49 thoughts on “50 Shades of Boy Are We Screwed

  1. Thanks. Interesting although we saw that coming, it’s just that it’s kind of a pleasure to review the painful economic reality with nice charts.

    I am just wondering what parameters were used by those external analysts to produce such GDP forecasts. Barclays and Credite Suisse expect over +2%! (page 45). When did they produced their analysis? It seems as if they were based mostly on oil price expectations for October of 2012 or so. It would be nice to plot actual GDP growth with their past forecasts for the last 15 years or so (well, same with Giordani’s inflationary expectations)


  2. Alpargatas anyone? Naaaaaaaaaaaa… Tenemos Patria!
    Toro I’m expecting you to come up with a nice post about BCV’s President quote: “No nos podemos volver locos como el año pasado, que se entregaron 59 millardos de dólares…”
    Hay que ser bien cínic@…


  3. In “The crowded bandwagon (cont)” ( http://caracaschronicles.com/2013/01/31/the-crowded-bandwagon-cont/ ) a very rough estimate put the gross per-capita oil income at a meager 3044 USD/person.

    Slide #4 shows that that figure, initial point for the following discussion, was very close to the reality… and that’s essentially the best we can hope for.

    How it is that Venezuelans, either chavistas, opposition or ni-nis, can realistically expect that their necessities can be covered with just 3000 USD/person per year?. Education, health, justice, infrastructure and a very long etcetera require much, much more than that!!!… and 3000 USD/person (gross income) is roughly the best we can expect for!.

    To put this in perspective, the average USA investment per public school student is about 11000 USD/student [1]… and most readers of this blog will concur that USA is not exactly the leader regarding public schools in the world…

    [1] http://en.wikipedia.org/wiki/Education_in_the_United_States#International_comparison


    • Dago, the 3000 USD/person is only what comes from oil. One would have to add to that what comes from taxation. Even if 3000 were the only amount, we’d be talking 8USD/person per day, which is almost 4 times the defined poverty line.

      The key is not to look at the value but at its flow. If people (including children, and retirees) are receiving 8USD/day, that is an amount less that they need to receive from other sources, lowering their income requirements from salaries, which translates into greater competitiveness for businesses, which translates into lower prices of goods and services, which implies that one can no longer compare with a nation that does not have this base income for everyone. Public schools would be able to receive a much bigger portion of the taxation pie quite simply because there would be a much smaller piece of the taxation pie dedicated to welfare and social programs, because there would be no more poor, as defined by income.


      • The 3000 USD/year-person are gross oil income in a very good year. Some 1000 USD/year-person, net oil income, on 10-year average, is a figure closer to real, medium term availability.

        And here lies my point: We Venezuelans (from all political colors) have at least an order-of-magnitude mismatch between what we expect the oil will do for us, and what oil can really do for us. And that’s only comparing the basic/middle school education figures.

        With the current pitiful state of agriculture and manufacturing, it would take decades until taxing can, per-capita wise, significantly rise those figures.

        Most Venezuelans have this magical thinking that we just need to get rid of such or such bad government, and things will be peachy again. But there are definitively no peaches here: Getting good governance is just the bare beginning, and the hard road will still lie ahead.

        How I long for having at least one of our political leaders drilling this fact deep down into our collective psyche!.


        • ” We Venezuelans (from all political colors) have at least an order-of-magnitude mismatch between what we expect the oil will do for us, and what oil can really do for us.”
          The real point is what we can do to multiply with our own work and initiative the wealth in oil income we recieve. Just to recieve it may help cover our inmmediate needs but does nothing by itself to allow us to grow into a healthy economy and a prosperous people..


            • I agree with both of you, but I think the difference is that Mr. Bass is looking ultimately at a long-term picture wherein oil revenues utilized in such a manner that they grow the economy with the result that the overall GDP/exports of Venezuela is less reliant on oil income to determine its future. Likewise, as you note, in the short to mid-term, direct transfers would greatly assist the poorest people in Venezuela. The key to both becoming reality is that the economy must diversify and expand and outgrow its dutch-disease issues. Both viewpoints are valid, it is simply a matter of how to disperse the cash through economic strata.

