If, reading that, you’re gripped by an overpowering urge to click off and go watch a video of a duck riding a skateboard…well, I can understand that. But it’s your loss. This story may seem intractably technical, but it could very well come back and kick you in the ass.
First, some unavoidable background. I’ll make this as painless as humanly possible.
The first thing to remember is that the money in your pocket may be an asset to you but, from the Central Bank’s point of view, it’s a liability – something it owes you. (That’s why every bank note says "Pagaderos al portador en las oficinas del banco" – "payable to the bearer at the bank’s offices.") So, on BCV’s books, the Monetary Base is a liability.
From an accounting point of view, "base money" (as it’s also called) is simply the Central Bank’s assets minus its capital and the rest of its liabilities. By assets we mean, mostly, BCV’s Foreign Exchange reserves (together with other bits and bobs of foreign and domestically denominated assets in its possession). Those other BCV liabilities include the money BCV owes the government and PDVSA for the accounts they keep there, the money the banks deposit at BCV as a legal reserve, and sundry other BCV debts (TEM bonds, etc.) Capital, in an accounting sense, is fixed: we can ignore it for the purpose of this analysis.
So, in shorthand:
- Monetary Base = BCV Assets – BCV’s Other Liabilities
That means that, ceteris paribus, if BCV’s assets rise, the Monetary Base expands. And if BCV’s other liabilities fall, the Monetary Base expands. So far, that’s just accounting.
Now, we know for a fact that the overall monetary base has been growing, and fast – 18% since November last year – but what we don’t know is why exactly. And the reason we don’t know why is that – for the first time in its history – BCV refuses to publish the data! (Check page 14 of their latest weekly report and see for yourself.)
Now, lets puzzle this one through. Why would the monetary base expand?
Suspect #1 has to be growth in BCV’s main category of assets: foreign reserves. Any increase in foreign reserves assets directly expands the monetary base, through a mechanism I explained in detail a few years back. In this case, though, Suspect #1 has an air-tight alibi: foreign reserves have been falling throughout this period. In fact, to judge from the reserve account alone, you’d expect the monetary base to be contracting, not expanding.
Ruling out suspect #1 leaves two other suspects: either Central Bank’s other liabilities are falling very fast, or its non-reserve assets are growing very fast – or a bit of both.
Suspect #2 is a fall in BCV’s other liabilities. This is what you would see if the Government were spending its way through the rainy-day funds it kept at BCV. In November last year, the government and PDVSA had Bs.16.9 billion stashed away at BCV, and FONDEN held another Bs.56 billion. Again, those accounts are assets to the government, but liabilities to the Central Bank: if the government spends them, BCV owes the government less (its other liabilities fall) while more base money circulates.
So one way you can account for the growth of the monetary base at a time of falling foreign reserves is that the government’s just burning its way through its old saving funds at dizzying speed.
Suspect #3 is the one that really worries me, though. In this scenario, BCV’s "Other Assets in Foreign Currency" (that is, assets other than Foreign Exchange Reserves) grow as the Bank essentially prints money in return for public sector IOUs. Alarmingly, a lot of circumstantial evidence seems to be pointing in the direction of suspect #3.
In its first quarter report, BCV was forthright in saying they had recently expanded this category. What they didn’t say, though, was what those other assets were…or who issued them…or how many of them they’d taken on.
The malas lenguas think what’s happening here is that PDVSA (and perhaps other State Owned Enterprises, like SIDOR, too) are now so strapped for cash and so completely shut out of international credit markets, they’ve started writing IOUs in US$ to the Central Bank, and getting bolivars in return.
In other words, since nobody abroad would give these broke-ass SOEs a reasonable loan for their junk-ass bonds, they’re forcing BCV to swallow their paper and call it "Other Foreign Currency Assets". Which is another way of saying the Central Bank is creating new base money for the purpose of lending it directly to the PDVSAs and SIDORs of this world on God-only-knows-what-terms and in God-only-knows-what-amounts.
Amusingly, SIDOR actually announced that this was what was happening late last month…and promptly got rapped in the knuckles by BCV Chief Merentes for doing so.
Now, if SIDOR’s announcement fit the classic definition of a gaffe – an involuntary act of impolitic truth-telling – then the Monetary Base Data’s disappearing act amounts to a cover up. Because if Suspect #3 is the culprit, the Central Bank is financing public sector deficits directly: and that’s unconstitutional (c.f., Art. 320) and incredibly destructive to boot.
If you’re an economist reading this, all kinds of alarm bells are ringing by now. After all, base money is sometimes called "high-powered money" for a reason: it’s the raw material the financial sector needs to create yet more money. Adding one bolivar to the monetary base adds more than one bolivar to overall liquidity, because banks are able to lend fractions of that bolivar again and again.
Which is why, if you’re an economist, you’re especially skittish when you start to see unexplained growth in the monetary base, and doubly so when you start to see unexplained growth in the monetary base while foreign reserves are falling and triply so when you start to see unexplained growth in the monetary base in a country that already has the 220th highest inflation rate out of the 222 on record to begin with.
The fear here is that we have the proverbial printing press going…more and more money circulating backed by assets of deteriorating quality, and a Central Bank that refuses to explain what the hell is going on, exactly. And, though I hate to sound cassandraish about this, the fact remains you can only take so many hyperinflationary policy decisions before you get, y’know, actual hyperinflation.
[HatTip: Omar…¿who else?! – HatTipII to GomezCal, for pointing out the SIDOR-BCV two-step.]