What if it's Diosdado who's vetoing devaluation?

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VENEZUELA-Diosdado-Cabello-pieza-clave-de-la-pol-tica-venezolana2014 will be remembered as the Year of the Shortage.

In Venezuela these days you need a prescription to buy acetominophen, a birth certificate to buy diapers, and six hours out of your Saturday standing in line to buy some cooking oil. The macroeconomic chaos the country has reached has made it uncontroversial to describe it as “the worst run economy in the world.”

Our tendency is to see these dislocations as deep, structural and, in a weird way, right: just desserts for the appalling mismanagement and criminality of a governing clique that’s now openly predatory in its dealings with society.

We are, in other words, enormously confused about the causes of the shortage economy. People have a Concept Salad in their heads about what’s behind the problem: is it all those mothballed factories? is the country just broke? is it the bachaqueros’ fault? Or Cadivi’s? Or is it just that the government is vaguely useless, in a general way? People intuit the answer must be “all of the above”: that’s common sense, right?

Nope. Shortages are caused by price controls. Period. In particular, by controlling the most important price in the economy: the price of foreign exchange.

The world is full of countries that have desindustrialized, and don’t have shortages. History is full of countries that have gone more or less bankrupt, and it hasn’t led to goods shortages. Blaming smuggling for shortages is like blaming the fever for the infection.

Economics is full of ambiguous conclusions; this isn’t one of them. Price controls are responsible for shortages. Nothing else is.

The opposition – what’s left of it – has badly squandered a teachable moment here. But the confusion in public opinion contrasts with the absolute clarity among experts: anybody with even a primitive grasp of the way the economy works knows there’s no way out of this but to adjust prices, starting with the most important price in the economy.

The real question about price and forex controls is, how could Maduro persist in a policy that’s so blindingly obviously destructive to its own interests for so long?

I mean, look, his numbers are almost comically grim at this point:

toxic maduro

It’s Maduro’s obduracy that cries out for an explanation: his absolute bloody minded determination to keep digging that damn hole long after it’s become perfectly plain to everybody how deep in it he is.

The legendary opacity of chavista policy-making makes it impossible to explain the behavior, but I think we’re well past the point where you could attribute this to a simple policy mistake. Maduro has, for some time now, acted as though revising price and forex controls was just not an option for him. As though some player in the policy system had effectively taken it off the menu of imaginable policies.

This is not that surprising. It’s not news that some players in the upper echelons of government (as well as some far from those echelons) profit from the gap between official and black market dollars. If you have the connections to buy dollars for Bs.6.30, then the higher the black market rate goes the more you make. You’d expect those players, though, to balance off the immense short-run profits they get from this kind of arbitrage with the need to keep access to those profits over time.

Because 2000% arbitrage margins are great and all, but if they come at the cost of making the government’s brand outright toxic, they imperil your ability to stay in power. Wouldn’t you rather make a more “modest” 100% or 150% arbitrage margin for longer than push your luck with these stratospheric margins and risk killing the scam in a couple of months?

The chavista regime has always been parasitic, but things have changed.

Think of Ebola and Chagas Disease. Both live off of their hosts, but Ebola is much, much more aggressive. In fact it’s so aggressive it kills off its host in relatively short order, which is why most Ebola outbreaks burn themselves out relatively quickly: the disease is just too aggressive for its own good. Chagas, on the other hand, takes 30 years to kill you: it’s not as greedy in its parasitism, but it balances that out with longevity. Maybe Chavez was the restraining mechanism that kept the red parasite from becoming self-defeatingly over-aggressive.

Or maybe the cartoonish extremes of parasitism we’re seeing now respond to a specific player’s strategy: a player poised to profit both from sky-high arbitrage margins and from an implosion in Maduro’s leadership. A player positioned to step in in a moment of crisis and “save” the country from the ruinous policies that enrich him.

Now, who could possibly have that kind of power? And a short-term interest in maintaining the widest arbitrage margin possible? And a reason to want to undermine Maduro’s leadership in the medium term? And the Machiavellian chops to think up a plan like this and carry it off?