              My only concern would be the over-reliance of the poor on the cash transfers for extended amounts of time. From my own experience working with low-income residents here in how to manage their own finances, is that they rarely, if ever, plan to be off state transfer rolls. There is a mindset that sets in that rather than use that income to build your capital and develop other opportunities, the transfer becomes the only income.


              • pitiyanqui, if you read more on the subject you’ll find that everything to which I’m pointing suggests *long* term success, not only short and medium, as you mention. Read the documentation.

                Let me see if I can turn the question around so that you see why. Imagine Venezuela with no oil, that is, with taxation being the government’s only source of income. How would you spend it? Let’s assume it gets spent exactly that way. Ok? You have that Venezuela in your head? Now, pretend that in that Venezuela that you just imagined I wave a magic wand and provide every single Venezuelan with an variable, but buffered, amount of USD/day income. Are you claiming this would be hurtful to your imagined Venezuela?

                I’ll ask a second question. Let’s assume that the solution to Venezuela includes building a school system that costs 30 million barrels of oil, one barrel per Venezuelan. Would you support creating a special SchoolSystem tax that takes 1 barrel from each Venezuelan? That is, a tax that takes 100% income away from the poorest Venezuelan and the same amount from the richest Venezuelan, to pay for that School System? This craziness is the alternative that you seem to be defending.


              • Actually I am not arguing that at all.

                What I am saying is that in the short and medium term, cash transfers would alleviate the poverty issue. Including all Venezuelans, it would have a substantially greater impact the E & D class folk than the A’s as it would represent a much more sizeable portion of their total incomes.

                However, leave ceteris paribus aside for the moment and think of the longer term effects. In a perfect world, the economy would become, as I noted, increasingly diversified and the oil revenues would hold a decreased importance in the overall economic picture of the nation. On a microeconomic level, in the long term, you’d also see a significant change in the poverty definition relative to Venezuela as the accrued revenues would lead to capital development over the years in both human terms as well as the physical. Given better educational opportunities, a growing economy with better job opportunities, and overall access to better, simply put, a better life, the median income of the population as a whole would shift upwards. At that point, for an ever increasing proportion of the population, the oil revenues become a smaller percentage of their individual incomes. Or do you think this would not happen? The children of today’s mobile plantanero could be tomorrow’s economists debating reallocating the revenues in a more productive way on Caracas Chronicles since Venezuela of the future suffers from far too many sifrinos wasting their stipend at Starbucks.

                My only caution, as I mentioned, is that given the inability to control consumption choices, some people will unconsciously elect to remain poor or in relative poverty. Again, I base this on firsthand experience.

                Having worked with low-income people, say, families of four in the ~$25,000/year income level, they are still considered poor here because the cost of living in the U.S. is relatively expensive. As a result, these people receive extensive transfer payments (TANF, SNAP, WIC, SSI, you name it) along with a pretty sizeable tax credit/rebate (the transfers are non-taxable, here at any rate and they receive an EITC which is often substantially more than their taxes) due to their “poverty” levels which is pretty ironic given that outside the majority of the OECD nations, and these individuals would be considered extremely wealthy, but of course, here, they are poor. Sadly, they make choices that seem to perpetuate their poverty. Instead of investing in their own development, such as education, healthier choices, or purchasing property in better neighborhoods with better access to schools for their children, they lean heavily to managing their money on a day to day basis and don’t worry overly much because they have guaranteed streams of income from the government, and much of this comes from the high discount rate/propensity to spend that these people have. I always shake my head when I see them; they usually have a nicer car than I do and it always gives me heartburn, if for no other reason that I can’t help but wonder what sort of habits the children learn from their parents.

