The Devil's Excrement

A few days ago I wrote about the changes to the Central Bank’s Bill which were approved by the National Assembly in its first discussion of the Bill. It was truly scary and irresponsible. Perhaps the most irresponsible part was the fact that the Central Bank could use as part of its international reserves securities issued “by public entities”. This meant that the Central Bank could buy bonds from any Government entity such as PDVSA or CVG and count it as part of the Central Bank’s reserves.

But something happened, someone intervened and good sense prevailed and magically in the version of the Bill that I received tonight, which I have reasons to believe is the truth (The Assembly’s web page is down) the term “foreign” was added to “public entities” and the whole thing was stopped. This was the good news.

At the same time, about the only  good thing in the Bill was removed. In the version approved in the first discussion, the Central Bank was tasked with establishing an “adequate” level of international reserves every six months and was ordered to transfer to Fonden(or the entity designated by the Government) within fifteen days after the end of the semester any excess. But, it also stated in the version approved then, that Fonden would have to return funds in reserves fell below this “adequate” level. This last part was removed from the second and final version. This was the bad news.

The Bill is still not very good, as it allows the Central Bank to finance the Government and its decentralized entities and also allows the Central Bank to lend money to Government entities which give it as guarantee Government paper. This is all inflationary, artificial and simply accelerates the monetary bubble being pumped up in Venezuela.

Thus, as far as I understand it tonight (another gnome could still change this version approved by the Assembly before it becomes law) here are the most relevant changes approved that will allow the Central Bank to finance the Government in the upcoming months:

—The Central Bank will be allowed to lend, receiving as guarantee securities issued by the Republic or any of its decentralized entities, as well as “related instruments”. Moreover, the Central Bank could establish special conditions in terms of maturities and interest rates when these activities derive from programs which the Government has established as having priority in agriculture, manufacturing, construction, foodstuffs or projects which will generate exports, as well as those destined to the manufacturing of gold coinage. As such, the terms will be determined according to the nature of the sector or project and should have sufficient guarantee, according to the Board of the BCV, which can be a real guarantee over the goods that are part of the programs.

The same will be true of the BCV discounting Bills, promissory notes and other securities coming from the same programs. These programs will have an annual budget from the Venezuelan Central Bank.

—The Central Bank will be able to buy securities from PDVSA in the primary market in exchange for local currency, but it can only buy securities denominated in foreign currency in the secondary markets.

—The Central Bank will present the Executive Branch a study every semester of the estimation of what is the adequate level of international reserves. The Central Bank will transfer any excess reserves to the entity designated, no later than fifteen days after the end of the semester.

This is still bad, particularly the first point. The Central Bank will still be allowed to buy PDVSA securities and any others issued by Government entities, but since it can not count them against reserves it will have to be ore careful than in the original version.

However, the inflationary possibilities of having the Central Bank lend against Government paper are simply endless.

So, this was simply a case of good news and bad news, or bad news or good news, whichever way you want to take it.

A reader asked the following in the comments, which led to an answer and then to this post:

Miguel,
What is your take on the US printing money to finance the debt and new politically driven hand-out type projects like never before (maybe WWII exception)? Do you see the possibility for a Weimar or Zimbabwe type hyperinflation in the US or is the overall debt expressed as a % of GDP manageable?
I realize that Venezuela’s only meaningful collateral is oil and the country therefore is extremely vulnerable unless oil prices will be on a sustained upward trend.
The US on the other hand has, at least still for now, a wealth generating economic system second to none and with it an arsenal of weapons at it’s disposal to break the inflationary spiral.

It is a very good question, because I do worry about all of the money printing in the US and what is long term impact will be. So, here is my looong answer (short one is in the comments of that post):

First of all, there is a very basic difference: In the US, authorities are very worried about all of the money printed in the last two years, while in Venezuela all of the money printing gimmicks do not seem to concern the Minister of Finance, the Minister of Planning or the President of the Venezuelan Central Bank. They all say that inflation here is “structural”, without realizing that they have created the perverse inflationary structure.

