The thing about having a really crazy economic policy framework

cash-on-the-street-1Economists love to go on and on about “relative price distortions” – one of those inexplicable pieces of jargon that normal people just can’t make sense of.

In fact, it’s just a fancy way of saying “crazy prices.”

Prices that bear no relation to what things are actually worth. Prices divorced from what people would be willing to pay if you just got out of their hair.

All kinds of prices are crazy in Venezuela, but let’s focus on the two craziest ones: the price of dollars and the price of gasoline.

In both cases, it’s trivial to find people willing to pay way, way more than what the government currently charges for them.

We know about the dollar: people would be glad to pay literally a hundred times more bolivars for a dollar than the government will accept for it. That’s nuts! But we also know that every day people in other countries pay several hundred times more for gasoline than the Venezuelan government charges Venezuelans for it.

Those are crazy policies. And crazy here has a specific, technical meaning.

Economists like to note that you seldom find $100 bills lying on the sidewalk. If an opportunity to just pocket something of value presents itself, people take it until the opportunity disappears. After all, refusing to bend down to pick up a Ben Franklin would be really, really crazy.

Well, the Venezuelan government has, for ten years, been perambulating atop sidewalks practically paved with loose $100 bills, never deigning to bend over and pick one up.

People are clamouring, desperate to give the government more bolivars for each of its petrodollars. The government’s not interested. Drivers worldwide would gladly outbid Venezuelan gasoline buyers hundreds of time over for the gas PDVSA sells. The government doesn’t care.

Chavismo flat out refuses to accept extra money people are practically tripping over one another to give it for these scarce, valuable things. It prefers to just crank up the BCV printing press, creating more and more bolivars and fuelling more and more inflation.

Given that that’s its basic policy stance, it’s very little surprise that the government is flat broke. If you went around refusing free money all day, you’d very likely be “broke” too.

But you’d be broke in a very peculiar, very specific way. You’d be broke in a way that looks almost voluntary: you’d have no money, granted. But you’d be surrounded by very low-effort avenues to stop being broke, too.

It is, at any rate, a very different kind of “broke” than the way Greece – a country with tons of debt, no money and no prospect of getting any money – is broke. Venezuela is in a very different place. Greece is insolvent, we’re illiquid.

It’s true, we don’t have enough money in our pocket right now to pay our debts, but no one in his or her right mind would conclude that we’re fundamentally unable to pay, except in the very strange sense that our mental health problem may now be so severe that it impossible to imagine us ever again bending over and picking up some Ben Franklins.

This, I think, is the way to understand the FRod/Hausmann argument over the solvency of the Venezuelan state. And it’s why I think FRod is basically right and Hausmann basically wrong on it.

What FRod is arguing is that having a government so crazy that it won’t take free money certainly constitutes a crisis. But it’s a peculiar kind of crisis, and one that rather obviously doubles as an opportunity.

Precisely because the underlying policy stance is so crazy, the problems it creates are ridiculously easy to correct.

You don’t even have to do that much to correct them, really. You just have to stop turning away the people desperate to give you extra money for the things you sell.

Hausmann’s position, by contrast, seems relatively weak. “Whaaatttt?! haven’t you noticed your pockets are totally empty?! You’re broke! You better hope the IMF bails you out cuz there’s no way anyone else is going to think about lending you a penny!”

That is the non-sequitur, as far as I’m concerned.

It’s true, of course, that Venezuela is now so indebted that even if it somehow snapped out of its crazy-spell it may struggle to scoop up enough $100s fast enough to pay all the bills due in the next couple of years. But if it did start scooping up bills, it would become obvious to everyone that the country’s fundamentally solvent. It sits on top of an enormous lake of oil, and its debt-profile, while no bed of roses, is not terrible. The bulk of our debt matures only in 2027, after all.

FRod’s point seems to me so vanilla as to be almost uncontroversial: a sanely-governed Venezuela would probably look like a pretty reasonable credit risk to an outside banker. In fact, it’s a testament to the scale of the insanity in the current economic policy mix that it doesn’t.

But Venezuela paper will never look like anything other than a kamikaze run to investors so long as the government continues to make it a badge of honor to refuse to accept even a penny over $1 in return for a $100 bill.

45 thoughts on “The thing about having a really crazy economic policy framework

  1. Again, you are ignoring that right now, if we were to fix the relative prices, we still owe a ton of those dollars to foreigners. We would still need financing. And on that – both of them agree! Their disagreement is that FRod thinks we can do just fine by borrowing from the markets, while Hausmann basically says the markets are closed for us.

