Sunday, August 30, 2015

Printing Your Way Out of Economic Troubles...

from Bloomberg
Venezuela seems to be hovering on the edge of tipping into hyperinflation. Or perhaps it has already fallen into the abyss. Given the paucity of official data -- the none-too-believable official figures were last published in February -- it's a little hard to tell. The best guess we have at the value of a Venezuelan bolivar comes from the Colombian village of Cucuta, where people go to buy currency so they can smuggle subsidized fuel and other price-controlled goods out of Venezuela. As The Economist notes: "Transactions are few; the dollar rate is calculated indirectly, from the value of the Colombian peso. The result is erratic, but more realistic than the three official rates."

Using those rates, economist Steve Hanke recently told Bloomberg that annual cost-of-living increases are running at about 722 percent. To put that in some perspective, it means that a $400 monthly grocery bill would climb to $2,888 in a year. That may not approach the legendary status of Hungary's postwar inflation, which reached 41.9 quadrillion percent in a single month, but it's devastating for savers, or for people like pensioners whose incomes consist of fixed payments. It's also pretty bad for the economy.

It's a bit of a mystery why this is happening. No, right, don't tell me: The government is printing too much money! Indeed. As Milton Friedman famously said, "Inflation is always and everywhere a monetary phenomenon." When too much money is chasing too few goods, prices rise. And the most common source of "too much money" is government printing presses.

But I'm not asking for the mechanism; I'm asking for the reason. Why is the Venezuelan government resorting to the printing press?

I know you've got an answer to that, too. Seigniorage! That's the fancy name for the profit a government makes by printing bills and minting coins. If you can buy more goods and services with the cash you made than it cost you to make it, you have essentially collected a stealthy sort of tax on the people who take the money from you and give you valuable stuff in exchange.

In general, seigniorage revenue is trivial -- indeed, it costs the U.S. government more to make nickels and pennies than the coins themselves are worth. But even with higher-value bills, the revenues pale in comparison to, say, the income tax. Estimates are hard to come by, but a 1992 analysis by the Federal Reserve put the value of seigniorage to the Treasury at about 1.6 percent of real federal on-budget expenditure. It's not nothing, but it's not going to keep civil servants in pensions, either. And the U.S. enjoys an unusual amount of seigniorage revenue because dollars are in heavy demand among citizens of unstable countries and people who want to conduct illegal transactions in cash.

Governments can try to jack up the amount of seigniorage revenue by stealthily inflating the currency. Basically, they exploit an information asymmetry between them and the people they trade the money to: The government knows how much money there is, and its citizens don't. So they'll probably accept fewer units of currency than they would if they knew the government was going to print extra money and thus cause prices to rise again.

But this is a terrible way to make money, which is why governments normally don't resort to this one clever trick for raising government spending without raising taxes. The problem is that inflation expectations rise pretty rapidly to compensate, and then the government needs to print even more money to outrace its newly suspicious trading partners.

The core thing to understand about inflation as a policy tool is that in general, steady-state inflation doesn't do you any good; what you need is accelerating inflation. A little bit of inflation is actually OK -- it allows the economy to naturally cushion economic shocks that would otherwise lead to unemployment. In the dark ages of economics, some people got the idea that if a little bit of inflation was good, more must be even better: Set the printing presses to "full stun" and enjoy perpetually higher economic growth. (You still see this folk economics circulating on the Internet from time to time.) But this doesn't work. People start to expect the inflation, and the economy returns to its natural level of output, except that everyone's savings are now worth less. To get more growth, you have to inflate even faster than you did before.

Unfortunately, once inflation starts to accelerate, it's kind of hard to stop because people also start pricing the acceleration into their expectations. Hyperinflation has all sorts of bad knock-on effects: It hurts your capital base and makes people unwilling to plan for the future because they have no idea what their money will be worth. But the supreme irony is that after a certain point, the government actually starts losing money. You've probably heard of the much-maligned Laffer Curve, which was used to support unrealistically optimistic estimates of the revenue-generating effects of Reagan-era tax cuts. But it actually does a pretty good job describing what happens to government revenues during hyperinflation: First they go up, but then they go down, down, down, and the government stops being able to buy goods and services because people don't have any use for the money, except maybe to economize on the Kleenex they can no longer afford to buy.