                I am not going to say that everyone will do this, and the above applies to the situation as it exists in the U.S. There will be any number of people in Venezuela that will take this opportunity and run with it and climb out of the ranchos. However, as incomes rise, with the transfer and investment by consumers of the oil income, you will have those who self-select to stay behind the curve. Eventually, you’ll have to address that segment of people as well. Addressing those entitlements, which will have become engrained, will be painful…just look at what is going on in El Imperio. Entitlements need to be addressed, but no one is willing to do so, to the detriment of the entire nation, not just those receiving them.


              • Pitiyanki,

                “some people will unconsciously elect to remain poor or in relative poverty”, as opposed to the many forced to remain poor or in relative poverty because people in power are consciously controlling consumption choices?

                “they lean heavily to managing their money on a day to day basis and don’t worry overly much because they have guaranteed streams of income from the government”, that’s income from the government. Cash distribution of oil income is not “from the government”. But more to the point, are you suggesting that because a percentage of people will not use their percentage of the money the way you think is best, that we keep the remaining percentage who would use the remaining percentage of the money “correctly” from receiving it, and instead let a few government officials (mis)handle the 100% of the money?

                “self-select to stay behind the curve” I think you focus too much on this group, without realizing the difference between those in this group receiving welfare, versus those in this group receiving oil money. Welfare money is money taken from the richer, via taxation, and given to the poorer based on certain conditions. This system gives incentive to be on the receiving end. I agree, not good. Unconditional distribution of oil money is different to welfare money for many reasons. For starters, it’s equal for all. There is no incentive to be poorer to receive it: those who find best uses for it rise, higher than those who don’t. So the incentive is to find best uses for it.

                Here’s the key: I’m not theorizing. The *results* of cash distribution trials invariably show that your predictions based on your experience working with the poor are flat out wrong when applied to unconditional cash distribution. Read the documentation.


            • Mao tried boosting Chinas Steel production by having millions of people build back yard smelters each producing a small amount of steel , regardless to say with ruinous results . Atomizing a complex economic operation requiring huge organized investment over long periods is a recipe for failure . Same thing with an economy where people are given small amount of moneys to spend on their petty personal comforts and pleasures. To start with they wont invest it , they will use it to buy mostly imported mostly frivolous consumer goods that raise not one bit the countries over all productivity . What we lack and must build up is an organizational capacity to foster economic growth and allow the maximum of people to engage in productive activities . Giving people freebies , money that they havent earned through their own work in the long run is spilled milk however much they like it , you can justify giving it to help them scape the worst ravages of poverty ( the ‘safety net principle’ that Rawls proposed) but what really counts is creating a system which makes every one a productive contributor to a healthy growing economy and that requires large well organized investments , investments that have punch . Again what we lack is the culture and organization that can efficiently handle and manage such investments from our oil revenues with optimal advantage . I always felt in the old days that Pdvsa the organization was worth at least as much as the countries oil deposits, that a country was rich not because of its natural resources but because of the corporate and gubernamental organizations they had and their capacity for creating wealth using the productive labour of their employees . If Venezuela was home to 3 Toyotas, 2 Hyundais and one Google we would be a rich country even if we had no oil wealth !! Distributing our oil wealth among all Venezuelas has a populist tinge that I find alarming although I recognize the advantage of denying corrupt innefficient governments the resources that they use to feed their despotic agendas. ,


              • billl bass,

                “Atomizing a complex economic operation requiring huge organized investment over long periods is a recipe for failure .” that is not necessarily true. This reminds me of the computer chess competitions that yearly invariably ended up between to regular opponents. After 6 years, they were tied. One’s strategy was to have a bigger, faster mainframe each year, sure that by crunching an ever increasing number of moves per second was the key to winning. The other’s strategy, also with a mainframe, but was to consider fewer moves each year, but of more intelligent focus, so that they could be analized deeper. On the seventh year, the computer chess world couldn’t wait to see the tie-breaking game between the two titans. Sadly, neither of the them made it to the finals that year because they were eliminated early in the competition by a couple of university students that had a PC connected to a set of chips, one chip for each piece in the game. Each chip would pick the best move for itself, and the PC would choose amongst them, the best for the group. Thus distributed computing powned. So, I disagree with your extrapolating from some failed decentralized failures.