Ask yourself a simple question: If in 2001 inflation was at 11%, what “structure” took it to take it to the current 27%? Who did it?

Well, it was the Chavez Government and the “structure” is simply the uncontrolled growth in monetary liquidity (M2) in the absence of higher productivity and/or higher international reserves. (Milton Fridman said it succinctly: Inflation is a monetary phenomenon)

Back to the question.

In the US there was a financial crisis. This required emergency measures by the US Government of issuing debt and “printing money”. M2, which measures how much money is out there in an economy,  increased in the US in the last two years from US$ 7.2 trillion to US$ 8.3 trillion during the crisis, that is a 15.2% increase in the last two years. It also is about 7.8% of GDP.

This is unprecedented and a source of concern. By creating such a huge amount of new money, there will be inflation down the line, even if today the concern is avoiding deflation. When the US economy recovers, this will certainly generate inflation, but as I said above, the good part is that the authorities know about it and are willing to do something (hopefully!)

Well, in Venezuela, according to Chief Economist Chavez, we have yet to feel the economic crisis (not true, but let’s believe him for a minute).The same measure, M2, the amount of money out there in the Venezuelan economy has gone up by 83% from US$ 62 billion to US$ 113 billion. This is 16.8% of the Venezuelan GDP. Thus, the increase in M2 in Venezuela is FOUR times that of the use and the percentage increase as a fraction of GDP is more than Twice as much. Not good, no? And I am worried about both countries!

Except that Venezuela’s GDP is measured at Bs. 2.15 per US$ because the Government pegs the official rate at that value. In reality (hard currency) GDP is much lower, thus the increase as a fraction of GDP is even much bigger than it appears at first sight.

Thus, if you are worried about money printing in the US, in Venezuela we are running the presses full time! And Chavez says there is no crisis.

In terms of debt, US debt is running at around US$ 12 trillion versus a US$ 14 trillion GDP or 85% of GDP: In Venezuela debt is running at around US$ 90 billion and GDP is at 200 billion, so it looks “better”. However, GDP is measured at Bs. 2.15 per US$ and over half of the debt is denominated in US$, so the comparison is not correct as if the Government devalued to say Bs. 4.3 per $, then GDP would be halved. In fact, the “weighted average” of the economy is clearly above Bs. 3.5 if not Bs. 4 per dollar.

And therein lies a huge difference. If the US Government “devalues” its currency, things become more expensive for Americans if imported, but the US produces most of what it needs. By allowing the dollar to slide, the US exports more and becomes more competitive.

In Venezuela, this is not the case. If the Government devalues, the dollar denominated debt does not change in price, it gets more expensive! Moreover, Venezuela is not very competitive and imports too much, thus, devaluing its debt is not as effective as in the US and will be felt more by Venezuelans.

But even worse, US debt has increased by US$ 1.2 trillion during the last year to help the crisis. That is exactly an increase of 10%. Well, Venezuela’s debt has increased this year in Bolivars by 43% (From Bs.30 billion to Bs. 43 billion) and in foreign currency by US$ 11.5 billion or 30.7% in US$ and counting…. (There is a difference in that I am not taking into account the Chinese fund on all of this)

Thus, the changes in debt in crisis laden USA are about a quarter of those here. Thus, if there is going to be inflation in the US, imagine what will happen here.

But even worse, the Chavez Government keeps coming up with creative ways of funding its wild spending, such as the now direct financing of PDVSA and soon to come CVG (see previous post).

So, if you are worried about the US, you should be absolutely scared about our prospects. Money Printing in Venezuela has reached unprecedented levels. The ratio of M2 to reserves is at 4, an unprecedented value which says the “equilibrium” exchange rate is at Bs. 8 per US$.

Yes, I do worry, I live here!

The Chavez Government has been threatening to bring to market a bond issue by Corporacion Venezuelana de Guayana. All  the work was done, balance sheets for the company were cooked up for the last three years and a credit rating was sought. And that was the problem, the rating was so low that it would be nuts to bring it to market because CVG would have to pay a huge yield to get the deal done.

