Wartime economic dislocations, without a war

/ February 12, 2013

bloomchart

I couldn’t get the chart itself, but  The blurb under Monday’s Bloomberg Chart of the Day tells its own story:

The bolivar is one of only five currencies that have lost more than 90 percent of their value since Chavez took office in February 1999, according to data compiled by Bloomberg. The four other countries — Iraq, Myanmar, Democratic Republic of Congo and Uzbekistan — have been mired in war or dictatorship.

The scary thing is that even then, the bolivar is still evidently overvalued!

[Hat tip: Hutton.]

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37 thoughts on “Wartime economic dislocations, without a war”

      • Which begs the obvious question: even though Venezuela is never going to suffer from that kind of hyper-inflation … would switching to the dollar be a smart move? It would put an end to devaluations and stop governments inflating the money supply, for sure! Several (well, two that I can think of) Latin American countries have done it already. Panama also uses the dollar, but they inherited it. Just curious as to what you think.

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        • That is a favorite meme of a group of economists in Venezuela. Regardless of the pros and cons from a monetary point of view, which I’m not all that familiar with, I think this will never happen. It simply isn’t viable politically.

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          • Francisco,
            Right now, in the USA, many Chinese are buying up houses with cash. As soon as there is rule of law and restoration of property rights, the same will happen in Venezuela. Venezuelans who sell property at these very low properties, and I’m including factories, stores, undeveloped land… they will be taking loses which the government should pay back some day if there is any justice. However, the people coming in will see opportunities with no equal anywhere else in the world. I talked to an economist this morning about Venezuela. I asked him if it is better to jump in or wait. He said to seize the opportunity you must jump in… otherwise there will be no opportunity left for those who wait. The economy is depressed now, but Venezuela has huge resources and opportunities to secure something at bargain prices with huge long term gains into the future. It’s not depressing at all if you look at it like that.

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          • from my anecdotal conversations with many very enthusiastic supporters of Correa in Quito, the dollar is there to stay. Any attempts to change the currency will likely cause social unrest. The memories of their worthless previous currency are still too fresh in the minds of the population.

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        • The variations of exchange rate of a currency carries with it economic information similar to the way the varations in the price of goods and services do. Dollarizing would be like turning out yet another light in the already dark.

          Regarding inflating the money supply, it’s like a river, you can’t stop it from getting to the ocean, but you can guide where you want it to go. For example, if the government becomes the sole entity allowed to do so, yet never allowed to do so above a certain mark, then you have a very efficient, inevasible, and progressive taxation system.

          —

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          • It is important to understand that, by adopting the dollar, Venezuela would be ceding control of an important economic lever to the United States. Quantitative easing (the equivalent of printing money) may be at once a useful policy for the US and a poor one for Venezuela, or vice versa. You can be sure that when the policy is set, the US will take only its interests into account.

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  2. I remember there was a time where the government printed 1 Bs bills and not BsF, the old ones. What a joke!

    I’ve always believed that the people in power (controling oil income) have always pushed the bolivar down in order to have more power and be richer than they truly are inside Venezuelan territory with their petro-dolars.

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  3. And with all the attendant deaths too… with all the attendant externalities related to violence. And let’s not get started on infrastructure that looks… rather bombed.

    Really, if the gringos or somebody else hated our guts so much or wanted our resources that badly that they are willing to see their destruction before getting their grubby hands on it, they need not waste a firecracker. Just don’t hinder chavismo, willya?

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  5. So this is a question I’ve been asking myself for quite some time.

    lets put aside the official exchange rate of 6,30 x 1 USD$ and try to figure out what the real value (or implicit value) of the Bs.f is.

    The traditional way to do it would be to divide the number of Bolivars in circulation by the hard currency reserves adjusted into dollars. However, I’ve talked to a lot of people who have told me that there are two real problems with this:

    1) Nobody, not even the central bank knows what the real monetary mass they have printed is; and
    2) We could be using all of the different separate funds they have created as reserves, but we can’t since the government has obscured those numbers so much that they don’t even know how much “cash on hand” they have.

    I read today that number as currently declared would put the real value at Bs.F 24 per 1 USD$

    Now, suppose we were told that if we added up all of the separate funds, liquid and non-liquid reserves would total 40 to 45 Billion USD, implicit value would drop to around half its current calculation, that is, around 12 Bs.F x 1 USD.

    Would this in your opinion be a fair assessment of the real value the Bs.F. should have?

    Could a future calculation of two parallel exchange rates (one CADIVI fixed rate and one fluctuating rate) be guided by this calculation?

    I doubt we will ever get so much as a glimpse into the black box that have become the parallel spending funds that have been created, but this would be food for thought.

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    • The traditional way to do it would be to divide the number of Bolivars in circulation by the hard currency reserves adjusted into dollars.

      Huh!?? No, no: you’re confused. The traditional way to do it would be to allow people to buy and sell dollars from one another. There is no “shortcut” to this method of deriving information about relative scarcity. That’s, erm, THE WHOLE POINT of the market economy…

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      • And since this isn’t that (a market economy) because of the bias put in place by the government itself, we have to make due with what we have. In practical terms, not dogmatically, as we would wish it to be.

        I agree with you the whole thing is like reading science fiction. I doubt anyone outside those of us who have to live with it will understand it, but we have to make due with trying to calculate what an exchange rate would be under those very sick and twisted circumstances.