                I especially disagree with your assumption that “small amount of moneys to spend on their petty personal comforts and pleasures” “raise not one bit the countries over all productivity”. Money does not disappear just because it is spent on something “frivolous”. Even small change on useless crap helps the economy, because someone had to sell the crap, and to do so that provider had to buy other stuff that was not crap, sold by a different provider, etc.. Consumer markets can be just as powerful, and less vulnerable to centralized error than industrial markets. Even frivolous spending is a productive contribution to a healthy growing economy, so you are wrong to thing healthy growing economies can only come from large well organized investments.

                I will concede that “large well organized investments” have a bigger punch. The key, however, is on the smallest word: “well”. The advantage of consumer markets is that there is no “well”. It is precisely because large organized investments are prone to being large *badly* organized investments, that I side with the consumer market solution for Venezuela. Are you suggesting that the chances of long term success with a centralized handling of the oil money are higher than with a decentralized alternative? Given Venezuela’s history?!

                You give the example of PDVSA. Awesome. I’ll use that very same example. Look at it now. Are you telling me, that given the amount of money flowing through PDVSA that you didn’t see it coming that some powermongers would want their grubby little hands on PDVSA? Oh, wait, you did “recognize the advantage of denying corrupt innefficient governments the resources that they use to feed their despotic agendas.” What is surprising is that your concluding recommendation simply ignores that little tidbit.

                Funny that you mention money not earned. The alternative to not giving people money that they have not earned is giving it to government that also has not earned it. To be clear, the money a government earns is the money that is a product of the economic system that they help succeed, measured by how much they can sustainably get from taxation. Oil money was not taxed money, so it was not government earned money. Since it’s money that neither government nor people earned, the question boils down to, is it better for unearned money to be centrally handled by a few citizens who became politicians, or decentrally handled by all citizens.

                Allow me to end with a point that most people simply sidestep. The oil money, though not earned, belongs to the people. It’s like inheritence money. What you are defending is not whether the government should give them taxation money or not. You are defending the government taking people’s money in a regressive way because for each barrel the government takes from the richest Venezuelan, it is taking one barrel from the poorest Venezuelan. That is one unacceptable tax table, even if later that tax is used for large well organized investments that provide punch…


        • Dago, I understand your point, that the oil money is not enough. In fact, you’re preaching it to the choir. But you seem to be implying something with which I’m in complete disagreement, that because oil is not enough, then it should not be distributed. The key to my argument is that distributing it is the *best* of all the alternatives, so, regardless of how non far it can take the nation, it is farther and longer term than any other proposal I’ve heard.

          Imagine oil money is rain water, taxation money is faucet water, and people are plants. Clearly, we use the faucet hose to water the plants that are looking dry. The question is do we let it rain on all the plants, equally, or do we control the rain as if it were faucet water?

          Another way to ask the same thing, imagine Venezuela had no oil. We would still need to properly spend taxation money. That’s the framework of most countries. Why does would you be so against having all our citizens better off equally with money that is outside the framework? How do you justify your ownership of it, especially when it’s unconstitutional, and regressive –more regressive than the gasoline subsidy?


          • I forgot to include part of the faucet water analogy:

            If you rain on all the plants, then the faucet water has very few plants to water since they are all getting enough to survive. If we opt to use the rain water as faucet water, which seems to be your proposal, you would have to water more plants because there would be many more drying up with no rain water, and they would all be looking to you, the Lord of the Rings, for water.

            Not that unused rain water, ends up in the faucet…


          • Trouble to distributing it to everyone piece meal is that it will get spent mostly on frivolous purchases , in ‘in today gone tomorrow’ fashion leaving nothing lasting behind, Remember the ‘ta barato dame dos’ mentality . While is we somehow manage to create a State and Corporate Business system and culture that works then all that income can be invested and managed wisely to the maximum long term benefit of all. Wise investment is always better than quick feel good items . I have no confidence in the economic wisdom or capacity of most ordinary people to do whats best with their money , specially with our caribbean lotus eater culture !! The challenge of making government and local businesses operate functionally is big , but unless we face this challenge we achieve nothing !!