I just can’t think…

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1 COMMENT

  1. Fear is vetoing devaluation , fear of the consequences of the inflation which would follow on an full blown official devaluation , fear of its nurturing an impopularity for the govt that would dash its hopes of remaining in power for ever . A fear shared by Maduro , Diosdado and all others in the highest circles of govt , also the illusion , the false hope that half measures and media control and manipulation will allow people to be convinced that the consequences of posponing devaluation is really blameable on a cunning and malign political enemy working from behind the shadows , that finally things will turn for the better by some kind of fiat miracle, Hitler in the end, when the world was crashing about his ears believed that miracle weapons would turn the tide.

    On the other hand devaluation is happening only in very slow motion , the more items are pased from sicad i to sicad II , the more items are denied official dollars to force them to be bought at the black market rate , the more the bolivar loses its value to rampant inflation , the closer we are moving towards a kind of shadowy virtual devaluation .

    Diodado and cohorts are certainly making money from the arbitrage opportunities that a distorted exchange rate allows , but they are no fools they must realize the consequences long term of allowing insiduous devaluation cause the provoke the havoc in peoples lives that its causing . In the end I think that posponing devaluation is cowardice !!

  2. You might be right about Godgiven having much to potentially gain from erosion of Maduro’s support, but is he opportunist or puppet-master? I think Maduro is utterly ignorant of economic matters, he simply can’t be expected to make the connection between price controls and scarcity. There is a logical leap he has to make that is required, a bit like understanding evolution or other abstract concepts. He probably doesn’t even see it as his job to really understand basic economics, and evidently his secuaces haven’t cared to give him the info. A little too abstract for someone who probably hasn’t even seen the engine of a bus.

    • I’m sure he doesn’t understand the link.

      I’m also sure he has some courtiers and advisors coming into his office trying to explain it to him and beseeching him to curb the arbitrage margins.

      And I’m sure he has other courtiers and advisors coming into his office telling him that’s absolutely out of the question.

      Apparently he has good reason to side with the latter, against the former. The question is, why?

      • Well, aside from the possibility that he lives in a cognitive bubble that predisposes him to see any market-friendly solution as intolerable, I would agree with the view that there is “some” pressure from economic distortions the controls have created. In addition to raspacupos, smugglers etc there are people (as Glenn’s link below shows) who will lose not just their purchasing power (never mind that between scarcity, implicit inflation (black market) that power is nominal anyway), but also their capital investments – that $40k Corolla suddenly looses half its value, whooosh! – tragic and terribly ironic!

  3. I know this is over simplified, but as long as the Chinese continue to loan billions allowing the government to almost give away (likely Chinese) appliances for Christmas, this could go on for years and years and years. I actually think Venezuela would be much better off if the Chinese would just go ahead and buy the country, as that’s what they are doing anyway. Ecuador is “dollarized.” Venezuela could be the first to “yuanize.”

  4. Why not devalue?

    http://www.washingtonpost.com/blogs/worldviews/wp/2014/11/19/venezuela-where-your-car-gains-value-the-older-it-gets/

    “He said he’d purchased a $45,000 SUV in Florida and had it shipped but had to fork over $30,000 in bribes and fees once it arrived. He still expected to turn a tidy profit, saying the vehicle lasted a single day on the lot before it was sold.

    The dealer spoke on the condition of anonymity, because, he said with a grin, “a lot of my customers are government officials.”

    Also “Venezuelan officials…. have set up a waiting list for the Chinese-made models appearing lately on Venezuelan streets, such as the Orinoco sedan.”

    • “Venezuelan car dealers say many of the vehicles are being bought and sold to outrun inflation pressures, not to get around town.”

      It would take a lot of courage to pop that investment bubble!

  5. If you are assigned D dollars from Cadivi/Sicad (at the rate c VEB/USD) and you sell some of those dollars to cover your Cadivi/Sicad-bolivars at the parallel rate (p VEB/USD), your arbitrage profits in dollars are this:

    P(D,c,p) = D*(1 – c/p)

    With Cadivi at 6.3 and the parallel rate at 125, you keep 94.96% of the assigned dollars as profit. Think of this as your gross margin.

    At the Sicad 1 rate of 12.0 and the parallel rate at 125, you keep 90.4% of the assigned dollars as profit.
    At the Sicad 2 rate of 50.0 and the parallel rate at 125, you keep 60.0% if the assigned dollars as profit.

