A Patchwork Orange
Ever notice how chavismo's instinct, when facing a clear policy failure, is always to see how they can patch it up?
Take SITME - the Central Bank's baroquely controlled alternative to the just-as-baroquely-controlled CADIVI foreign exchange control system. SITME amounts a patch on the old parallel dollar market, which the government tolerated as a patch on the sclerotic CADIVI system which was itself a clumsy patch against inflation pressures. (What was that phrase they used again?...the "Forex Anchor".)
Well, it turns out that SITME - the patch on the patch on the patch on inflation - needs a patch!
The proximate cause is that Venezuela's banks are fast running out of the types of bonds that SITME requires (and whose valuations SITME distorts) in order to transmogrify bolivars into dollars.
Without getting too technical, SITME works by allowing banks to sell some of the bonds on their books to their customers, for bolivars, and then allowing those customers to re-sell the same bonds abroad, for dollars.
Of course that can only work if the banks actually have some of these magical, dual-use bonds to sell in the first place. Under current regulations, only Venezuelan sovereign bonds (i.e., government IOUs) and PDVSA bonds can be used for SITME operations.
Trouble is, the traffic in SITME is all one way: the system caters only to people who have bolivars and want dollars. So the net outcome of every SITME operation is one less bond in the banks' books and one more bond held abroad. It doesn't take a rocket scientist to figure out that, if you do it that way, the banks are eventually going to run out of bonds - and sooner rather than later. And when that happens...a llorar pa'l valle...
But, never fear!
Nelson Merentes has thought up....a patch!
If the banks are running out of criollo bonds to feed into the SITME machine...why not just let them transact any bond through SITME? Brazilian Treasury bonds, Argentinian bodens...you name it. Hell, why not U.S. T-Bills, too, while we're at it?
Frankly, I can't begin to see how this patch makes any sense, even in its own (extremely convoluted) terms. Because even if BCV lets the banks unload their Foreign Bond holdings to their customers for bolivars so they can trade them for dollars...aren't we going to end up in exactly the same place where we started? In a few months, aren't the banks going to run out of those other foreign assets as well?!
This is what you get when you have a government endlessly chasing symptoms and ignoring causes. Because, when you stop to think about it, it's entirely obvious that the banks are going to run out of any asset BCV lets them use as an intermediary if it lets people trade 5.30 bolivars for a shiny dollar.
At that exchange rate, you could allow SITME to transact rocks and Venezuela would run out of 'em.
Rhetorical curlicues aside, the 5.30 rate is fake. No amount of financial shamanism is going to make it unfake.
What's funny is that, remember, this whole two-bit farce of a Foreign Exchange Policy started back in 2002 2003 as a way of bringing inflation under control. Seven years later, Venezuela is 220th out of 222 in the World League Table for Inflation.
By any reasonable standard, the entire thing has been a debacle...but it's not about that anymore, is it? By now, the whole Patchwork Orange has a life of its own, entirely unhinged from any kind of defensible policy goal.
The whole crazy machine runs entirely on its own inertia...it really is a sight to behold.
CORRECTION: CADIVI launched in 2003, not 2002. Good catch, Moses
Roberto N
Kepler
torres
dcisfun
Behold! The return of the Permuta!
That's the big news of today. The patch of the patch of the patch of the patch is not working, an additional patch will not do the trick either.
So, why don't we add another distortion by reinserting the permuta, after we pulverized all the credibility of it 3 months ago?
Gotta love these economic Hail Mary passes.
great job Quico
You got to the crux of the matter and explained it in lay terms really nicely. Your best in weeks.
The emperor has no clothes
So let's make him even MORE naked than before. Good plan, boys!
Yeah, great post. I LOVE the term "financial shamanism"! How many other words could one insert into the first half of that? Trade, electoral, legal...just factual in general. In so many ways, they speak what they want to be true as if expecting that will magically make it so.
Actually, I think it isn't unhinged, but firmly connected to one, single, absolutely inviolable policy: never admitting that Hugo made a mistake.
AIO
Theorizing the conspiracy...
Thx for props, guys.
You know, it's at this point that I get all conspiracy-theory minded. Because a mechanism this boneheaded, this transparently unsustainable, there just has to be gato encerrado.
The one thing that SITME does guarantee beyond any possibility of doubt is that, within the next few years, Venezuelan banks are going to have no more dollar denominated bonds on their books. So...what if that's the ulterior motive here?