These are not arcane secrets, known only to a select few in the economics community. I guarantee that there are sober analysts in the Venezuelan government who know exactly where this is headed. Why, then, have they let things get to a point where they are preparing to issue bigger bills so that people won't have to carry around a sack of money every time they want to run out for a quart of milk?

Part of the answer is that in the early days, inflating does make the government a little more money, and the point at which it starts to lose money is also the point at which the freight train is traveling 120 miles an hour, and it has a choice between slamming on the brakes and killing everyone instantly or waiting to hurtle over the cliff. Embezzlers and accounting frauds often start this way -- they fudge things just a little to cover a temporary shortfall. Only the underlying problem doesn't go away, and they need to fudge even more the next quarter to cover up both the gap they have now and the gap they covered up last quarter. They tend to be uncovered when the gap is so big that it can no longer be fudged. This is what happened to Bernie Madoff when the market collapsed.

The larger answer is that this is the end game of Chavismo. For about a decade, some sectors of the left hoped that Hugo Chavez represented an alternative to the neoliberal consensus on economic policy. Every time I wrote that Chavez was in fact direly mismanaging the economy, diverting investment funds that were needed to maintain oil output into social spending, I knew that I could look forward to receiving angry e-mails and comments accusing me of trying to sabotage his achievements for the benefit of my corporatist paymaster. And in fairness (though without minimizing his appalling authoritarianism), those policies undoubtedly did improve the lives of some incredibly poor people.

The problem was that the money he was using was, essentially, the nation's seed corn. Venezuelan crude oil is relatively expensive to extract and refine and required a high level of investment just to keep production level. As long as oil prices were booming, this policy wasn't too costly because the increase offset production losses. But this suffered from the same acceleration problem that we discussed earlier: The more production fell, the more the country needed prices to rise to offset it. Between 1996 and 2001, Venezuela was producing more than 3 million barrels a day. It is now producing about 2.7 million barrels a day. In real terms, the price of a barrel of oil is barely higher than it was in August 2000, but Venezuela is producing something like 700,000 fewer barrels each day. Policies that looked great on the way up -- more revenue and more social spending -- became disastrous on the way down as the population was hit with the double whammy of lower production and lower prices.

This was predictable. Indeed, many people predicted it, including me, though I was just channeling smarter and better-informed people, not displaying any particular sagacity. But the Venezuelan government either didn't listen to the predictions or didn't believe them. Now falling oil prices are crushing government revenues at exactly the time the country most needs money to help the people who are suffering great misery as the oil cash drains out of their economy. In the beginning, printing money may have looked like the best of a lot of bad options. By the time it became clear that the country was not fudging its way out of a temporary hole, but making a bad situation worse, it was committed to a course that is extremely painful to reverse.

Venezuela may be able to pull back from the edge, though it can only do so with great pain. Or it may end up in a hyperinflationary spiral, which will ultimately mean even greater pain. I don't envy the decisions it will have to make. Or the millions of Venezuelan people who will have to live with them.

Death by Line

from The Telegraph

An 80-year-old Venezuelan woman died, possibly from trampling, in a scrum outside a state supermarket selling subsidized goods, the opposition and media said on Friday.

The melee at the store in Sabaneta, the birthplace of former Venezuelan leader Hugo Chavez, was the latest such incident in the South American nation where economic hardship and food shortages are creating long queues and scuffles.

The opposition Democratic Unity coalition said Maria Aguirre died and another 75 people were injured - including five security officials - in chaotic scenes when National Guard troops sought to control a 5,000-strong crowd with teargas.

"Due to the shortage of food ... the desperation is enormous," local opposition politician Andres Camejo said, according to the coalition's website. It published a photo of an elderly woman's body lying inert on a concrete floor.

Camejo said thieves had also attacked the crowd, members of which were seeking to buy cheap food on offer at an outlet of the state's Mercal supermarket chain in Barinas state.

There was no confirmation of the incident by authorities.

El Universal newspaper reported that Aguirre was knocked to the ground during jostling in the crowd, while the pro-opposition El Nacional said she was crushed in a stampede.