    Whether you have access to Cadivi or Sicad-II dollars, the real driver of your profits is *not* the fixed exchange rate but the amount of dollars your ghost company is actually assigned. When an arbitrageur is only paying for 5-10 cents on every dollar he receives because of the exchange rate differential, he won’t worry about whether he’s getting 95 free cents or 90 free cents. He will try to get in on as many of these dollars as possible.

    (In mathematical terms, this intuition is simple: the partial derivative of P(D,c,p) with respect to D is much bigger than the partial derivative of P(D,c,p) with respect to c when c is in the neighborhood of 6-20 VEB/USD and p is 125 VEB/USD. If you are trying to maximize profits, increasing D is much more rewarding than reducing c or increasing p)

    If Diosdado et al understand this basic math–and they likely do at some intuitive level–they are focused on securing dollar allocations for their ghost companies and on making them more dependable.

    I agree with your basic point. Diosdado et al do not want a change in the status quo (i.e. the elimination of Cadivi/Sicad-I). But I agree for a different reason. I think Diosdado does not want a change in FX mechanisms because he has loyal contacts in Cadivi that ensure him dollar allocations. If the FX system were to change, he would have do seek out new contacts to secure his ghost companies dollars. This would be a headache.

    I think Diosdado and anyone else engaged in Cadivi/Sicad-I arbitrage don’t really give a damn if there is a devaluation from 6.30 to 12 or to 18 to 22 or even 25 as long as the existing institutions and the people in them remain the same. Even with a 200% mega-devaluation from 6.30, you still get 84.88 free cents from every dollar you buy.

  6. Why would Diosdado benefit from undermining Maduro’s leadership so hard? You think he wants to be president? Or you think he can put a more easily controlable puppet there?

  7. I wonder how much of the policy is being driven by a true belief in 21st Century Socialism? To some, the fallacies of the theory are apparent and have been demonstrated by the results. The success of the theory relies, however, on total control of the system. A lack of full control allows the system to be undermined by social deviants. A certain kind of true believer would see the problem as lying in a lack of adequate control rather than excessive control. While this seems delusional, I do not underestimate mankind’s capacity for delusion…and it would explain a lot.

    • If I’m Diosdado and I’m trying to work Maduro not to adjust the exchange rate, I’m sure this is going to be a key argument I’ll be using: lots of appeals to Chavez and his ideology, lots of talk of mano dura against the speculators, etc. I don’t believe for a second any of them really believe it, but I believe it’s awkward for any of them to be openly seen to not believe it.

    • When and if he gets a visible new job we will know they are in “terms”. His lack of a position speaks volumes about the situation’s volatility.

  8. Devaluation of dollars, or at least killing the 6,3 lie for good, has two undesirable consequences for the ruling kleptocracy:

    1) The political cost: Everybody knows that the “1097$ minimum wage” is one of the most stone-faced lies maburro has pulled out of his ass, but nevertheless, don’t forget that the bastard’s been behind all the late devaluations, since the infamous 4,3 to 6,3 that was signed by the wax doll from hell (He was already rotting in february of 2013), but the 1097$ lie serves as a comfortable and musical lie for the chavista base, who believe such bullshit as that and that we’re getting cheap goods since there are cheap dollars.

    Killing the 6,3 means taking off one of the most important bricks of the bullshit tower that’s the so-called “economic war”, which means in short, killing the latest get-out-of-jail-for-free card this regime’s got to escape all its responsibilities.

    Also, the huge inflationary spikes don’t mix well with incoming elections for the regime, they make cheating harder.

    2) The profit for the mafia cost: You asked in the article if “Wouldn’t you rather make a more “modest” 100% or 150% arbitrage margin for longer than push your luck with these stratospheric margins and risk killing the scam in a couple of months?” Well, the ruling kleptocracy have zero brain cells guided into thinking into even the shortest term in future: They prefer to keep making their 2000% or 5000% for a very simple reason, they are criminals, and they are extremely “lambucios”. That’s the same model when you see street vendors hoarding cooking oil that’s sold at retail price of 15Bs and then reselling it in 150Bs, they want the most absurd gain in the shortest time with the tiniest amount of work.

    The dollars are for chavismo the new gasoline, and extremely cheap commodity to be smuggled, controlled and getting the fastest gains, in addition to providing the most extreme economic control over those seen as enemies of the state “aka everybody who depends on dollars for some step of their production chain.”

