Why the black market dollar’s gone haywire

Think of it as a kind of #TropicalMierda QE


As the parallel dollar jumped the last few weeks after months of unaccustomed stability, people keep asking us what on earth is going on. The surge, however, estaba cantada, ever since Nicolás Maduro decided, last September 22nd, to lower banks’ legal Reserve Requirement Ratio (RRR)— the encaje legal — in the name of urban agriculture.

Messing with the RRR is one of those decisions that seems recondite and technical to muggles, but that we economists are trained to recognize as a big deal. And, indeed, it signalled a tectonic shift in Venezuela’s monetary policy.

Whereas former Economy VP Miguel Perez Abad had worked to limit money printing and constrain liquidity growth, this absurd move unleashed a trillion new bolivars into an economy already running at triple-digit inflation. At the time, our take on the risks from messing with the RRR was adamant:

Accelerating inflation, depreciation in the parallel rate, worsening fiscal deficits (as inflation this high is effectively cutting real tax revenue)..  Basically another push in the key drivers behind the macro shitstorm the country is currently in.

Depressingly, our forecast is right on track. Again. The price of greenbacks in the unofficial market has shot up by over 70% in a month or so, almost in lockstep with with the announcement of the ‘unconventional’ monetary policy program that we like to think of as “#TropicalMierda Quantitative Easing”.

Quantitative Easing, #TropicalMierda Style

“Recent stability in the black market rate was underpinned by a brutal contraction in domestic liquidity. An unsustainable situation”… Luis Vicente León was definitely onto something back in September. While Pérez Abad’s policy worked for a while to curb the depreciation of the bolivar, it did nothing to fix the reason underlying the collapse in its value:  a government that spends more than it can borrow, and has borrowed more than it could probably pay back. With the holidays (and the end-of-year bonuses associated with it) drawing near, the government was hard-pressed for a quick cash boost. And dropping the RRR does just that.                 

The government force-fed the new bonds to domestic banks, essentially forcing them to spend all the funds freed up by dropping the RRR on lending to…you guessed it, the government.

With the help of a couple of colleagues, I ran a hasty post-mortem on the nitty-gritty of the monetary bazooka. In mid-October, the branch of the Finance Ministry in charge of public debt issuance seems to have been instructed to coordinate a mammoth deal with two very large para-fiscal institutions. BANDES and the Simón Bolívar Fund issued bonds amounting to around 500 billion Bolivars and a low-single-digit coupon rate.

With unofficial estimates of inflation easily above the 500 mark, this sounds like a killer deal, right?


The government force-fed the new bonds to domestic banks, essentially forcing them to spend all the funds freed up by dropping the RRR on lending to…you guessed it, the government.

(There’s a term for this: it’s called financial repression. Not surprisingly, academic studies of our case show financial repression is a key driver of our economic chaos.)

But back to our story. Once state entities got the money from the deal in their checking accounts, the spending binge began. Let’s follow the moneyin this case, Surplus Liquidity in Venezuela’s financial sector as reported by BCV. It’s easy to see that the money bazooka started in earnest on October 19th, a day on which the system overflowed with 350 billion Bolivars.

Just to put this into perspective, they might have spent a whole lot more cash that day for all we know; that figure only represents the number of bolivars that couldn’t be digested by the banks right away. And it meant that surplus liquidity in relative terms (as % of deposits) more than tripled overnight.

Hermoso, ¿no?
Hermoso, ¿no?

Behold what happens when you inject absurd amounts of liquidity, #TropicalMierda style, to finance public spending, into an economy that stopped producing real goods years ago and just can’t handle it:

(H/T Girish Gupta; http://www.venezuelaecon.com/)

The spike in the parallel rate has been so aggressive and ‘unexpected’, mind you, that Ángel García Banchs publicly had to recognize he had been wrong in his prediction of a downward trend in parallel rate (which he’d doubled down on literally the day before #TropicalMierdaQE!) and an imminent unification in the domestic FX market.

The problem isn’t just what’s driving the exchange rate, but figuring out the rate itself

To add insult to injury, the meltdown in the dollar black market has coincided with growing uncertainty about  the actual free-market rate, if such a thing exists at all. Ever since DolarToday stabilized around the 1000 VEF/$ mark for most of 2016, several analysts claimed that the rate the site reported was increasingly out of sync with the rest of the market indicators, such as the Colombian Peso:VEF rate at the border, and reports of actual corporate FX transactions.

Some claim that the black market rate was deliberately suppressed for months by intervention from public entities (boosting supply of FX through selling at the SIMADI rate) or straight-up manipulated by DolarToday’s new data source and ‘methodology’, (based, believe it or not, on Instagram comments, but that’s a whole different rabbit hole.)

