Venezuela: The day Chavismo feared has arrived

It's the day Venezuelan opposition finally showed signs of political maturity.

Pre-Chávez, Venezuela was ruled by an oligarchic elite (and that's not an overdose of rhetoric) that never needed to explain themselves to their underlings as they never bothered to include the vast majority in the political franchise. Then along came Chávez and that has now changed forever. Since that time, the reaction from the upper and middle classes has basically been one of the petulant schoolboy stomping his feet in rage that someone dared to steal back that which he had stolen.

However, this post over at oppoblogger Quico's Caracas Chronicles site may just mark the moment when Chávez finally has something to fear from the opposition. A much-needed dose of maturity is shown by Quico as he makes it clear to his fellow oppos (much to the disgust of some of them..check the 100+ comments) that Chávez is not a dictator. In fact, he recognizes something that has been clear to non-rabid outside observers for some time; the rest of the world laughs at an oh-woe-is-me opposition that tries to lump a democratically elected, re-elected and re-re-elected President who has brought social justice to his country with the real dictators of our time (Stalin, Pinochet, Amin, Pol Pot etc etc).

So go read Quico's post, "The Dictatorship Canard", for yourself. It's linked right here. You may or may not agree with the whole thrust and political background of Quico, but that's beside the point. The overriding reason why it makes such a refreshing change from the usual drivel written by the anti-Chávez brigade can be summed up in three words: It is intelligent.

Venezuelan economics and "forgetting" the facts that don't fit your rant

Over at Caracas Chronicles, Quico has today continued his diatribe against the Venezuelan economic policies concerning international currency reserves (IKN picked up on his politically charged but generally excellent post of a couple days ago right here). But today Quico has obviously decided to "forget" some pretty basic economics in his rush to condemn the Vzla gov't and its economics, basically because he's the kind of partisan analyst that hates Chávez so much he could never say anything remotely in favour of the guy. As I said the other day so be it, I'm not my brother's keeper etc, but he does himself a disservice by his error of omission.

So what's the problem? The problem is that Quico picks up on this official MINCI PR and takes issue with a passage thus (his full post linked here):

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"...Most irksomely, the press release parrots the meaningless concept of an "optimal level of foreign currency reserves", which immediately flags it as a work of rank hackistry. For the Nth time, calling any absolute level of reserves "optimal" is simply meaningless. It's a bit like confidently declaring that 2 kg. is the "Optimal Level of Harina Pan reserves.".."

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That, unfortunately for Quico, is simply untrue. In serious economics circles there is a clearly defined concept of optimum foreign currency reserves. I'm not going to get all wonky on you here (those so inclined to dust dry economics can run the names "Garcia and Soto" though Google with keywords like 'currency', 'GDP', 'reserves' etc and have a nice afternoon) but to hit it in simplified bullet points:

• It actually costs a country money to hold currency reserves. This cost is usually defined as local interest rates minus world benchmark interest rates (usually LIBOR). Even in these rocky times that equation is not to be ignored. This cost is more akin to an opportunity cost than real "gotta pay a bill" cost....but a cost is a cost. Period.

• There is always debate about these things, but a consensus among economists revolves around having 10% of a country's GDP available in the reserves to avoid sudden stop shocks etc.

• In the case of Venezuela, the current U$42Bn really is too much according to these accepted parameters. In fact the U$30Bn that will be left once Chávez extracts his $12Bn soon is as close to optimum as possible.

• Or put another way, the cost to Venezuela of holding that extra U$12Bn in reserves would be around U$1Bn annually. That's a significant amount of moolah, folks.

In other words, yer man Quico over there at Caracas Chronicles is telling half-truths and preaching just what the converted want to hear instead of being intellectually rigorous and telling the whole truth. The problem in Venezuela is NOT, repeat NOT the size or non-size of its international currency reserves. The problem in Venezuela (in this case at least) in the amount of money being printed by the Central Bank aka M2. If Quico stuck to that he'd have a decent argument, but until then he's just another anti-Chávez ranter and can be ignored. A pity, really.