    I think you’re mischaracterizing F-Rod’s position here. Because if you’re illiquid, you’re insolvent in the short term.


  2. F-Rod: “Creo que si se realizan los ajustes económicos, no tendría que vender los activos sino hacer emisiones de deuda a un costo razonable que le permita pagar los costos de mantenimiento, para llevar a cabo la estabilización económica asociada a esos ajustes”.

    O sea, la receta de F-Rod es = Ajustes + préstamos de la banca.

    Hausmann dice: Ajustes + FMI.


    • Claro, but I do address this:

      It’s true, of course, that Venezuela is now so indebted that even if it somehow snapped out of its crazy-spell it may struggle to scoop up enough $100s fast enough to pay all the bills due in the next couple of years. But if it did start scooping up bills, it would become obvious to everyone that the country’s fundamentally solvent. It sits on top of an enormous lake of oil, and its debt-profile, while no bed of roses, is not terrible. The bulk of our debt matures only in 2027, after all.”


      • That enormous Lake of oil is not so easy to turn into $100 bills, and for that a lot of $100 bills are needed in advance.


        • thanks for pointing that out but thats the kind of little detail that people tend to gloss over and that´s really at the crux of the viability of the proposed fix .!!


      • The issue as I see it is tied to this. A liquidity crisis is in the offing, it is just a matter of when. It can be staged off somewhat by eliminating the subsidies, but then, do it all at once, and you will have anarchy. Do it gradually to avert a political and humanitarian crisis, and you have the limitation of your available liquidity.

        I think this is the Gordian knot. What to cut and when and where, while at the same time where to borrow to stay afloat? I believe the answer is beyond the capacity of this government (and a good many others).

        I also think, as repulsive as it might seem, the IMF might be the better option, since what they want will have to be done anyway and the savings of the basis points will make a difference on cash flows.


    • I mean, the IMF is a lender of last resort: where you go when it’s clear no one else will lend to you. But if Venezuela fixed its relative price problem, it’s very far from clear that no one else would lend to it. In fact, if Venezuela fixed its relative price problem, it would look like a relatively good credit risk in a lot of ways.


      • Yes, and that’s the nub of the debate. Hausmann seems to think that Venezuela would be shut out of the markets even if it miraculously fixed its relative pricing problems. F-Rod does not.

        Which, by the way, is like having a debate on the exact color of the hairs inside a unicorn’s ass. I mean, Venezuela is *not* going to get its relative prices right any time soon, so why debate who will lend us money if it suddenly did?

        Still, fun to see them trading barbs.


  3. So are you saying that keeping the subsidy and Fx controls is in a way the collateral that makes debtors sleep better at night because they know it’s a simple solution to the problem of I don’t have money in the bank? Also, people are willing to pay 100x more for a dollar but if I suddenly have to pay 100x more for gas will I be willing to pay 100x or 10x for the dollar? I guess my question is will the people have enough money to buy those goods at the 100x rate they want it now when the decision is made and the debt is effectively moved over to them? Both serious and naive questions, thanks.


    • Nah, the opposite: I’m saying that the policy posture it’s SO crazy it gives creditors the heebie-jeebies. It’s as though you’ve lent $10,000 to the neighborhood heiress and then you find out she lives alone with 173 cats and hasn’t bathed since last March. Learn those things about her and you might legitimately start to worry about whether you’ll get paid back, even though you know she *could* pay you back if she wanted to.


      • I see. A quantitative expression of which could be the riesgo país for example. But does FRod or anyone think that riesgo país deterioration is mitigated by having a subsidy in lieu of cash? I probably got it wrong but find it enlightening if that’s the case. Enlightening in a non-conspiracist way.


  4. This whole debate is hypothetical. This government is incapable of making the corrections needed. They will not make any substantial economic policy reforms so long as any reserves remain to spend.


  5. Sadly, there’s excellent historical precedent pointing that no, we will not stop and pick those pesky bills.


  6. Without major political/institutional change (unlikely until Venezuelan populism is overthrown by its “Pueblo”), there will be no substantive macro-economic change, nor private lenders willing to lend to the Country. IF/when there were such change, the gradual lowering of the gasoline/Petro-Caribe subsidies, coupled with massive investment needed in the Petroleum sector in a low oil price environment, with an impoverished/non-productive populace/private sector, coupled with inevitable/omnipresent/traditional corruption, will not bring a quck fix to Venezuela’s economic destruction.


