDER its real value.
      2) there is the other issue about currency controls: as far as I know from Chinese friends, they can buy as many dollars as they want for tourist purposes and the like. I don’t know if that goes for companies and huge amounts of money (in the millions or more).
      The Venezuelan government is doing just the opposite of what the Chinese do.
      The Chinese have been moving away from central planning and heavily into promoting diverse exports, specially for the private sector.

      • Thanks Kepler for that explanation. My gut feeling is that the Venezuelan experience could fill an entire chapter in an economics textbook as a case study of how not to manage an economy.

        So the Chinese pursue the strategy of purposely weakening their currency in order to give them favorable terms of trade, since a weak currency presumably stimulates exports and growth of the manufacturing sector. Weakening a currency sounds easy: for instance, increase the money supply beyond the growth rate of the economy. Presumably tightening the money supply will do the opposite and can have deflationary effects and weaken the manufacturing sector.

        So, to what extent would pursuing a weak currency have helped Venezuela, compared to a strong currency, all else being equal? How is Venezuela supposed to benefit from a strong bolivar (bolivar fuerte “fuerte”)?? Who justified this policy in the first place, and why? In addition, I can imagine that weakening the bolivar would have immediate inflationary effects, but inflation is crazy ANYWAY. Is this entirely a problem of settling debt obligations denominated in dollars?

        If the government finally devalues, there will be a spike in prices, presumably. How bad would that be compared to what is going on now (ignoring the political cost to the government)?

        I know this and related questions have been answered in this blog (the question of currency control is of course recurrent) but perhaps a rehash is worthwhile.


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