Archive for September 18th, 2006

The robolution at its best: Piensa mal y acertaras!

September 18, 2006


The
biggest economic problem confronting the Chavez administration today is inflation. Four months
of hyperinflation in the Food and Beverages category, reaching 19.9% between May
and August should be enough to have the Government call for emergency Cabinet
meetings to attack the problem. But it has not happened.

Instead,
we have gotten a slew of wishy washy statements by various Government officials, as our tropical Marco Polo travels abroad doing what he likes best: Avoid the local problems he can
not tackle and promote his intrenational image.

It is
clear that the inflation problem is easy to understand; the financial system has
been flooded by money as the Government has increased spending dramatically in
the face of the December elections. So, the solution is simple: reduce
liquidity.

There are a numbers of ways of accomplishing this:

–Have the
Central Bank absorb liquidity. This would help, unfortunately, it has already
been done so much, that the Central Bank is losing money and can not afford to do increase it

–Spend
less: the Government has clearly stated it refuses to do that. Are you kidding me? Chavez is very good at announcing, not doing.

–Have
CADIVI approve everything that is submitted to it; It is already doing so,
imports will be close to US$ 30 billion for the year. Local  industry is getting killed.

–Increase
interest rates so that people are encouraged to save. The problem is that they would
have to increase it so much in order to make it attractive, since interest
rates are deeply negative.

–Remove
exchange controls. Sure, as if this Government is ready to give up such a
political and powerful tool.

–Issue
dollar denominated bonds in exchange for local currency, much like the Government has done in
the last two or three years. This would be the easiest way to absorb liquidity.
Despite this, the Government has been talking about doing it, but postponing it for no reason. As the problem gets worse, it announces it may do barely US$ 500 million by
mid-October. What gives? Aren’t they interested in reducing inflation? How can
they not do this, given that it is so simple, sell a bond for Bolivars, remove those
Bolivars from the system, presto, easy economic recipe!

Not so
fast. As the Spanish saying goes: “Piensa mal y acertaras!” (Think badly and you
will be right on target!)

You see,
if the Government were to issue a large bond, say two billion, in US$ and sell it to the
public and institutions at large, it would have to do it in a more transparent
way and would be competing with the sale of Argentinean bonds that is done
weekly by Fonden, which has no transparency and is enriching a number of people beyond
their wildest dreams.

You see,
these sales are done with total discretion and no transparency by the financial
authorities as to who gets the bonds and at what price. Apparently, it mostly
goes to “friends” of the administration who reportedly have to pay someone for
each dollar assigned to them. Every week a few hundred million dollars are assigned
this way to friendly institutions, without any transparency. Imagine someone
making a profit of say only Bs.100 per dollar. Multiply by one hundred million
a week.

Get the picture?
If a huge two billion dollar issue were sold publicly, not only would it not go
to the friends, but it would seriously compete with the weekly sale of these
Argentinean bonds and its corresponding “profits”. It would just kill the goose
that is laying the golden eggs. Thus, no bond issue has been placed in the market
despite many announcements to that effect in the last few months.  

Maybe
those involved are worried about the outcome of the December elections, maybe they are not,
but just in case, it would not hurt to make a few more million dollars, before
the “you know what” hits the fan. Inflation? Chavez’ popularity? The people?

They could
just care less.

You see,
when these bonds are sold, no liquidity is removed from the financial system,
Fonden simply exchanges its dollars for the Bolivars to spend in its projects. The
Boliars stay in the system. So the mechanism competes with “their” market, but
it does not have the desired objective in terms of the Government. It has no effect on inflation

Such is
the way of the pretty robolution…

Follow

Get every new post delivered to your Inbox.

Join 11,584 other followers