I have no idea why the government would see that as a policy goal. But, taken on its own terms, the policy itself makes so little sense, it must be aiming at something else.
Patch or Tweak
This is not even a patch, this is a tweak. The whole SITME system is absurd, it favors those that do not get official dollars, i.e. if you are not a priority or are not even eligible for foreign currency. Wine importers for example are making a killing.
Nobody is gong to come and sell bonds of Argentina or General Electric via SITME. Banks were forced to, some people with shortage of Bs. have changed a little, but everyone knows this is unsustainable, thus they are waiting.
By forcing banks to sell, many banks have lot the hedge on their capital. I am not clear as to what the ulterior motive of SITE is, but you can bet after September, banks will be targets, like almost every sector has been.
My feeling is Giordani created the deatils of SITME, that is the simple explanation of why it is so screwed up.
bad for banks?
Isn't this, in effect, decreeing the de-capitalization of the banks? I mean, you're forcing them to sell an internationally traded asset (bonos) for an increasingly devalued one (bolivares). Can a banking crisis be far away?
Good Question, JC...
...wish somebody would walk me through it...
Conspiracy?
Of course it is a conspiracy. But not a covert consìracy. Its wide open for all to see. Just like everything else this government does it does with the sole intention of completely destroying the economic base of the country. They know that is the only way they can complete their plan for coverting Venezuela into a conumist state.
Bebe a Suelto
The other night, I caught an old movie on television about a baby outwitting three incompetent would-be kidnappers. As stupid as the premise was, it was hysterically funny watching this innocent baby out-fox the three stooge-like bad guys again and again.
Reading this post, the entire situation with the exchange system reminded me of this movie. The baby is the economy and three stooges are Chavez, Giordini, and Merentes. No matter what they do, the laws of economics mess up their plans and come back to bite them in the butt.
Unfortunately, it is not just a stupid movie meant to give us a some laughs. They are messing with the lives and livelihoods of real people. And that isn't at all funny.
p.s.: "Rhetorical curlicues aside, the 5.30 rate is fake. No amount of financial shamanism is going to make it unfake." -- Classic!
An A+
I couldn't agree more, Roy. Gordo said the day that the s--t will hit the fan; unfortunately we're standing in front of the fan. But " we the people " put them there and its up " we the people " to correct the situation.
Could it be...
"It doesn't take a rocket scientist to figure out that, if you do it that way, the banks are eventually going to run out of bonds"
Unless, of course, the government keeps printing more bonds and selling them to the banks, right?
Isn't what the government trying to do an (incredibly stupider) version of just printing more money to get out of a bad financial situation?
Bonds are just IOU's; the stooges in the government think they can just continue to print them without even affecting the M2 or whatever the hell would be affected if they just printed more BS (that's Bolivares, not bullshit, though it's hard to tell the difference nowadays). In the government's fevered minds, what SITME is doing is "printing dollars", that is, they create vaporware (the bonds) which magically transforms into dollars. In their minds, they think it solves two problems: it gives them BS (when they sell the bonds to the banks) and gives the public dollars without them having to lose their dollars (aka international reserves).
Of course, there's the little detail that at some point the government will have to actually pay for those IOU's, but these guys have already demonstrated that thinking clearly about the consequences of their actions isn't exactly their forté. Maybe that's why now they want to sell someone else's bonds, so they can skip that part of the problem.
That takes us back to yesterday's post, Anon...
You're right in principle, Anon, but this takes us back to Yesterday's post: one of the weird ways the SITME mechanism is perverse is that it actually INFLATES the cost of borrowing to the Venezuelan government. SITME creates constant down pressure on Ven bonds - all those banks selling bonds in NY put pressure on bond prices, y'know?
So at the same time SITME makes it imperative for the government to float more debt, it makes it less and less affordable for them to do so.
It may be, as you say, that they're too crass to care about that...but coño, you'd think at some point even Merentes looks at a 14% yield and gets sticker shock. De hecho, that's why they're doing this latest patch in the first place, to avoid placing more paper...
Fernado (Quico):
Cadivi was
Fernado (Quico):
Cadivi was set up in the first months of 2003 as a "punishment" for the private sector which got involved in the strike of December 2002- February 2003. It was not set up to control inflation.