            • billl bass, you seem to have ignored my counter completely. A) you’re just guessing, whereas I am providing results of actual tests that point to the opposite: people actually spend their piece meal amounts very thriftily, and B) even if they did spend it “frivolously”, the person providing the frivolous good or service is creating a successful business which will necessarily have to spend non frivolously to keep the business growing, which eventually leads to creating jobs and paying taxes. In other words even frivolous money flows into non frivolous money back into the cycle; it does not disappear. By the way, I’ll add C), who are you to decide what is frivolous, given that they are adults of equal rights as you to spend on any legal activity?

              I am curious as to how you would explain that such a huge amount of money would accomplish nothing in an economy just because it is spent by consumers rather than by government officials who are less interested in efficiency in the spending than the end recipients.


              • Sorry Ex torres I addressed one of your previous postings before discovering the one above so please excuse this supplement to my prior comment . first its long been observed that people spend what they get for free with greater laxness than they do money they ve earned with their own effort , the spendrift lottery winner or lucky recipient of a rich uncles inheritance is a figure we all recognize . second you forget globalization and how easy it is now to spend on consumption goods produced and imported from abroad so that the effect of increased personal income does not necessarily favour local production , third you forget the culture , we are not a country shock full of hard working disciplined ambitious competent entrepeneurs , these are a brave admirable minority but most or our countryman are of a different ilk, specially among the less fortunate ( just read any book by Axel Capriles ) , on the frivolity issue I guess Im just relying on personal observation , people who spend big on imported luxury cars but dont own a home , or people with a family who spend their wage on beer and frolick before attending to their familys needs , on how our country has world records in the consumption of imported licquor, or the use of cosmetic surgery. We are far from being a nation of careful savers or wise patient long term investors . Where I do heartily agree with you is in the reference to the spendrift wasteful use which corrupt and incompetent governments make of our oil revenue and how comparatively better it would be for such money ( absent more rational alternatives) to be distributed between all Venezuelans. Do understand Ex Torres that my objections to the free money distribution scheme is purely pragmatical not that I object to the principle of what you propose . One way of looking at it is as if Venezuelas oil took the form of a corporation in which all Venezuelans owned an equal amount of stock and thus were entitled to their respective share of the dividends .


            • billl bass, you have not looked at the most recent observations. Though, as you point out, people tend to spend unearned money with greater laxness, cash distribution of small, frequent amounts is surprising even the researchers as to how thriftily poor people manage the money and how efficiently they raise, not only themselves, out of their dire situations, but also their whole local economies. Read the documentation.

              Regarding globalization, I have not forgotten. I pay close attention to it. The key is to be more competitive. Even if most people initially spend on imported goods, the importer makes money, which gets spent indirectly locally, in rent, in food, in utilities, in services, etc.. Other people will see local opportunites and will begin offering alternatives at a better price. And here’s the crux: with cash distritbution, the reason these new alternatives will have a chance is because locals will have cash in hand to spend on the local alternatives the moment they present themselves. Also, by having zero poverty, the government will have less overhead since it won’t be having to run so many social programs, employing people who could be doing something productive, rather than overhead.

              Regarding culture, I did not forget that, either. I disagree. We are a country full of many hard working entrepeneurial people who cannot rise above their situation simply because they either cannot get past the ridiculous startup barriers they face, or because, if they do, there are no people with cash in their pockets to spend on the ventures. Think lemonade stand. What entrepeneurial kid would set one up if nobody in the neighborhood has cash to buy lemonade. And it’s because there are no lemonade stands that any money that sporadically gets into people’s hands gets spent on imported beverages.