But as part of the cookbook to make sure Venezuela’s economy is destroyed, the National Assembly approved two weeks ago that the Central Bank can buy bonds issued by Venezuelan corporations. This is not the law yet, but will soon be, after all, Chavez controls how the National Assembly breathes.

Thus, today we got the announcement that Chief Economist Chavez approved the bond issue. Read: BCV will buy it!

Think about the possibilities and the implications:

–It is sold to the BCV in exchange for Bs. Thus, BCV prints a bunch of Bs. to buy it. CVG turns around and buys US$ at Bs. 2.15 per $ to buy stuff abroad. Reserves don’t go down, the BCV has the bonds!

–It is sold for $. Reserves don’t go down, because the BCV has the bonds, CVG spends the US$ and/or brings some back to pay unions.

–Reserves are at around US$ 33 billion, but of that not all of that can be used, there are drawing rights, gold and other instruments. Add to them the CVG bond, which they will be unable to sell.

–Come December Chavez will ask for US$ 8 billion for his Fonden. The money for Fonden will come out of the cash, not the instruments, so that BCV’s reserves will become even more illiquid.

Will they really do this? You bet they will. They have done US$ 11.3 billion in $ denominated bonds this year and US$ 9 billion in local bonds, they will do this one and next year’s budget calls for an additional US$ 14 billion in debt. These guys’ irresponsibility has no limits. This is a bubble, we all know it is being inflated, but we don’t know when it will explode.

But it will.

While I don’t particularly like Isamel Garcia of Podemos, he simply stuck his guns with Chavez for too long, you have to give him his due for doing what others are afraid of. In a little noted act last Friday, Garcia went to the Prosecutors Office with the leader of his party Podemos in the National Assembly to denounce (There is a more detailed article in Saturday’s El Nacional on page A-2, by subscription) a billion dollar corruption scheme by former Minister of Finance Rafael Isea.

You have read about this before in my blog, but as far as I can remember this is the first time a formal accusation is made. Essentially, Isea purchased “structured notes” of foreign bonds abroad and then sold them to local brokers (One of which was his main adviser and is part of the accusation, he was adviser and recipient at the same time)

According to the accusation, Isea spent between US$ 7 and 10 billion in purchasing these notes with dollars at Bs. 2.15 per $ which were then sold to local brokers at a higher price, but below the swap market price. These notes were used to lower the swap rate during the first semester of 2008, but it ended up being a waste of time, as the rate rose sharply again later. But the intermediaries made a lot of money and it is rumored that Isea made so much money that he purchased a number of radio stations that allowed him to become Governor of Aragua State in the Fall of 2008.

I wonder what the Comptroller Russian the Ruffian will say now, he always says that there are no “formal” accusations of corruption.

I wonder if a 10 billion dollar accusation will wake him up from his stupor.

Kudos to Garcia, he still has to work harder for me to like him…

While all of the attention was on Chavez’ press conferences on water and electricity, the Government was toying with the economy, setting us up for a crash like never before as the country’s debt goes up and the mishandling of the economy reaches new levels of irresponsibility as the Chavez administration continues to look for stop gap measures that will one day come to haunt it.

Recall PDVSA was issuing a trio of bonds that were not very attractive if your goal was to acquire foreign currency. With this issue, PDVSA would have outstanding bonds in the amount of US$ 13 billion, up from barely US$ 4 billion when Chavez took over. Those bonds were retired by the Government because they were issued under US regulations which requires filings by PDVSA for which the Board was responsible. They have now been replaced by US$ 7 billion in bonds issued under US law, but not registered in the US and the Petrobonos which are issued under Venezuelan laws. That means that investors would have to go to Venezuelan Courts in any dispute, which makes these bonds less attractive to foreigners (i.e. they yield more than the others)

While people were expecting the Government to change the terms to make the bonds more attractive, the Government took a different route. First of all, it made the interest payments tax exempt, which they were not when the bonds were first announced. The Government was going to withhold 4.95% of all interest payments, which implied that the coupons (The amount paid by the bonds every six months on their face value) would actually be lower. This was solved by given the interest payment (not capital gains) tax exempt.