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        • I just think there are deep theoretical reasons to think that any alternative method is equally as bad as any other alternative method. You might as well use LechugaVerde.com…or just invent a number.

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        • We’ve tried. Sick and twisted we must be.

          Our models (pre-devaluation) seemed to indicate that a nominal exchange rate would be 16.2 +/- 3.7. At this point, its a wait-and-see how the markets adjust before we reevaluate that.

          Yeah. Spectacularly wide interval there. We’ve had to make a few guesses, but the folk doing them are pretty smart.

          Current account balances, inflation and interest rates differentials are the easiest to look at and hazard a relative guess. The other stuff isn’t nearly so fun such as the ToT, real public debt versus stated public debt, and econopoli competence. Perhaps just as important is the pent up demand because of the extended bad peg and relative internal velocity that would result from a floating currency.

          Trying to come up with an intrinsic rate is a path to madness since it never really holds and would shift with literally the creation of more credit. Its similar to the loons ranting about a return to the gold standard…just can’t be done with a constant change in monetary supply and velocity.

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          • ” Its similar to the loons ranting about a return to the gold standard…”
            Hey, we were only loons until someone like you explained it to us. I think many of us had the knowledge in the back of our minds that it is absurd, but we needed to understand how.

            I’m being serious btw.

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            • Forgive me. I’ve been dealing with gold standard loons lately and that was just a bit of grumpiness directed at them. My rojo rojitos are no less dogged and willful with silly economic ideas than the Venezuelan version, despite being diametrically opposed.

              People want to tie up a phyical number to value something at, which is normal since it is firm and quantifiable. After all, that is what a the whole accounting discipline is about and in effect what currency/money is supposed to be: a store of value. But fiat currencies, be they pegged or not, don’t quite work that way and are somewhat counterintuitive. Why? Because, being a fiat, we are “told” what the value is and it lacks an intrinsic worth since it is neither a consumable good nor a store of value or unit of trade beyond its perceived worth which can differ significantly than the stated amount. A bit of dissonance and a frustrating one at that since we inherently want to protect our assets, even if they are colorful bits of paper.

              We should be able to come up with a relative internal value based on churn and volume, but no one seems to know what these are…a Venezuelan Bolivar take on the Heisenberg uncertainty principle. Alternately, from an external viewpoint, nominally, they should be affected by the factors that I mentioned, but, there’s a bit more to it and, as Mr. Toro points out, comes down to the market value of one for the other and thus perception by the market itself.

              I’m not a big fan per se of the Austrian School, but there’s a bloke by the name of Henry Hazlitt who wrote about psychology, perception, inflation, and future expectations and the lag/spike effect they generate in valuing currencies. More or less, dumping currency into an economy doesn’t necessarily immediately drive up inflation, but eventually, as prices rise, the expectation that they will continue to rise drives inflation onward. So, money loses its store of value aspect and this is transferred to goods…you know…. “Hoarding”. And a flight to other currencies. That “speculation” thing.

              In the end, the real rate becomes what you can “get” for your bolivars. Or, alternately, a WAG.

              Incidentally, this actually validates the Big Mac methodology to some extent, due to the lack of any other real measurements.

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        • The Big Mac Index gets you a good idea for an equilibrium (ie, long-run) exchange rate for goods. The financial-market determinants of an exchange rate (relating to the relative venezuela-usa trade-offs between risk and return, and agents’ expectations) add substantial volatility for the final value, and in an economy with chronic inflation such as Venezuela, persistent devaluation expectations imply a significant devaluationist bias on the market rate. The chavismo usually calls this ‘speculation’, when it is better understood as a slow-mo Run on the national currency.

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      • Nevermind the theoretical methods… the parallel market exchange rate is changing rapidly! So rapidly that it looks like people will need to spend their Bolivars fast to keep up! Is anybody else watching?

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  6. Love the chosen photo for this post, where Jaua el Boludo tries out paternalistic body language, by aiming to place his left hand over the handshake between himself and President Xi Jinping. Of course, chavistas, let alone PSFers, neither adept at subtleties, won’t understand the irony: that Jaua/Venezuela is indentured to Beijing, hence the need for Jaua to go there, not the other way around.

    P.S. Also love the photo chosen for your article in FP, Juan. Says it all.

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  7. Miguel O. states in his Devil E. blog (comment section of “Mostly depressing Thoughts”) that the “old” Bolivar devaluated from 58 to the Dollar in 1993 to 680 in 1998 “when Chavez got to power”. Would this not also be an approx. 90% devaluation? Or is my math “fuzzy”, or what am I missing?
    I have no time for Chavez, but facts are facts…..

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    • The fact is that the Bolivar has gone through a 30-year old slide since Black Friday, but the truly disappointing fact is that the best opportunity for stabilization our country has gotten since then, this 9-year-and-counting oil bonanza, has been wasted on Chavez’s ridiculous personal project.

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    • Maybe a clearer picture would emerge if we look at the sliding value of the bs vs the dollar as a function in the sliding value of the average Venezuelan oil bbl for the period between 93 and 98 and then looked at the sliding value of the bs vs the dollar as a function of the climbing value of the average Venezuela oil bbls for the period between 98 and 2013 . Traditionally the exchange value of the bs vs the dollar should be pegged to fluctuations in the value of the oil bbl , at least since before 93 to 98 , thereafter the two appear to become dissociated . which considering our increasing dependence of oil revenue is something which demands explanation !

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