Oh, what the hell…we love rabbit holes!

For months the DolarToday website prominently featured this peculiar note on methods:

El tipo de cambio corresponde a las operaciones privadas realizadas en Venezuela (Caracas principalmente) […] Los datos correspondientes a operaciones privadas en la ciudad de Caracas los obtenemos promediando la información que los mismos usuarios publican en la sección de comentarios de Instagram.

That bit of #TropicalMierda methodology was sudenly omitted from the site some days ago, setting off a collective “hmmmmmmm”.

To put this updated policy into context: we know that the long-standing feud between government authorities and DolarToday sort of resolved itself earlier in August, when BCV dropped its lawsuit against the website in polite terms and zero disclosure about what happened there.

Zillions of rumors flew around about the website being bought off by government allies. It sort of made sense, hearing government officials boasting how they had won the war against the site, and the ‘market’ sort of agreed it. However, once the parallel rate began to fly again, and the Instagram dollar policy was taken down, the sweet talk was dried up and the trusty old #EconWars jibber jabber came right back.

All of this leaves a plateful of unanswered questions. Does this new surge in the parallel dollar means that the BCV-DolarToday honeymoon is over?.. Does it mean that the past months of stability were nothing more than a coordinated effort to keep greenbacks cheap, allowing a small and well-connected elite to hoard them and flip them now for astronomical profits? What’s happening behind the scenes that makes people so desperate to buy dollars at increasingly higher prices and with no end in sight?

More importantly, though…how much is a dollar really worth in the streets nowadays? I, for one, have no clue at this point. But they are becoming as scarce as the gallineros verticales this disastrous policy was supposed to bankroll in the first place.

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  1. “What’s happening behind the scenes that makes people so desperate to buy dollars at increasingly higher prices and with no end in sight?”

    The obvious answer, given the timing, is the death of the RR. Since there’s no end in sight for the chavista goverment, unlike the previous months, the market adjusted to that.

    • Lots of people are buying dollars now that they plan to flee the country, so those who can’t leave are selling their dollars just to eat.

  2. Financial repression happens not only in Venezuela.

    In 1988 the G20 decided that for the purpose of setting the capital requirements for banks the risk weight for the “infallible” sovereign was 0%, while that of We the (risky) People was 100%. And no one said anything about that pure and unabridged statism… instead they began to complain about the wishy-washy pro-free market ingredients of a “Washington Consensus”


  3. I’m gonna go out on a limb and predict the Strong Bolivar will continue to weaken, the government will continue to make outlandish decisions and Venezuela will eventually default. At this point, the rest is “academic”. It’s like doing an autopsy on a guy who got run over by an 18 wheeler. I mean, my understanding is that people are now weighing money in lieu of counting. Zimbabwean 100 Trillion Dollar bills sell for about $20 now as oddities but I don’t think the same will happen with the inevitable Bolivar super bills. Too many people will be saving them for a time when they are actually worth something. Hyper inflation is very different than regular inflation in that it represents a situation where nobody wants to hold onto the currency. They would rather have something, anything of stored value. At that point, the rate of inflation is unhinged from the fundamentals anyway.

    • You’re definitely correct about the “guy run over by an 18 wheeler” metaphor.. But for us economists, these developments are definitely worth pondering from the theoretical standpoint. For me, the worst we could do with this crisis is to avoid studying it in detail, as it is a necessary condition to avoid all of this ever happening again.

      • You do excellent analysis, but I believe this will keep happening over and over again regardless. Hopefully Venezuela will be inoculated from the siren song of engaging in currency abuse for a couple of generations. That’s probably the best you can hope for. Almost the entirety of the developed world is following you down this well trod path. Once enough foreigners figure out the dollar is doomed, the USA will be one of those countries you mention where they can’t borrow enough to match their spending and can’t pay off their debt in any legitimate manner (creating money doesn’t count). At that point, all hell will break loose. If you can figure out that inflection point, let us know!

      • Very clear explanation of where the surplus reserves went: stolen by the government. Believe it or not, I still do not fully understand the government rates – SIMADI, DICOM, or whatever. Could it be that the SIMADI dollars ran out, simply no more supply, and the alternative was BF to Peso to USD, driving up the black market rate? I just don’t follow it, so I appreciate your information and work. (In fact, I was about to post asking if anyone knew why the DT rate had jumped so much from October to November.)