But more importantly, the Government also announced that the bonds would not count as part of the foreign currency position of banks. Let me explain this for the uninitiated: In Venezuela, banks can only have a certain percentage of their equity in US$, that amount is set at 15%. Therefore, banks can not cover (hedge) themselves against the devaluation of the swap market except for a fraction of their equity. They can protect themselves form a devaluation of the official rate of exchange by buying bonds called TICC’s which are denominated in US$ but only trade in Bolivars and their face value will chnage only if there is a devaluation of the official rate of exchange.

So, what the Government did was to make the new Petrobonos exempt from this limit. What this means is that these are extremely attractive for local banks, not as a away of buying dollars and making a profit, but as a way of protecting themselves against future devaluations of the parallel swap rate. This means that banks will buy these bonds in US$ instead of buying Bolivar denominated bonds, which yield the same or less than the Petrobonos. But on top of that the Petrobonoz give the banks devaluation protection.

What is so laughable about this is that ten days earlier when Giordani, Merentes and Rodriguez held their Ferrari press conference, they said exactly the opposite. At the time they talked about limiting how much banks had in Government paper, so that they would lend more. That is long term policy under Chavez: Less than two weeks.

As if this were not enough, the illustrious Deputies of the National Assembly rushed a bunch of changes to the Central Bank’s Law. The first one, surprise, surprise, was to allow the Central Bank to buy PDVSA’s debt, something that was expressly forbidden before. This alone guaranteed that the placement would be successful, even if it has yer to become law. Additionally, the Central Bank will now be able to accept Venezuela’s bonds as guarantees for loans from the Central Bank. (The Central Bank is expressly barred from financing the Government). Finally, the changes force the Central Bank to establish what is an “adequate level” of foreign reserves every six months and transfer the excess to the development fund Fonden. But then, in the most creative change to the Law, it allows for Fonden to sell dollars to the Central Bank for Bolivars. Thus, the Law will allow each dollar to be converted into Bolivars many times, which guarantees that some time in the future there will be an explosive devaluation of the currency.

Why? Because every time the Central Bank gets foreign currency, it creates Bolivars for the Government. Thus, suppose PDVSA gives the Government US$ 1 billion, immediately, the Central Bank creates Bs. 2.15 billion in local currency. This has gotten so bad, that the IMF gave Venezuela US$ 3.5 billion in drawing rights, which increased the countries reserves by 11% and the last week in September monetary liquidity went up 10%, i.e. the Bolivars were created and these are not even dollars the Central Bank has, these are special drawing rights that Venezuela can use when it wants.

The problem is, that then the Central Bank gives Fonden dollars from the reserves, so that the Bolivars that were created have not backing. There are currently Bs. 7.4 for each dollar in the Central Bank. This is in part what has created what the Government calls “structural” inflation, these huge number of Bolivars is not backed by dollars or the result of higher production, thus there are too many Bolivars chasing few goods, which results in more inflation. This is simply printing money to survive a few more months. At that time a new “solution” will be found or tried.

Except now the Government will even have more freedom to create Bolivars as the Fonden will be able to convert the same Dollars back into new Bolivars: A recipe for disaster! When? That is the tough question. There is no experience in doing that, but clearly the official rate of exchange can not stay at Bs. 2.15 per dollar with so many Bs. around looking for dollars. The more Bs. they create holding the reserves constant, the bigger the adjustement will one day be.

And on top of that, allowing the Central Bank to buy PDVSA bonds simply becomes a way to circumvent the fact that the Central Bank (which is broke by the way) can not finance the Government. It will now do it indirectly via PDVSA. Of course, the President of the Central Bank Nelson Merentes, a Mathematician, sees no inflationary effects from all this, because he has no clue. Somehow they blame the “structural” inflation as the source of the problem, without realizing that they created the “structure” that makes Venezuela the country with the highest inflation in the Americas at close to 30%, when everyone’s has fallen into single digits. This is simply the result of printing money and now they set up the tools to print even more.

So, tomorrow they will gloat at having placed all of the bond (they did today already), as the new bonds yield in the gray market close to 17% in a world of dropping yields. But even to sell it all, they had to all these shenanigans that we will all have to pay for one day.