Another person was killed and dozens detained following looting of supermarkets in Venezuela's southeastern city of Ciudad Guayana earlier this month.

President Nicolas Maduro accuses opponents of deliberately stirring up trouble, exaggerating incidents, and sabotaging the economy to try and bring down his socialist government.

Critics, though, say incidents of unrest are symptoms of the increasing hardships Venezuela's 29 million people are facing due to a failed state-led economic model. Low oil prices are exacerbating economic tensions in the OPEC nation.

Wednesday, August 19, 2015

Venezuela's Medical System Plays Possum

from Breitbart
Newly-minted parents at Venezuela’s Dr. Luis Razetti Hospital in Anzoátegui are denouncing its maternity ward for killing 17 babies in a week, the victims of sanitation so poor the ward is overtly inhabited by a swarm of opossums.

Parents say that ten babies were found dead between Saturday and Sunday morning, with another seven dying between Monday and Friday of the week before. All the parents were told their children died from a “bacterial infection”; most of the victims were premature, having been on average seven months into their gestation.

The ninth floor of the hospital, Venezuelan newspapers report, is currently suffering a major infestation of opossums, who appear to be spreading dangerous bacteria throughout the ward. One mother noted that the bathrooms on the ninth floor are out of service, and pregnant women and women who have recently given birth are forced to walk to the fifth floor to use the bathroom.

El Universal, the nation’s largest newspaper, reports that deaths of newborns at the hospital are common. One set of parents told the newspaper that their child had died on a Thursday, but they were not told until Friday. Others who have used the hospital’s services tell El Universal that the situation resembles that of a year ago, when 15 newborns died of an infection and became a rallying cry for the opposition against the socialist government’s recurring inability to provide adequate medical care.

The source of these infections seem to be opossums, who roam the hospital ward freely. One relative of a dead newborn told El Tiempo that, upon challenging hospital officials regarding the opossums, she was told “the appearance of possums is something normal in the hospital; there is an invasion of this type of rodent, but there is no cause for alarm.”

The report in El Universal finds that the reason opossums are so common, says one employee at the hospital, is that sanitation employees have run out of cleaning liquids and necessary maintenance items, leaving them impotent in the face of the filth consuming the hospital.

Earlier on Tuesday, El Tiempo reported that the Anzoátegui state government’s Legislative Council will be investigating the deaths. The latest report indicates that up to 50 newborns have died in the hospital in the past month, all of a similar infection.

Venezuela’s medical situation is dire, and has been dire for years. Doctors warned in 2013, during the tenure of dictator Hugo Chávez, that nearly every kind of necessary medical supply was running out, from needles to bandages to drugs. By the next year, doctors were reporting a surge in the number of amputations at hospitals, as those injured began developing infections that doctors did not have sufficient antibiotics to suppress, and thus resorted to removing limbs.

At the time, reports indicated that 70 percent of Venezuelan pharmacies were struggling to keep stocked with basic drugs; in Caracas, the capital, that number was slightly less, 60 percent. The Venezuelan government, which controls all medical care in the country, at the time owed $4 billion to drug companies and had no way of paying the debt back, leaving pharmacies understocked.

Venezuela relies heavily on the Cuban “slave doctor” trade for its medical care, outsourcing medical jobs to doctors who are paid a meager living stipend to work long hours in Venezuelan hospitals. Even this aspect of the Venezuelan medical system is collapsing, as dozens of Cuban doctors use their assignments in Venezuela as launching pads to defect to the United States, leaving Venezuela with a shortage of doctors.

Thursday, August 13, 2015

The Richest Venezuelan...

On more than one occasion the late Venezuelan president Hugo Chávez declared that being rich is bad, often adding “Rich people attack me for saying that, but I claim it is bad.”

His favorite daughter, however, may disagree.

According to the Miami-based Diario Las América, Venezuelan media sources will soon publish materials showing that María Gabriela Chávez has bank accounts in the U.S. and Andorra with assets totaling nearly $4.2 billion.

If the claim is true, Chávez’s daughter would be the richest person in Venezuela, a country with industrialists like telecommunications magnate Gustavo Cisneros (worth $3.6 billion, according to Forbes) and food and beverage mogul Lorenzo Mendoza ($2.7 billion).