        There’s also a question in the back of my mind about the relatively unchanged implicit rate, if V. continues to sell off reserves and accumulate debt – it seems the implicit rate would somehow be discounted by debt, but I guess not. I mean, from an ongoing concern point of view, one would look at realizable assets, or potential income (e.g. if the price of oil should go to $70), but the regime seems intent on destroying the economy, now owing money (about a billion) to the foreign gold mining company, and striking a joint venture with them, depreciating the value of those reserves by using their recovarable value as debt payment.

        As you said, “an economy that stopped producing real goods years ago”, and has borrowed more than it can probably repay. That implicit rate should, it seems to me, somehow reflect the claims stacked up against it to bring it to a realistic value. And by reducing the potential unrealized assets … I wonder how you manage to keep your head, dude. But do keep it!

        Not easy to get reliable data on what is going on in V..

    • “Too many people will be saving them for a time when they are actually worth something.”

      Historically the process normally does not work like that. When the situation does eventually reach a turning point, a new currency is issued. People just don´t have any faith in the old hyperinflationary currency any more and refuse to accept it.

      It is much more likely that you will get to the point where your Bolivar super bills lie in the street and no-one picks them up as I personally saw in Angola and as it happened in Germany.

      • Yes, that is what happened in Zimbabwe too but then something no one really saw coming occurred. The Zimbabwean bills deonimated in the trillions are now defunct but are being sold to tourists and also internationally, including on eBay. The 100 trillion dollar bill is the most scarce and fetches $20 even inside Zimbabwe. So when the Bolivar bills denominated in some absurd amount hit the streets, I am assuming many people will hold on to them even when they are worthless scraps of paper, looking to sell them as oddities. But since this means they won’t be scarce, they won’t be worth much, if anything.

  4. There was no BCV-DT honeymoon ever, there was only the fact that more dollars were sold at simadi rate and that lots of people have been selling their saved dollars just to be able to eat in the same way they would sell some appliance because their miserable salaries can’t cover the bachaquero prices on food.

    Also, there was no agreement wither in the BCV vs DT case, the BCV simply ran off with its tail between its legs in shame while DT bragged and mocked the BCV and the regime for months to come, publishing almost a daily article speaking about how the demand had failed miserabily.

    In the case of the raise in the parallel rate, you answered it at the beginning of the article, there are more bolivars rolling in the streets, simple as that.

    • You are onto something regarding their editorial line.

      Can’t get any more anti-honeymoon that the scorching headlines I get almost on a daily basis from the DT app. It’s just too much, and even a little awkward for hard oppos.

      • Well, it’s the regime’s fault for “provoking” them.

        In any case, DT doesn’t control the dollar’s price, because if they were such hardcore oppos or so hateful as the chavistas paint them, they would have cranked the dollar’s price above 5000 Bs a long time ago.

  5. So, the inflationary furnace is now being fed all kinds of new combustible fuel. Pretty soon we’ll see 5,000B to the Dollar, then the rate will climb again. The only way to stop it is what Germany and Hjalmar Schacht, the new currency commissioner, did in 1923 with the introduction of the “Rentenmark,” a new currency backed by bonds indexed to the market price of gold. Hard assets backing currency. It worked. Perhaps Venezuela could eventually do the same thing using their oil fields as hard assets. Somebody, somewhere, better think of something, and quick.

    • I propose the new currency be called “el Nuevo Bolivar Fuerte”. When I was in Peru, it took me a while to figure out why it was the “Nuevo” Sole.

      • I am proposing that three zeros be cut and the new money be called the “Bolivar Super Fuerte (BsSF.) Then in six more months when it is necessary to do it again, we can call it the “Bolivar Super Extra Fuerte (BsSEF.)!

    • To some extent, the V. and PDVSA bonds are already implicitly indexed to the price of oil, but I think I’d rather play oil futures (which I don’t do) directly, than add the political or country risk to the production risk. Futures are a global market for contracted oil delivery, already out of the ground. In U.S. football analogy, it’s like V. is trying to punt twice on the same down.

      • Does the Bolivar react to changes in the oil price? I understand this is not a real currency market that you can watch in real time, but is there any sense that it is strongly coupled to the price of oil? If it doesn’t react to $10-20 swings in the price per barrel then I’d take this as a further bad sign (there are so many screaming klaxons already that it doesn’t really matter).

        • One might expect a positive correlation of oil to the PDVSA bonds, but honestly, I have no data, just hypothesis based on theory. By “contagion”, the VEF might strengthen as the economic outlook for the country improved. There are so many other variables that come into play, so many screaming klaxons, as you say (not playing the first seven “Voy cantando …” notes of the “Alma Llanera” melody, either). E.g. Let’s say somehow the dialogue ends with the regime “retiring” and HRA provisional president, unified MUD, weeks of nationwide public celebration. The VEF might rally on that news, even if oil dropped 20%, the PDVSA bonds might rally, too. But for the VEF the underlying is the thing to watch, and that would be country production of goods and services, and exports of oil – all other things being equal. The fiscal policies would have to come into line so that the national revenue (trade surplus) is not wasted, but the economic activity has to be there, or no fiscal policy will work, that I can imagine at the moment.