              Your examples, such as the one about liquor consumption, begs the question: are you suggesting that instead of letting all Venezuelans spend small, frequent amounts on liquor, that we let a few Venezuelans spend huge amounts on liquor? Frankly, you are the one who seems to forget that the government is made up of a few of the very same people to whom you do not trust with little amounts of money, yet you want to give these few a very large amount of it. Even when you point out that you are aware of the corruption and incompetence of government, you simply ignore that very observation when you make the final recommendation, whereas I consider your observation determinant in ruling out the alternative you propose.

              Your suggestion of sharing the wealth as dividends has its own drawbacks. But before I get into those, what difference is there between having every single Venezuelan recieve dividends from stock that they have by virtue of citizenship, than simply receiving the money from oil that they receive by virtue of citizenship? The first drawback with the idea is that dividends are only paid out after all other corporate spenditures are taken care of. This leaves open the very same loopholes of corruption, incompetence, and powermongering that we have now. My contention is that oil corporations buy their crude oil from the people, then they go off and make whatever money they want from it. This keeps any kind of corruption, incompetence, or powermongering from affecting the people, allowing for corporations interested in purchasing the crude to compete freely. It also keeps the government doing what it’s supposed to do best: regulating the competition of those corporations, and getting the most long term taxation benefits from them, as well as from the successful consumer market.


              • Ex torres : You have almost written a small essay in answering my doubts ; I would have to write a book to address yours , not fair to the rest of the bloggers , I hate government mismanagement and corruption as much as you do but I ve also seen how large well run corporations work from the inside and they are much more capable of maximizing the benefit of an income stream that ordinary people with little education and practical economic expertise . there is no contest , believe you me !!There is a sentimental liking for the little guy ( and his largely imaginary virtues) and a distrust of large organizations which is reflected in how many people think about these things ; I understand that, but if you phocus your attention on trying to create strong well run organizations be them public or private ( not all private companies are as well run as Polar , some in fact are pretty lousy and predatory) then Im pretty certain that the advantages are obviously on the side of organizations which are professional and competent in handling resources not on the amateur little old lady with money in her shoe box . The big challenge is in creating such organizations and forming the people who man them , there Venezuela has met huge failure , specially the last 14 years . The thing is that in practice its easier to form a selective number of people to develop and run such an organization than to change the culture of a whole people , a purely practical question . I believe that unless Venezuelans tackle head on the problem of developing well run technocratic organizations who can operate free from populist political interference nothing of substance will get achieved , Lets recognize with mutual respect that we are too set in our ways to be able to convince the other and let it go at that ! in any event Ive found the exchange informative and intellectually estimulating , thank you for that.


            • billl bass, it’s like the chicken before the egg problem. When it boils down to this, most people think it’s ok to agree to disagree, but they are wrong. The egg came first, since egg laying animals were here way before the mutation of the chicken ever came to be.

              Here, you decided to bow out, avoiding the cruxes, as most do because breaking the paradigm of distributing cash is a mental short circuit. Note how all over the place you’ve been:

              Firstly, you won’t accept that the money belongs to the people by consititutional right. Secondly, the alternative that you propose hopes to get good organization from goverment comprised of the people whose very culture is the one you don’t trust with little bits of money. Thirdly, you imply that frivolously spent money does nothing for the productivity of a nation’s economy. Fourthly, you sidestep when it is pointed out that you think your judgement as to what is frivolous trumps the judgement of other adults, who may even agree yet decide to spend that way. Fifthly, you suggest the possibility of dividend payouts as an alternative, even though they would exhibit many of the characteristics of cash distribution, yet it also has negative characteristics of the current corruption/incompetent system which cash distribution does not. Sixthly, the proof is in the pudding, and there have been countless puddings worldwide (including latin environments) demonstrating that cash transfers work better than any alternative, not just at reducing poverty, but at economic growth. Read the documentation. Finally, what you propose (using the oil money for centralized projects with punch) is more regressive than the current gasoline subsidy. You need to own it.

              I am more than happy to change my mind if you provide argumentation. If your barrier to a more in depth discussion is respect for the readership, here, you can, as others have done, write to me at torres atsign excite periodpunctuation com, but I bet that the readers here who are still reading our comments are doing so out of interest, not building animosity, quite simply because our comments are easy to ignore if they are under older posts.