Those figures stand in stark contrast to the overall state of the Venezuelan economy, which has been plagued by the collapse of oil prices, spiraling inflation rates caused by untenable fiscal policies and massive shortages of the most basic commodities, such as food, diapers and beauty products.

María Gabriela, 35, is the second-oldest of Chávez’s children, and she was the one who seemed to inherit his political mantle. After his 2002 divorce, she stepped into the ceremonial role of First Lady of Venezuela, accompanying her father on state visits.

After his death in 2013, she maintained warm relations with heads of state including Cuba’s Fidel Castro and Argentine president Cristina Fernández de Kirchner, and there have been suggestions that she will mount a campaign to become president after Nicolás Maduro steps down as president.

Earlier this year, Maduro named María Gabriela a deputy permanent Venezuelan representative to the United Nations.

Although the scope of her alleged wealth is much higher, allegations of her being rich aren’t entirely new.

Last July, Venezuelan outlets reported that she was involved in a scheme that favored an Argentinean rice company, Bioart, by importing 37,000 tons of greatly overpriced rice to Venezuela – a deal that reportedly contributed $15 million to her personal accounts.

Shortly after the allegation surfaced, María Gabriela posted to her Instagram account a note to her late father saying, “They speak about millions, about inheritance, about riches … and the think they insult us. They’re such simple beings that they have no inkling about the bigger riches that you always gave me and that you left me.”

In September of 2014, according to La Tribuna, the Cuban-American television journalist María Elvira Salazar showed on the air a receipt purported to be from a U.S. bank account in María Gabriela’s name that held nearly $737 million. The address on the account was that of the Venezuelan consulate in New York City.

The Chavista website claimed the receipt was “a fake from a fictitious bank.”

Tuesday, August 11, 2015

Election Rigging - Chavista Style

from the National Interest
Each time there’s an election in Venezuela, the “Chavista” regime performs a weird type of geopolitical striptease, gradually revealing to the world its most-intimate parts. The result is to repel, rather than seduce.

The regime headed by Nicolás Maduro is doing it again in anticipation of the upcoming parliamentary elections, which will take place in early December.

If the election results were to reflect the advantage the opposition now enjoys in popular support, it would constitute a major turning point for that country. But that’s unlikely.

The comptroller-general, who is supposed to represent the citizens’ interests, but instead is a lackey of the president, has barred key opposition leaders from running for office. Among the disqualified candidates are political prisoner Leopoldo López, María Corina Machado, who was expelled from the National Assembly (the legislature) a couple of years ago, two former mayors—Daniel Ceballos and Vincenzo Scarano—and Pablo Pérez, the governor of the oil-rich state of Zulia. They are all facing trumped-up charges and will not be able to participate in elections for years.

The government also has changed the election rules, imposing an electoral quota for women, which will disqualify other candidates. The quota was announced one day after the opposition, which had formed a united coalition, made public its list of candidates in most assembly districts—all of whom had won credible primary elections. The regime doesn’t want any part of such a contest.

The Maduro government also has turned down offers by several international organizations to send election observers. Maduro could not have marked his territory more clearly: “Venezuela will not be monitored by anyone.”

Diosdado Cabello, the National Assembly president who has been linked to drug trafficking, showed his contempt for such offers by throwing a letter from the president of the European Parliament, Martin Schulz, in the trashcan.

Elías Jaua, Venezuela’s minister of foreign affairs, has called the secretary-general of the Organization of American States (OAS), Luis Almagro, “a traitor” and “an enemy of Venezuela” for meeting opposition leader Henrique Capriles, who had traveled to Washington to request OAS observers.

In a preemptive move against Spain, which also has offered election assistance, Maduro launched a personal attack on Prime Minister Mariano Rajoy for his support of the EU’s tough rescue package for Greece, calling him a “hitman” and a “thug.” Almagro, who Venezuela had supported earlier this year when he ran for the OAS post, was called even worse.

Maduro and his cronies in the National Assembly know two things. First, they know they will lose a free election. Datanálisis, a respected polling organization, has predicted that the opposition likely will win twice as many assembly seats as the “Chavistas” in a free election. Maduro also knows, however, that the international community can’t do more than it already has to assure such an election.