  6. BTW, the photo is classic. Vendemos Bolivares has a quote, but Compramos Bolivares is blank. The “average man” knows what’s going on.

  7. Excellent post. Stability for months in the face of rampant price inflation did smack of behind-the-scenes manipulation, Govt. or private, regardless of so-called liquidity relative stability. But, lately, besides your Govt. liquidity bazooka, we’ve had the: death of the RR (OpUno, dixit); partial opening of Colombian border trade; a 2017 natl. budget spending 8x the 2016 Bs. amount; intl. reserves rundown with default in sight; Govt. admission of $ imports of certain consumer goods; price of oil unable to advance; no visible end to the current Union Civico-Militar; and everybody and his brother, who can, trying to sell their meager capital assets to buy $ to leave the shitstorm….

    • And, as JL says below, dwindling oil production, plus no new Chinese loans, and JP Morgan saying that any new Venezuelan indebtedness not approved by the AN is of questionable legality….

  8. Any way you shake it, the gov’s economic strategy – if you can call it that – is some screwy incarnation of a Ponzi scheme. At this point, the money coming in has basically dried up save for a trickle of rapidly-dwindling petro dollars. That leaves the gov to try and game the system with whatever liquidity is left, which is also dwindling fast. Seems the only hope for a rebound in the long term is another infusion of real money, which no institution or nation is willing to offer so long as such disastrous chaos is sponsored by the gov. Some people within Chavismo must realize the bottom could fall all the way out at most any time. One wonders what economic affairs will be discussed at the pending “negotiations.” Since we all know the gov is incapable of changing course, what’s to really be done other than analyzing the ship as it sinks?

    • I was thinking that the bottom will fall out when the price control regime fails. With hyper inflation, there seems to be some breaking point where the people, tired of getting out of bed only to discover the price of gas/food/etc. has risen 10% while they slept, essentially throw in the towel and look to convert any local currency they have into anything of value. At a certain point, there’s just no confidence left that the currency can do anything but crater.

      But in Venezuela you have price controlled rice for example. The Bolivars can still be used for something and the official price doesn’t skyrocket. So is this like the finger in the dyke? Now I realize the price controls are not good policy. It looks to me like they will slow the collapse of the currency in the short term but make the collapse that much more catastrophic in the long term. It’s like having your finger in the dyke, but a larger and larger volume of water is building as the whole dyke begins to crumble. The price fixing schemes will likely fail when the scarcity is so bad that people are simply not getting enough nutrition from whatever price controlled food they manage to have on offer (i.e you can’t live on a small portion of rice). In other words, this is likely to lead to a situation where Venezuela needs international food aid to stave off starvation. Given Venezuela’s resources, this is as absurd as it is catastrophic.

      Does that make any sense, that the price controls, while horrific policy, are a brake on the runaway inflation in the short term?

    • Eso pienso yo rambien, el gobierno esta apostandolo todo, con el encaje legal, que hotra herramienta de estado de mierda le queda? Por eso ya estamos viendo que el bitcoin mas caro del mundo esta en Venezuela.

  9. Averaging Instagram quotes is not a bad methodology. Instagram quotes are driven by a Bayesian engine to revise estimates. What gives Instagram the power to produce accurate group estimates is the interaction among its members: one can read exchange rates others are quoting and will adjust in accordance with the information shared, plus personal information.
    A Google search of “accuracy of group estimates” will show you an enormous body of research into subjective probability estimation. Averaging a large number of naive subjects’ estimates yields a number awfully close to the population parameter. For example

    El tipo de cambio corresponde a las operaciones privadas realizadas en Venezuela (Caracas principalmente) […] Los datos correspondientes a operaciones privadas en la ciudad de Caracas los obtenemos promediando la información que los mismos usuarios publican en la sección de comentarios de Instagram.

    That bit of uncalled for commentary “That bit of #TropicalMierda methodology…” reveals more about your (lack of) familiarity with estimation theory than the soundness of methodology chosen by DollarToday.

    (PS: I don’t like the editorial style of DollarToday)

    • Ponderate that. I sell one dollar at 900. Should I be in the equation. Do I move the price just for one dollar in my Instagram comments?
      For someone who write about bayesian, you should ask your self, what if i lie, and publish a comment selling one trillion dollars at 800? That remind me the time I edited one Wikipedia page…


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