Of course, the day it all explodes, the Government will blame the US or some external power for it. The newly appointed Minister of Electric Energy sent his first public interview talking about the foreign campaign against PDVSA, rather than addressing the huge problem created by the inaction of the Chavez administration in the last eleven years. This is no surprise, his only qualification for the new position is his political loyalty to Hugo Chavez. He is a former oil industry worker, with no qualification for the position other than being in charge of the Energy Sub Committee of the National Assembly.

And therein lies the problem: For Chavez, it is all a political problem, but the problem is really technical and managerial and a Mathematician in the Central Bank and an oil worker in the Ministry of Electrical Energy will not solve the problems we face any more than they have in the past eleven years.

Both areas wlll simply implode or explode in their faces and Venezuelans, particularly the poor, will pay the full price. And Chavismo will pay the “political” one.

This is a rather strange story. It has the elements of truth and the elements of deception. It sounds too far fetched to be true, but has the components of veracity. It is the story of Pedro Leonardo Mascheroni, a physicist who worked at Los Alamos for many years and may be accused of treason for passing classified information to the Venezuelan Government or someone claiming to represent it. The story has too many inconsistencies to be the truth, but at the same time, has many consistencies that suggest there is some truth to the whole thing. We may never know.

Pedro Leonardo Mascheroni is a US citizen and Physicist of Argentinean origin. He has been a somewhat controversial figure, critical of the US fusion program, but also critical of the US weapon program. He was dismissed from Los Alamos many years ago and sued the Regents of the University of California, which runs the Los Alamos Lab. He lost the suit and was not reinstated. He has been repeatedly described in the New York Times as a “rebel scientist” dismissed from the labs as a security risk, but defended by the Head of Security of the same labs. And here the contradictions begin, as the same Head of Security suggested that the firing of Mascheroni created a national security risk if he went back to Argentina, while others claim all of his work and even the report on his firing were public.

And Mascheroni himself seems to have said contradictory things, as he stated in 1991 that he would never let weapons data fall into unfriendly hands, but then he says that he was the one to  first approach the various Governments (reportedly including the Venezuelan one) trying to sell his ideas on fusion. He then says that the Venezuelan Government wanted him to produce a study on how to build a nuclear weapons program and he decided to do it to show to the Chavez Government that this was too expensive. Instead he wanted to have Venezuela show some interest in his fusion ideas (the same ones that in 1991 he was fighting to be able to publish, but was unable to do so, so they can’t be too public) as a way of getting the US to be interested in them.

He then proceeds to tell a story of communicating via post office boxes in secret and collecting $20,000 in cash from his supposedly Venezuelan contact and then bickering over how to pay him the $800,000 for his report and never getting it. Then, the FBI detains his contact with his report on fusion (not on whether Venezuela should or not build a nuclear weapons program) which triggered the raid on Mascheroni’s home and the suspension of his wife at Los Alamos where she works and has a high security clearance. He was told that he would be charged with treason, but has yet to be charged and held a press conference to tell his story on Thursday.

And thus the inconsistencies. Mascheroni paints himself as an altruistic and idealistic scientist trying to get his ideas across, but his work  seems to be more on smaller fusion systems using lasers, which is far removed today from being or getting to be a useful weapon. At the same time, he claims to be dealing with openly available information, but meets in secret and charges or tries to charge large amounts of money for his work, but then claims he did not touch the money and was keeping it for the authorities.

The official story also has holes or gray areas in it. If the “Venezuelan” contact was detained, why is it that he is not named or mentioned or has not been charged? Was the FBI visit just a fishing expedition or do they know more than they are letting on? Was Mascheroni set up by the US Government? So  far, the evidence seems to point this way to me, given the fact that all of the news minimizes the Venezuelan connection and the inconsistencies mentioned above.

Finally, there is the inconsistency in my mind that given that there are nuclear experts in so many countries that could provide the same advice for a fee (Including Mascheroni’s own Argentina), why would the Venezuelan Government approach someone living in the US with all of the potential complications it could entail, including the fact that it could be a set up? I think they have learned something from Maletagate and Antonini, they are not dumb.