How the Venezuelan government operates is no secret. It has been exposed and denounced by virtually every legitimate human- and political-rights organization that exists, from the UN Human Rights Council’s Working Group on Arbitrary Detention and the Inter-American Human Rights Commission to Human Rights Watch—all to no avail.

It hasn’t helped because Maduro’s simple strategy—the same strategy used by his long-time mentor, the late Hugo Chavez—is to defy the world at all cost, with help from Cuba, which knows a thing or two about political longevity.

Venezuela’s election, therefore, should not be seen as a decisive moment in the struggle for freedom. The outcome is being rigged even as I write this.

Nevertheless, it is an election worth fighting, so long as the opposition and the international community understand that it is an important step in the long march towards liberty.

Friday, August 7, 2015

Colas y Culebras

from Reuters
CARACAS (Reuters) - Venezuelan supermarkets are increasingly being targeted by looters as swollen lines and prolonged food shortages spark frustration in the OPEC nation struggling with an economic crisis.

Shoppers routinely spend hours in lines to buy consumer staples ranging from corn flour to laundry soap, turning lines into venues for shoving matches and now more frequent attempts to plunder shops.

The economic crisis has hit President Nicolas Maduro's approval ratings and raised tension levels in the country.

Fifty-six incidents of looting and 76 looting attempts took place in the first half of 2015, according local NGO Venezuelan Observatory of Social Conflict, which based the figures on media reports and testimony of observers around the country.

On Sunday, a small crowd in the western city of San Cristobal pushed its way into the government-run Bicentenario supermarket to grab products after it had closed, leaving staff scratched and bruised, according to store manager Edward Perez.

"As we were closing, a group of 20 people unexpectedly started shouting insults at the government and the workers," said Perez in a telephone interview.

Several looters were arrested after the fracas, which Perez blamed on "ultra-right-wing sectors of the opposition" seeking to sow violence.

Last Friday, one man was killed and 60 were arrested in Ciudad Guayana in southern Venezuela after shops were looted.

The government did not respond to a request for comment on the lootings but Maduro calls the shortages and the unrest a product of an opposition-led "economic war".

More frequent than these serious events are minor melees that ensue when delivery trucks arrive at stores carrying prized products such as chicken or milk.

But the combination of limited official information and exaggerated rumors propagated via Twitter often makes it difficult to distinguish between the two.


Lines have been noticeably longer since the start of the year, and have been especially tense since last Friday's incident in Ciudad Guayana.

"There's no organization, they treat you like an animal, they don't respect anything," said Carmen Neskowi, 49, who identified her profession as "standing in line," in a queue outside a Caracas supermarket. "It's an insult."

The problems, however, have not spurred a broader wave of protests like those led by the opposition in early 2014 that left 43 people dead.

Supporters of the ruling Socialist Party note that the network of subsidized state-run grocery stores created by late president Hugo Chavez and financed by plentiful oil revenue helped reduce poverty and hunger during his 1999-2013 rule.

But the combination of dysfunctional currency controls, which have limited Venezuela's capacity to import, and the end of a decade-long oil boom has left Maduro's government strapped for cash and struggling to maintain the largesse.

According to polls, his party is expected to do poorly in legislative elections later this year, its support hit by high inflation, the currency's collapse and food shortages.

Local food producers ranging from neighborhood bakeries to an industrial pasta maker have halted or slowed operations for lack of raw materials or machine parts.

Obtaining low-cost food and medicine, once the hallmark of the Chavez era, has become a daily struggle.

Lines are increasingly filled with smugglers who buy subsidized goods and resell them at a profit on the black market or in neighboring Colombia, generating tension between resellers and those trying to stock their own kitchens.

Josefa Bracho, a 70-year-old teacher in the central city of Barquisimeto, vows not to stand in any more supermarket lines. She was slashed in the thigh with a scalpel after a dispute in a line with women she believed were smugglers.

"We'd been in line for almost four hours when three women got in front of me," said Bracho in a telephone interview.

"I said 'What are you doing? Why are you cutting in line?' Later one came by and cut my leg ... Standing in line means putting my life in danger."