              I must say, I’ll be disappointed if you bow out at this point. I sincerely hope that you find a way to continue the brainstorming.


  4. Are we screwed? Of course …
    Venezuelan ruling clique
    is without face,
    even worse …
    don’t want face.

    Hu (1944:51-52) contrasts meiyou lian 沒有臉 (lit. “without face”) “audacious; wanton; shameless” as “the most severe condemnation that can be made of a person” and buyao lian 不要臉 (lit. “don’t want face”) “shameless; selfishly inconsiderate” as “a serious accusation meaning that ego does not care what society thinks of his character, that he is ready to obtain benefits for himself in defiance of moral standards.”


  5. I have a doubt regarding slide #31 that shows money velocity in his lowest scores in +30 years as somehow proof of more inflation to come (via debt monetization). How did the author reach for that conclusion? Since, given a lower(higher) money velocity, what one should expect in theory from a monetary expansion is lower(higher) inflation, provided real gdp stays unchanged.

    May want to chip in on that, Francisco?


  6. Maybe I misunderstood the graph , but I thought Santos found it a puzzle that inflation wasnt higher given the higher monetary expansion and thought that that had something to do with the lower money velocity holding inflation in check but that such lower velocity was unsustainable and would not prevent a hike in the rate of inflation in the near future. Not being an economist this is all conjecture and could be wildly off .


    • My point was exactly that: Keep on printing money and betting that money velocity will keep on coming down, is simply nonsense. Indeed, annualized Jan-Apr inflation is coming at 42% general index, 58% for food. I cannot predict where money velocity will go (Daniel is right on that count) but I assume it follows a trendless, stationary process, or best case scenario stay the same. As every 1% of GDP means 8% of expansion in monetary base, printing out 8% of GDP (deficit is 18%) would cause money to grow (ceteris paribus) at 64%. That is consistent with much higher rate of inflation.


      • Hi Miguel,
        I also found puzzling the recent downward trend in money velocity, but I think determinants of such trend is an empirical question still to be further investigated. The thing is that if one believes the theory that money supply has a direct, proportional relationship with the price level, then we have to assume near-constant money velocity -at least in the shorter term- The whole quentitative theory is based on that assumption.
        The fact that it has not happend, in fact IS a puzzle, I guess it has to be with the distortions introduced by across the board prices and exchange controls, and also by the crowding out effect of internal public debt -and/or the crazy fact showed in your slide 27…explosive M2 while semiconstant base money-

        Kudos for the presentation,


      • I think it’s mostly just wait and see at this point. While there are certain factors that could affect money velocity (currency controls, for example, that prevent a drastic run on the Bolivar via the official market), these are more of the structural, rather than time-varying type.

        I believe your reasoning is correct, Miguel, and i share it: more money (with still or higher velocity) = more inflation… eventually. I think it is important to point out that econometric studies of the monetarist theory of inflation in Venezuela have a very poor fit, be it on contemporaneous correlations or via a VAR; so i recommend you to consider other explanatory variables for your inflation prognostics.
        I personally found out, for forecasting purposes, that a lagged inflation term (the ‘inertia’ or persistence of inflation), a measure of excess demand (nominal gdp minus trend real gdp), and movements in the official exchange rate, add up to a robust fit.

        My two cents as an UCV economics graduate who made a dissertation about inflation dynamics :)


        • Hi Daniel,
          We did some work in the early 2000s testing the short and long run relationship between money and inflation in Venezuela using cointegration and other stuff. I remember the fit wasn’t that bad…

          If you send your contact to Quico I will send you the paper…


      • Miguel, why were those guys like Credit Suisse (and others) so optimistic? It cannot be they were basing their forecasts on ever rising oil prices for Venezuela, could it?