    In conclusion, the dollars won’t get devaluated “officialy” since the monopoly-controlling mafia doesn’t want to, after all, it’s been the same with the gasoline, and look how damaging has been that one for the country’s economy.

    • Really cheap shot by Semtei, who was a Chavista who never said anything bad about the Chavista Government, until the day he left. Rodriguez, on the other hand, wrote quite a few reports very critical of the Government while Director of the Economic Office of Congress, including one that noted that Merentes has used money from Fiem to pay salaries. This was investigated by6 the Assembly, but, of course, nothing happened. He was also the one that noted that as oil increased, the Government was not increasing contributions to Fiem and that Chavez was not funding the program to coordinate antipoverty programs. All those papers should be somewhere on the web, I remember reading them.

  9. “Nope. Shortages are caused by price controls. Period. In particular, by controlling the most important price in the economy: the price of foreign exchange.

    The world is full of countries that have desindustrialized, and don’t have shortages. History is full of countries that have gone more or less bankrupt, and it hasn’t led to goods shortages. Blaming smuggling for shortages is like blaming the fever for the infection.

    Economics is full of ambiguous conclusions; this isn’t one of them. Price controls are responsible for shortages. Nothing else is.”

    My grandparents didn’t have any kind of price controls in the European country they live in post-war Europe, yet they did face all kinds of shortages.

    On the one hand, you are right about the lack of industries being irrelevant, because you can always import goods from other industrial juggernauts like the US or China. On the other hand, price controls are relevant, because business owners won’t resell products at a loss, but something that you are forgetting that is as relevant as price controls to explain shortages is the DISTRIBUTION factor: the amount of people eager to open their stores and resell the products that are available in the market.

    Back to my grandparents’ example, they faced shortages not because the imports were not available, which were coming in droves mostly from the US back then, nor price controls were happening, the shortages happened simply because there were no people available to distribute the goods throughout the country, since all stores and shipping services had gone bankrupt due to he economic crisis. They had to wait until a government owned truck went to their forsaken city with the supplies, they tell me it was like Christmas when the truck arrived. The next one would only show up again weeks later. Again, no price controls were happening.

    I remember reading at RunRunes that hundreds of thousands of company in Venezuela have closed its doors since 1999, many of the owners and their families moving overseas after that, while few business open up to replace the ones closed.

    Price controls (forex or not) + LACK OF DISTRIBUTION (shipping + wholesale + retail) = inflation and shortages.

    • The fact that it was government trucks that brought the supplies suggests that the government controlled the importation and distribution and probably also the prices. One way to know if the prices were controlled is to ask your grandparents if the goods sold were horribly overpriced. If they were not then prices were controlled. The fact that they compare it to christmas suggest so. After WWII it was common practice all over Europe to ration and control prices of everything deemed essential, specially food.

      In situations like a post-war after price controls are lifted it does not take long for entrepreneurs to spring out of everywhere to make a killing. Look at this video from 9:30 where he explains (in spanish) how in post war Germany when price controls were eliminated supplies came out of nowhere, from under the rocks, from the rubble of the destroyed cities, and inundated the market.

      http://youtu.be/gv4fhdz3SUY?t=9m29s

  10. Let’s move the analysis two periods ahead. Is Maduro aware of this?

    No? Then he’s a complete idiot
    Yes? Then he’s willing to accept all responsibility for the failure of chavismo…because Cabello won’t be able to keep him close.

    Or put it differently, is Cabello the obvious winner of Maduro’s failure?

    • Here’s what I think. Whatever implicit threat Cabello is making about the “horrible thing that would happen if you devalue” is a *credible* threat in that Cabello has the power to make it come true. When Maduro calculates that devaluing puts his leadership in immediate peril, he’s not actually wrong. Diosdado has him completely tied up.

      • Quico, I think that chavistas/cubanos have venezuelans completely tied up.

        Chavistas/cubanos only care about venezuelans because they live on top of the oil, we are a burden to them. So, my theory is that they make as hard as possible for everyone living in Venezuela so you either fight or flight, and most people chose the later.

  11. I don’t know, but I’ve always felt that the “Diosdado is an evil mastermind” train of thought is something manufactured by all parties. I think that by now he’s simply content with all the 0s on his accounts

    • I mean, he obviously is an evil mastermind but I don’t think political power (at least visible) is his goal, he’s managed to do good for himself and that’s what he’s about.

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