Caracas Chronicles

Confused about SICAD II? Wondering whether the new currency exchange system really is a legal, market-based alternative to the black-market, or whether it just plays one on TV?

Don’t worry, you’re not the alone: Nicolás Maduro himself seems to conflicted on the question to the point of schizophrenia.

In his New York Times OpEd, he describes SICAD II as “our new market-based foreign exchange system, which is designed to reduce the black market exchange rate.”

See if you can spot the difference in MINCI’s official translation of the same OpEd. It describes SICAD II as “un nuevo sistema de cambio de divisas que ya ha reducido la inflación durante las últimas semanas.”

Did you catch that? Either SICAD II is somehow more market-based in English than it is en español, or the system’s market-basedness is locked in quantum indeterminacy, cycling in and out of existence over time.

It’s no wonder confusion is pretty rampant.

Take Girish Gupta’s commendable attempt to explain the whole mess to The New Yorker’s readers. First, Gupta describes SICAD II as “a supply-and-demand-based exchange system for the dollar”. Then, further down the page, we get this:

Authorities have not revealed how many dollars are being sold through the new exchange, stoking worries that there is simply not enough foreign currency available to meet demand. [emphasis added]

So SICAD II is, we’re told, “supply-and-demand based” but, at the same time, “there is simply not enough foreign currency available to meet demand.” Can both these things be true at the same time?

Let’s go back to basics: in a market-based system, the magic pixie dust that makes demand match supply is the price. Nothing else.

You wouldn’t say that “there is simply not enough supply of beluga caviar available to meet demand” because the market for caviar really is “supply-and-demand based”. The price of caviar can float as high as it needs to go to match a very limited supply to a very big demand, even if that means floating extraordinarily high indeed.

In principle, even if there was just a single dollar up for sale through SICAD II, there is some price at which demand would match supply.

That price would be caviar-high, though, and big numbers like that scare Venezuelan policy makers. The problem with SICAD II isn’t that there aren’t “enough dollars” on offer. The problem is that if you let the market float given the number of dollars supplied, the price mechanism would do its magic pixie dust stuff at a level that scares the crap out of Rafael Ramírez.

So, instead, they’re fixing the price at Bs.49-51:$, and at that rate there clearly aren’t enough dollars to supply all comers.

But then, that’s sort of definitional: when prices aren’t allowed to float, demand can’t match supply! (In fact, those are just two different ways of saying the same thing.)

The fact that orders in SICAD II are going unfilled, and the fact (ok, the rumor) that bids that come in above Bs.64 aren’t getting supplied dollars at all puts the lie to the whole idea that SICAD II is “a supply-and-demand-based exchange system for the dollar”.

And how can we be sure it isn’t? Simple, because the gap beween the SICAD II rate and the black market rate isn’t closing.

If SICAD II really was “market-based”, if BCV was willing to let prices do their magic-pixie-dust trick of matching existing supply – at whatever level – to existing demand – at whatever level – then the SICAD II rate would merge with the black market rate within days.

Because in markets where there are no price ceilings arbitrage erases price differentials. If there’s one thing we know about free markets is that the Law of One Price always holds: absent controls, the same good can’t have two separate prices in two separate markets.

What I’m saying is that SICAD II is …well, I don’t know what it is. But, until we see the SICAD II rate merge with and subsume the black market rate, I do know what it won’t be. It won’t be a market-based mechanism. At best, it can aspire to be a new bureaucratic price tier masquerading as a market-based mechanism.

On current evidence, with the black market selling dollars at an exchange rate 38% above the SICAD II rate, it looks like Spanish Maduro was closer to the mark. And English Maduro was doing what seems to come naturally: lying through his teeth.