      • I would strongly vote that inflation is unintentionally suppressed through as you mention, the controls, fixed prices, and internal absorption by the state. There are so many distortions and interference that inflation is simply being muted. (Trying to run a regression on this and control for everything gives me the jibblies just thinking about it). I’m sure scarcity isn’t helping, either, since it delays consumption, but not demand and therefore masks prices. Kind of funny that the unintentional consequences of the government’s mismanagement of the economy is actually accomplishing, (albeit insufficiently) something that they have tried to do for years.

        Something my mother-in-law was talking about the other day, and it didn’t really occur to me until last night that it might be impacting inflation is that the unavailability of things to buy is holding down inflation. I’m not talking about toilet paper or sugar, but rather about just “stuff” in general. Expectations of high inflation would cause consumers to buy now, rather than later, but what happens when its years of inflation ~30%? All capital purchases would have been made long ago…and non-regulated items moving at a faster rate of increase than incomes would eventually make them unaffordable after a while. Accumulating enough capital to make larger purchases, (cars, homes, electronics, equipment, etc), and thus throwing more money into the economy and increasing velocity would become a Sisyphean task as the price would have increased sufficiently in that time to make it unaffordable again. Besides, how many fridges, ovens, blackberries, furniture, and other items can you have as a store of value in lieu of bolivars before you see negative return both in utility and value?

        I realize there is stuff to buy, but seeing the prices for just basic stuff, like a cheap laptop, or a television in Venezuela is laughable and I woul imagine beyond the reach of a majority of people below the median income level. Cars, even clunkers? A whole other story entirely, despite cheap gas.

        Even with regulation, I think the real story in coming months will be with food as the scarcity pushes the people to parallel market prices at ever higher rates. Look to the price of eggs…always a great indicator, especially as the internal Venzuelan economy becomes increasingly autarkic.

        Really nice presentation, by the way.


  7. Faux economics, I would just ask what does dollar denominated debt (aka foreign debt) have anything to do with the foreign exchange rate? much less the black market rate that puts it at 140% of GDP LOL

    Think about that for a second, I will love to see the pie on your faces after so many predictions of economic armageddon over the years.


      • It kills you that you know I am right, foreign debt as a percentage of GDP using the black market rate ? LOL that was one hell of a clown college in economics.


        • Did you hear the talk? No you did not, he went from the two extremes, the official rate which is what Chavismo spouses and is also clownish to the parallel rate. He did say the truth is in the middle and the significance for the point at hand is that Venezuela can no longer issue like it did in 2009 and 2010 to solve its dollar limitations.

          No shame, no thinking.

          Again, move to Venezuela, learn what using a bidet all the time is about!


      • Oh, be nice. Poor Mr. Giordani here has a lot more time on his hands than he used to and he’s just a bit grumpy that he can’t try and prove his claim above any longer.


    • Shame, I have no clue who you are, what I do know is that you dont live in Venezuela. Put up or shut up, move and live the revolution, otherwise you are just a faux commenter. Think about what? you obviously don’t think much. .


  8. Yeah shame, things are peachy with 30% inflation, no foreign currency and huge shortages. Just peachy.


  9. The Venezuelan economy appears to be run by people whose understanding of governance was limited to one political science course their freshman year in college. (They were too busy ‘militando’ the rest of the semester) Low agricultural output? The oligarchs’ fault. Oil production going down? Sabotage. Power grid sucks? Sabotage. Traffic gridlock? Sign of growing prosperity. The laws of economics don’t apply to Venezuela because it’s not a ‘capitalist’ country. Just because you don’t believe in gravity doesn’t mean you can jump off a cliff and survive.


  10. Jefe : Their take on reality is that having certain narrow sectarian political beliefs is the ‘magic’ key , the only key needed to rationally and efficiently organize and manage a countrys complex economy and public services provided you are very passionate about those ideas . That every thing must be made subordinate to the expression of certain grandiose political values no matter how impractical or misguided . That they can dispense with every other consideration to achieve absolute success in any activity they come to control . That provided they are faithfull to those beleifs they can do no wrong !!


    • I certainly hope that their magic “key” will open a box into which they will all magically disappear! Like Pandora’s box, but in reverse! Pero solo si Dios quiera…


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