The master remembers the "millardito"

Ten years ago, Hugo Chávez had a problem: the Central Bank of Venezuela was independent. This was a personal affront to Chávez, who considered independence from him to be akin to a slap in the face. So, Chávez being Chávez, a furious assault on the Central Bank’s autonomy began by demanding they hand over $1 billion, a “tiny billion” or “millardito,” a la Dr. Evil.

The Central Bank acquiesced, but not before making up a new chavista euphemism, the concept of “excess reserves.” The President could have his billion, the bank argued, because the country didn’t need to save that much. We could calculate what the “right” amount of foreign reserves were, and hand over the rest. ¡Al cabo que ni quería! (Never mind that the Central Bank had already handed over the equivalent of all reserves in local currency, so any “excess reserves” handed over were basically inflationary double counting)

Ten years later, economist Pedro Palma brings the story back in an op-ed piece in El Nacional. In his trademark clear-eyed manner, he reminds us that, back in the day, the Central Bank decided that $29 billion was an adequate level for foreign reserves because that amount represented about 12 months worth of imports for the country. Ten years later, cosidering how much more we import now and using the same formula, Palma reckons that the appropriate level of Central Bank reserves should be in the order of $70 billion, more than three times what we actually have (around $20 billion).

The argument about “excess reserves” was a simple grab for a tempting pot of money. Once the independence of the Central Bank was violated, nothing in its vaults was safe. Given the role Central Bank independence plays in preventing price increases, is it any wonder we have the world’s highest inflation rate? Is it that hard to believe the bank has simply stopped announcing bad economic figures altogether?

When I first started studying economics, Palma had a TV show called Enfoque in which he talked about economic issues in clear terms. I remember having to stay up late to watch the show for my introductory economics class, and it became a benchmark for me. Someday, I thought to myself, I want to explain economics in such a clear and accessible way.

It’s refreshing to see the master in such good form.