Here is a Wikipedia link with some of the history:
http://es.wikipedia.org/wiki/Econom%C3%ADa_de_Venezuela
Nice presentation (Google origen cadivi)
http://webcache.googleusercontent.com/search?q=cache:OHNe1xcPbTgJ:www.uc...
Good catch, Moses.
I do remember clearly that Giordani's public reasoning for CADIVI at the time was preserving foreign reserves without having to allow the bolivar to devalue sharply and cause an inflationary spike, though. It may be that the political logic behind it was to screw the private sector, yes, but at least in public it was supposed to be an "ancla cambiaria" to prevent inflation.
BTW, "Fernando" is my dad!
It's 1983 all over again
"....at least in public it was supposed to be an "ancla cambiaria" to prevent inflation."
Let's count how many times we've heard that phrase since 1983.
Uhmm, woops! Ran out of fingers and toes dammit!!!
Any guesses as to how many "patches" we're gonna need this year alone?
oops sorry for the
oops sorry for the confusion... ill never forget the first devaluation in 1983. I was saving money to travel to Europe after graduating from the University and suddenly I had half of the money I had saved .... Had to wait 15 years ...
Statism Xtreme.
Whenever a society tries to run a part of itself by means of State control, they fail, usually through the production of unintended consequences. Faced with failure, policymakers will not back down and admit they fudged it. They will patch the failure and enact new laws to patch their mess. When that fails, they will produce patches for the patches.
Europe has tried to control every aspect of labor and immigration of foreign workers all in one. The Spanish mess, for example, is there for all to see. Widespread immigration fraud, from the soft and innocuous to the hard and hazardous, twin-percentage-digits "paro", a sclerotic legal labor market, a thriving illegal labor market with lots of undocumented foreigners, and, oh!, alienated immigrants.
War on Drugs? Mandatory sentences for possession, unconstitutional seizures of property, no-knock raids, world-record incarceration rates, just the U.S., ma'am. In our part of the world, it is narco-guerrillas, paramilitaries and the cartels, fumigation from the air with toxic agents, up to idiotic prohibitions on the possession of chemicals such as ammonia, acetone and fuel oil. What will they invent now? I shudder...
It's universal! You cannot really blame Venezuelans from reacting to unreal expectations in a practical, down-to-earth manner. Just like European employers, workers and immigrants, and U.S. and Latin American traffickers and common people.
This set of statists, the Socialists is trying to run all the foreign exchange and import business through their own set of fantasies of what the world should be and through their own set of fantasies of personal wealth beyond dreams too.
They are the extreme brand of Statism. Not atypical in the base ingredients: generous quantities of arrogance, intolerance and faith in bureaucratic omnipotence, an initial dash of second, corrupt intentions that gets bigger with time. Remember, like all horrible concoctions it is constantly changing and being added to, according to whim. They are unique in their proud and willing ignorance of human nature and arithmetics.
The proliferation of unintended consequences and strange obligations and prohibitions, with the attendant corruption, will probably force the banks down. When the "capitalistic" economy falters, they will patch somehow by imposing bizarre obligations (even more so than the present ones!) on our main source of foreign exchange, PDVSA. When PDVSA is forced down by the tangle, brace for impact.
Is Chavismos bad governance or just raw totalitarianism?
It seems to me to be a waste of time to complain about what appears to be "stupid" governance, when everything I read about totalitarianism is effectively about:
Total power committed to moving a society in a ideological direction without regard to law, logic, individual rights, principles of any kind (including principles of economics, efficiency, effectiveness, and above all what is in the public interest).
Venezuela is moving in the direction of totalitarianism. Face it, get over it, and think about what you are going to do about it.
The T-Word
Gordo,
Read this: http://caracaschronicles.blogspot.com/2003/05/chvez-totalitarianism-and-...
I said Chavismo is moving in the direction of totalitarianism
Francisco,
They are not there yet, because they don't have the means to get absolute control.... but they're working on it!
They may never get there, even if they remain unchallenged... but they are acting like they are already there.
People are still expecting fairness, truth, competence, lawfulness, respect for the constitution, and they are not getting it. So, they complain, and for now only a few wind up in jail! For now.
Venezuela now and Russia now
Gordo,
Venezuela now is in a situation similar to what Russia is now when it comes to totalitarianism. For the XXI Century Totalitarianism things are a wee bit more relaxed than for the XX Century Totalitarianism, that's all.
In Russia you can watch on the Internet quite a lot of critical things from abroad...although most are NOT in Russian and most Russians speak only Russian.
