Venezuela-watchers are constantly exposed to what I like to call el chavismo mágico: a far-fetched fictional narrative constantly pushed by the government, full of twists and turns, fake “facts,” dramatic crises, in-your-face lying, conspiracies, shameful celebrations of mediocrity, wanton avoidance of reality, bad guys and martyrs.

In economic policy, one strand of chavismo mágico holds that the SIMADI/DICOM exchange rate is determined by supply and demand. People sell dollars, others buy the dollars, and voilà, we have an exchange rate.

That is, to say the least, hard to believe.

In a recent analysis of the SIMADI/DICOM rate published in Prodavinci, Douglas Barrios and our very own Frank Muci brought out their heavy statistics artillery and let it rip upon the phantom rate, confirming our suspicions that the market-derived rate is anything but.

First, they take a close look at the spread. The level of an exchange rate is usually reported in the news as one number, but in fact it’s made up of two numbers: the bid rate, which is the rate at which you could sell your currency, and the ask or offer rate, which is the price to would have to pay to buy that currency. The difference between the two is called the spread: you can think of it as the commission earned by the currency broker. The Euro-Dollar rate, for example, has as of writing a bid rate of 1.0548 $/€, an ask rate of 1.0549 $/€, for a spread or $0.0001, or 0.009%.

The proposition by the government that the SIMADI/DICOM exchange rate is determined by supply and demand is, to say the least, very hard to believe.

The Venezuelan Central Bank reports both the bid and the ask for the DICOM rate, with the ask rate being the one reported in the news. When looking at the resulting spread, Barrios and Muci found something really, um, weird: the spread is always, invariably, equal to 0.25%.

In fact, it has remained at 0.25% for 688 days straight. You know what other rate has a fixed spread of 0.25%? The CENCOEX rate, with a bid rate of 9.9750 Bs/$, and ask of 10 Bs/$. What a coincidence, right?

In real markets that are not manipulated by a red-shirted bureaucrat in a government office, the spread is very rarely the same any two days in a row, it changes in response to market forces: Barrios and Muci looked at the Euro-Dollar market and found the spread remained unchanged from one day to the next on only 10% of the days.

So how unlikely is it the DICOM’s unchanged spread was simply a matter of luck? They calculated it: it’s a number so small that it starts with a zero, and then you would have to write 688 zeros after the decimal point before writing a non-zero number. You have a better chance of winning the lottery jackpot ten times in a row.

In real markets that are not manipulated by a red-shirted bureaucrat in a government office, the spread is very rarely the same two days in a row.

Barrios and Muci then turn to the actual numbers used in the ask rate, particularly the digits in the four decimal spaces. If the numbers were truly random, you would expect that in each of the four spaces, the digits from 0 to 9 would appear more or less with the same frequency: around 10% of the time each. They use statistical tests to evaluate whether this is true, and they found that it’s only true for the third and fourth decimal spaces.

But in the first and second decimal spaces, something funny happens. For example, 19% of the time, the first decimal space is the number 9. For some periods, it was 9 for close to 40% of the time. Which shouldn’t surprise us, given the SIMADI’s weird tendency to stay just below 200, at number that start like “199.9___”.

The first and second digit don’t pass their statistical tests: they are very, very unlikely to be random. Those numbers are being chosen by someone. Someone putting a lot of effort into making it seem like the number is fortuitous happenstance.

A piece of advice for the bureaucrat choosing the DICOM rate every day: in the same Excel file you use to fill out the rates daily, there’s a function call RAND (ALEATORIO in the Spanish version.) It will generate a random number between zero and one for you! It’s magic. You could use it to generate the four decimals every day. You can even ask Excel to give you a random number between, say, 690 and 699. It would only take a second, and the rate would look a little less centrally managed, and you would feel like you’re actually doing your job.

16 COMMENTS

  1. Oh common!, please don’t teach them Excel functions, this could get our life worst and allow delsyeloina in round-the-world trips with excess of luxury to explain banks and governments that now they can prove they have a currency system in the “guerra económica”. Perhaps you could begin with the NPV() function since 1999 so they can get a Zika-like decease after reading the disaster made to a once promising country! But I also think that they new the RAND() from QuickBASIC, where the seed had to be declared with Randomize command at the beginning of the code. Every time the “heredero” talks, teleprompter enters de “Randomize” command. How else can we get 2 hours of extended, unthread, unrelated piles of talkative bullshit.

  2. No, no, no… You are talking about the discredited neo-liberal capitalist model. This is Bolivarian economics, in which the market price and the spread is whatever the hell we say they are! Got it?

    Sheesh! How many times are we going to have to explain this?

  3. ” If the numbers were truly random, you would expect that in each of the four spaces, the digits from 0 to 9 would appear more or less with the same frequency: arifound 10% of the time each. They use statistical tests to evaluate whether this is true, and they found that it’s only true for the third and fourth decimal spaces.”

    Is Benford’s rule of first digits holding in the spread? If so then only the 3rd and 4th digits would have uniform distributions. The first digits would likely be 0 or 1.

  4. FWIW, i created the channel in latin america for nicrosoft in the 80s with International Micro Systems. I also distributed Lotus 123 in Latam. Bill was the most ruthless businessman of all and his execs the sharpest. My comment is not related to article but about where we are now, meaning US vs Venezuela. Lots of news lately but little real action

    Where is all this headed? CC is not in the business of predictive intelligence much less covering BRV from US POV.

    Past days have seen TEA publish in NYT and Aruba chicken caper revisited via local ad as the narcos take to the media to gaslight country and world.

    The situation is clear, they are leaving in cuffs or bodybags.

    Everything depends on Potus. The same person whom the owners of this blog dislike so much.

    Everything is 50/50 right now.

    This is where we are. So things may take a big dump for the worse never to come back at least not the forseeable future. Its all or nothing for the Reds who are emboldened by what they see and hear.

  5. Interesting analysis but not unexpected. Who receives the majority of hard currency in the country? The govt. via multiple entities. Who drives the offer then? The govt (and they always had for the past 10+ years). At what price will they sell that hard currency (or quote their intention to sell which may very well never materialise)? At whichever price they want to because they are driving the offer.

    Does all that make sense, etc? No, but that is a separate topic.

  6. If by deliberate design the offer and the demand are under the control of one same entity then there is no real market where offers from different players determine the price of what is transacted instead we have a fictitious make believe market , which reported prices are manipulated to make it appear as if it was a real market . This article is about how such manipulations are so ‘transparent’ and rudimentary that they can easily be found out using a bit of statistical analysis ….!!

    • Yes Bill but what is the point here? Mental masturbation? No one buys for one second that it is a real market. The govt IS the market. If you try to go and buy at those prices, you won’t get the hard currency. I can arrive to the same conclusion without over-engineering things.

  7. The first and second digit don’t pass their statistical tests: they are very, very unlikely to be random. Those numbers are being chosen by someone. Someone putting a lot of effort into making it seem like the number is fortuitous happenstance.

    Or they could have used the infamous Random Number Generator RANDU to obtain their prices.

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