Caracas Chronicles

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.