In Russia you can read - if you live in Moscow and a few other places - an actual Novaja Gazeta (the newspaper that has had 6 journalists murdered since 2000, including Politovskaja).
In Russia you can still see Kasparov going to press conferences where he is occasionally attacked by regime's thugs.
In some cases, there is even more freedom in Russia, as apart from the usual corruption and as long as you stay out of politics the regime is not trying to get control on the whole economy.
Remember also there were very totalitarian regimes where economics was fine: the ones from the extreme right (Pinochet, Franco to a big extent).
Totalitarianism all "Bark" and no "Bite?"
My guess is that totalitarianism of the 20th century couldn't work because of the resource drain that total repression of the population required. My guess is the 21st century strategy is to coax the population to choose socialism over capitalism, and to encourage the people to voluntarily abdicate their desires and sensitivities for freedom and constitutional government for totalitarian "big-brother" government believing it will take care of them better.
For Capitalism to win this struggle, it has to take better care of the poor.
There have been less totalitarian regimes than we think.
Franco's economics was not that good. They were near last in economic performance in Europe for a long time. The totalitarians in his regime were mostly the Falangists and some "National-Catholics". They had influence, but they did not own Franco. There was a fascist ideology, but it did not have all the power, and was only one of the power players.
And Pinochet's regime, though dictatorial and murderous (like Franco's, but at a smaller scale) can hardly be called totalitarian. It did not have an all-encompassing, all-meddlesome ideology of state control.
Even in Eastern Europe, there were several regimes such that we would be hard-pressed if we tried to call them totalitarian.
Of course the government can issue more bonds
Anon 2 is right. The government can issue more bonds just as the FED does in the US. Why not? The capitalist system is run on perpetual debt and so why can't Venezuela do that? And don't come up with smartass comments that Venezuela is or supposed to be socialist since anyone knows that this is simply NOT the case.
After all Venezuelan total debt is only around 45% of GDP compared to 95% in US; 170% in Japan and around an avergae of 76.5% in Europe. So what's the problem? Giordani and Merentes will only be copying the system Quico and MOctavio have always supported and admired.
But no! The fact that it's their nemesis Chavez is doing this makes it somehow unworkable. It may well be but the end game will leave the banking system in government hands.
The "do do" has still to hit the fan in the US and Europe since the debts incurred are unpayable and more debt will have to be issued to pay the interest. This will eventually lead to a lot of social strife.
SITME is working but not in the ways you guys are theorizing. It's working to weaken all the banks in the private sector longer term so that the state can take them over when Chavez is reelected in 2012.
This crazy person is right!
Venezuela really can just keep issuing more dollar-denominated bonds. That yield 14% to maturity.
And you can also pay $2700 for a pack of TicTacs.
Nobody's stopping you.
Go on, then: strike a blow against capitalism! Buy those $2700 TicTacs!
Tick-Tacs Are a Strategic
Good, and will be in national basic ration, now, who maker them?
That so?
"The capitalist system is run on perpetual debt and so why can't Venezuela do that?"
That so?
More likely, States have been run on bad debt in the twentieth century based on the premise that they can tax, which never equals producing the money, just taking it by force. States run in the red. The dodo will hit the fan eventually.
And it will probably cause at it's worst, loss of competitiveness, strangulation of the private sector, job and business emigration, plus some rebellion from overtaxed subjects. No socialism, at any rate, ever.
Private enterprise runs on credit. But it cannot run on red numbers in the long run.
"Giordani and Merentes will only be copying the system Quico and MOctavio have always supported and admired."
I did not know that they supported ruining private production, and substituting it with nothing, thus forcing Venezuela to import everything and to depend only on oil. That's what makes it unworkable in their opinion. Not issuing debt. Not But don't worry, 2+2=5 in socialist arithmetics.
"SITME is working but not in the ways you guys are theorizing. It's working to weaken all the banks in the private sector longer term so that the state can take them over when Chavez is reelected in 2012."
Then, I suppose that Chavez will have to engineer a privatization of PDVSA, to re-retake it when it fails because it's capitalized them and taken their roles.
Patching
Patching is the basis of the venezuelan militaries thinking. By experience (my dad).
So far, Venezuela has not defaulted on any bonds....
So some investors are willing to take a chance... until there's a default. Then the dollars will stop altogether. The deficit spending is not sustainable, and the proverbial s--t will hit the fan. Stay away from the fan!