Thus, I don’t buy it yet. I don’t think Mascheroni is the idealist he is trying to project, nor do I think the Chavez Government is involved. Too many inconsistencies for my taste.

But there may be lots we don’t know yet.

Eleven years of neglect can not replace the media show that Hugo Chavze started last week to establsih what a great job he is doing and how it is all our fault:

According to Hugo, a shower should only take three minutes. As if many Venezuelans these days could even take a shower, as water rationing has become the rule everyday. And even if Chavez suggests you get in the shower right away without waiting for the water to get hot, he seems to ignore that there are electricity problems in most of the country, so that in order to take a shower you need many things to happen. First you need to have running water, something that does not necessarily happen in the barrios, but Hugo is so out of touch he is trying to blame the people for the problem. Then, if you are lucky enough to have running water, you need to actually be getting the water before you can take a shower. Finally, with all of the blackouts, you also need the electricity to get the heater going before the water can get hot.

But Hugo should read more about how many people have running water (electricity is very common, running water is not) and not about the Ginny index that Giordani has been telling us (and him!) about. In any case, the whole issue has become a joke, everyone wondering how much you can sing in three minutes and shower and get cleaned without being stinky (hediondo) at the end. That is why #3minutes has become such a popular topic in Twitter (that CIA tool according to Golinger , la Novia de de Venezuela)

Meanwhile, everyone wonders whether soon the name will be changed to XXIst. Century Communism, as Hugo clearly says that long showers or jacuzzis have no place in communism. Because he must think that the savage capitalism with Government intervention that he promotes, is somehow communism. I guess you need a jacuzzi like the one he has in order to understand it all. Or staying in nice Venice hotels…

Hugo seems to be realizing so many things are screwed up here he complains about all of the TV talk shows in VTV and that nobody watches TVES which replaced RCTV (including stealing its equipment)

Hugo: Nothing works!

The charlatanic rage in Venezuela has  a name: Coltan. Ignorance is like that. Show some shiny stones to the indians and they will sell your wife to you in exchange for them. Tell a Government that only believes in magical solutions, that they have the mythical El Dorado or a Rosetta stone and they will believe it. Even worse, they will hold a press conference to talk and tell the world about it.

Call it blue gold, tell the world that without coltan, there are no cell phones or video games. Keep talking, Coltan may save Venezuela, just like Chavez. Except…

The world market for Coltan is only around US$ 2 billion, so no matter how huge the deposits may be, it will pale in comparison with Venezuela’s gold, diamond and oil deposits. Because Australian companies are quitting producing Coltan because the price of Coltan ore is actually low, it is the finished product that is worth something.

Because Coltan is the mineral that contains Niobium (formerly Columbite) and Tantalum, two transition metals that are worth little as metals (They are superconductors, but useless as such). I once visited a coltan mine in Brazil, they were desperate to find an alternate use.

But the only use known for it is to turn it into oxide (A great process, stick a fuse in and the stuff melts under a reaction which is exothermic, i.e. it sustains itself, the stuff melts, you have a spigot and collect it  you get pure Tantalum Oxide or Niobium Oxide)

And the only thing you do with the oxide is make capacitors. We are not talking chips, oscillators, memories, we are talking good old capacitors (condensers if you are older), used in circuits to store charge. Both Tantalum Oxide and Niobium Oxide have high dielectric constants, which allows you to have more capacitance or ability (capacitance!) to store charge since the capacitance of a Capacitor is proportional to that constant.

But you see, companies that produce Coltan ore, or Tantalum Oxide, find electronics to be only a marginal busines and it’s currently a money losing one. So, imagine a money losing business run by Chavistas.

You get the picture.

But by now Chavez is an expert, we are told Coltan is to blame for Congo’s (Zaire, Rwanda?) instability. Coltan is the future of humanity. After the uranium that we are helping the Iranians find, prospect or whatever.

Coltan is like the revolution, but mineral…so, you can sell it.

or something like that.