  7. There’s so much more wrong with the economy than just the exchange rates and gasoline subsidy. Besides the oil sector (which itself is in a shambles) all other sectors of the economy has been decimated including agriculture so now so much goods and food has to be imported which amounts to the country hemorrhaging money that does not return, foreign investments and the people who would run companies that would receive it have scared off, there’s a brain drain of educated goal oriented people fleeing the country to seek greener pastures. There are social issues such as class hatred, and the welfare system (misiones and Mercal/PDVAL) which needs to be made more effective and targeted to make sure it gets to the people that really need it. I’m sure I’m missing a lot. This country is a disaster in so many ways the reconstruction is going to take a long time, that is if people can accurately diagnose the problems AND find solutions AND implement them. Seeing as how easily the Venezuelan people followed the pied piper (Chávez) into the swamp of financial ruin while watching democracy get raped I’m not optimistic.


    • Oh there’s tons wrong with the economy.

      But the subject here isn’t the economy in general, it’s the state’s solvency in particular.

      And granted there’s tons that’s wrong with that as well!

      But even just picking the very lowest hanging fruit would take you a surprisingly long ways.


      • solvent |ˈsälvənt|
        having assets in excess of liabilities; able to pay one’s debts

        The country is hemorrhaging money due to asinine policies and corruption. My suspicion is until the other problems are fixed, any attempt to balance the books by improving the supply side will only be lost into a system that was failing when oil was $100 a barrel. Don’t you think if this government had more money at it’s disposal the politicians/military/enchufados would only find even dumber ways to spend it and more ingenious ways to steal it?

        That the government didn’t protect and nurture the oil industry which is the only thing propping it up demonstrates the stupidity of someone who would kill the proverbial golden goose.

        Like a low income lottery winner who a year after winning the big jackpot is broke, this government didn’t realize that running an oil industry and running a country means you have to be sensible, cautious and conservative. Instead it spent foolishly like the money couldn’t end. Here we are (16 years?) later and all I have is this stupid (Chávez eyes) tee shirt.


        • Yes but the reason a lot of the internal industries have collapsed is because of the currency mess and price fixing. Get rid of those problems and jobs will return to Venezuela.


  8. On the brain drain subject understand that some companies are implementing a 3 year bonus system to keep good people from leaving them to emigrate abroad , the bonus is in dollars , spread for a 3 year period and may amount to 8.000 $ . Some transnationals find their people are offered jobs by affiliates abroad who have had a chance of learning of some venezuelan employee of talent . The companies hope that whatever problems they face now sometime or another normalcy will return and businesses already present in the market will be the first to benefit from a normalized situation.


  9. So you are telling Maduro and Co that they should eliminate the crazy controls and therefore el pueblo mesmo is going to finally realize that their minimum wage really is USD10/month and that they are basically dirt poor?

    I think that you can see why we keep on the same road to hell. Why nobody has taken Maduro down… the solution is very very painful buddy, everyday that passes the pain grows.

    If I were Maduro I would say “Leopoldo, tu que me criticas, vente para aca y a partir de hoy eres el presidente de Venezuela, yo me voy a la Luna” Agarro mi maletas y me voy pal carajo.


    • “Why nobody has taken Maduro down… ”

      Because the objective (predominantly of the Cubans) is not a sound, functioning economy. But rather, the reverse.


      • Well, the objective is Populist freaking economy, a disguised Dictatorship, where they can Steal a lot, and barely get by, repressing most people who still are not enchufados.

        Stealing money and power is the Objective and the reason for All.

        All of the illustrious “Economists” here with brilliant Macro-Economic reform proposals seem to forget that..


    • Dreamer: “If I were Maduro I would say “Leopoldo, tu que me criticas, vente para aca y a partir de hoy eres el presidente de Venezuela, yo me voy a la Luna” Agarro mi maletas y me voy pal carajo.”


      • My point is that it is more probable that Maduro steps down than that Maduro will tell Venezuela that the minimum wage is USD10/month (eliminating FX controls) and that to fill a tank of a corolla you will have to pay USD30ish (putting the price of gas at international levels).


      • El peo es que maburro no pone los dos cascos fuera de chimpanflores sin que le metan los ganchos, igual que TODO el resto de la cúpula podrida roja.