Bistromatics, Venezuelan edition

In my ongoing efforts to popularize the late Douglas Adams' stunningly perceptive concept of Bistromatics, my idea was to write a really long and wonky post about the problems Chávez&Co are unleashing upon themselves by tapping the country's international currency reserves to the tune of $12Bn, the money transfer coming up this month.

However there is good news: I've just been given a headsup that Quico over at Caracas Chronicles has just beaten me to it. And now the GREAT news; his post is much easier to understand on the subject than mine would have been, so please go over and have a look for yourself. Here's the link. But before I go, here are a couple of comments on his generally excellent article.

1) Quico is a raging Chávez hater and carries that message in everything he writes. So be it, I'm not my brother's keeper etc.

2) However, all the numbers and charts and stats he uses are, in my view at least, spot on. So Otto sez filter out the dogma, forget the politics on offer and concentrate on the fact that the numbers show Chávez is heading for an economic SNAFU. After all, Venezuela has always been totally addicted to oil and the same problems have shown themselves in any administration that lived through an oil price slump; this isn't something unique to Señor RedShirt.

3) I'd like to add this chart (which I cooked up yesterday) as this is just about the only chart relationship Quico didn't have that I would have used. It shows the Reserves-over-M2 rate compared to the real parallel exchange rate in Venezuela, January 2008 to date. It adds that final light blue spike to show where the reserves ratio predicts the parallel rate once the $12Bn is taken from Central Bank reserves.

You'll note that over the longer term the blue line has acted as a sort of anchor for the more volatile parallel rate. It's not an exact fit though, as other things affect the parallel market that live outside the world of theoretical economics and in the world of reality. For example in the April 2008 to July 2008 period the parallel rate was suppressed by bonds emissions that offered virtual free money for those lucky enough to be on board. Then when it became clear in August that there would be no more bonds delivered to market by Venezuela, the parallel popped back up (and overshot somewhat in my opinion). Then in the last few weeks we've seen extra pressure on the VEF due precisely to the recently announced policy of central bank reserves withdrawal. As the move was widely expected, the speculative pressure was already on the parallel VEF.

Really, this chart is just another way of presenting Quico's chart of the comparison to inflation data, but as the chart here is more pure monetary in nature it might be a better way to play. You be the judge. Anyway, all the above doesn't really stand on its own. To get the full idea of what's going on, check out Quico's really top class post. Here's the link again, just in case. now for that Bistromatics excerpt again.

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Bistromatics was created by Douglas Adams in the "Hitch Hikers Guide to the Galaxy" series. For those unacquainted with this important mathematical theory, here is the definition of the term as culled from the book:

The Bistromatics Drive is a wonderful new method of crossing vast interstellar distances without all that dangerous mucking about with Improbability Factors. Bistromatics Itself is simply a revolutionary new way of understanding the behaviour of numbers. Just as Einstein observed that time was not an absolute but depended on the observer’s movement in space, and that space was not an absolute but depended on the observer’s movement in time, so it is now realized that numbers are not absolute, but depend on the observer’s movement in restaurants.

The first nonabsolute number is the number of people for whom the table is reserved. This will vary during the course of the first three telephone calls to the restaurant, and then bear no apparent relation to the number of people who actually turn up, or to the number of people who subsequently join them after the show/match/party/gig, or to the number of people who leave when they see who else has turned up.

The second nonabsolute number is the given time of arrival, which is now known to be one of the most bizarre of mathematical concepts, a recipriversexcluson, a number whose existence can only be defined as being anything other than itself. In other words the given time of arrival is the one moment in time at which is impossible that any member of the party will arrive. Reciproverexclusons now play a vital part in many branches of maths, including statistics and accountancy and also form the basic equations used to engineer the Somebody Else’s Problem field.

The third and most mysterious piece of nonabsoluteness of all lies in the relationship between the number of items on the check, the cost of each item, the number of people at the table and what they are each prepared to pay for.

Numbers written on restaurant checks within the confines of restaurants do not follow the same mathematical laws as numbers written on any other pieces of paper in any other parts of the Universe….