        ESE, es el peo existencial del chavismo, saben lo que les pasará, no porque sea una venganza, si no porque saben la CONSECUENCIA LÓGICA de lo que han hecho, tienen tantos crímenes en sus prontuarios que están todos concientes que desde el primer minuto que dejen de ser gobierno, no volverán a pisar fuera de una celda por lo menos en 20 años cada uno de ellos.


  10. again, this is not a bad or crazy government but a puppet regime of a foreign power bent on maximizing its rent from its colony, short term, to the last cent, and then leave it to its fate.

    to comment on Rational policy making is key to state the assumptions on whose policies we are discussion in this case, its is not the Venezuelan government, or state for that matter the one making the decisions imo, rather the cuban nomenclature and a growing list of other national and non-national players standing to benefit from Venezuelan’s demise (starting with the local boliburgueses and militares)


  11. You could have Hausmann, Rodriguez, Nagel, Toro, and my favorite, Singapore’s Lee Kuan Yew as President, VP, Head of the “parliament” and Kuan Yew with Dr Albert Winsemius as Ministros de Economia in Venezuela starting today for the next 10 years.

    Kleptozuela would still be a violent mess, deeply dysfunctional and heavily in debt.

    That’s not to undermine their Economic brilliance, political wisdom and honorable best intentions of course. It’s because they would still have to deal with whatever’s left of the Deeply putrefied nation.

    They would have to deal with the MUD-crap people, for starters.. Chavsitas-light included, “Quitate-tu-pa’poneme-yo” opportunistic thugs, adecos/copeyanos, deeply corrupt, as always.

    They would have to deal with even more anarchy and record-breaking urban violence, and would have to use the Military, also Deeply, deeply corrupt, to police the corrupt police, and then the Criminal Gangs on every city.

    Meanwhile, as they attempt to avoid International Default with low oil prices, they would also have to rebuild, almost from scratch, every somewhat “democratic” institution we once had, every basic Ministry, every public organization from the ground up, to achieve minimal Power Separation again, and some sense of Justice or accountability instead of total impunity.

    Plus they would have to deal with millions of ex-chavistas, who will get REALLY really pissed off when they see Gas prices raised, and even some Taxation re-appear. Tough economic measures, imposed by the IMF or not, would mean very tough measures for a “pueblo-mal-acostumbrado” to swallow.

    Not to mention dealing with the 3 Million of Corrupt Chavista enchufados today, who would have to be re-enchufados, or else..

    Unfortunately ,no “democratic” government can do all that, at the present stage of the game in Murderzuela. It would require some other form of authoritarian, yet benevolent, constructive, corrective Regime.

    Where’s a horrible, despicable Perez Jimenez and then a Tony Tan Keng Yam when you really need them?


    • “Where’s a horrible, despicable Perez Jimenez and then a Tony Tan Keng Yam when you really need them?”

      People voted for one 16 years ago, and look how it ended…


        • Dictatorship is dictatorship, the only ones that are gonna complain are those who are in the BAD side of the dictatorship.


  12. This makes sense.

    And at a certain point (after the election?), they will declare martial law and start picking up those $100 bills.

    What would really unsettle creditors would be signs of a popular revolutionary movement developing that had a serious chance of unseating this regime. Wait a minute….


  13. All of this theoretical, somewhat intricate “Economics” talk is for semi-civilized normal countries.

    Utterly useless in Guisozuela’s diguised dictatorship, a simple Den of Thieves.

    To fix that huge mess, you have to start by not stealing 12 out of every 9 Bolivars or Dollars, by stealing less than 12 out 9 real oil barrels.

    Stealing just 8 out 10 barrels sold would be good enough

    But that would take a completely different Regime in power.

    Only after that changes, we can begin talking Economics, Int’l finance and all those nice, elaborate plans they taught us in College.

    If we like to waste time, and play Economists or Finance wizards, might as well contemplate those theories for Cuba, Libya, Nigeria or North Korea right now.


  14. And on this glorious 14th July, 2015, it seems that Mr. Toro has finally got it.

    The music will keep playing and the situation is sustainable as a large portion of Venezuelans have very low standards. This will not change overnight, more so as the country is embarked on a path towards lower standards and not the other way around. Sad but true. This, coupled with the opposition’s lack of ability to execute anything beyond monthly e-mail newsletters, makes the situation even worse.

    In the meantime, clip clip on interest payments and go relax in Greece (double compounding effect!).


    • Sure Lorenzo. I guess then you missed out on 13 years of fat coupon payments (and will keep to do so). Let me know when you find that article so I can exit all Venny/PDVSA bonds.


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