viernes, 9 de enero de 2004

One of the latest posts on Francisco Toro's blog.

Caracas Chronicles: Note on the latest deranged Chavez plan…
The president's plainly unconstitutional request for the Central Bank to hand over “just one little billion” in foreign reserves lays bare, yet again, his economic obscurantism, not to mention his criminal tendencies. I mean, this is no longer just about stupid policy: this is actually theft.

Yes, yes, I know...I shouldn't even blog about it. These types of topics tend to make a sure cure for insomnia. It's the kind of story only bankers and economists seem to get worked up about: discussing the details heatedly in a kind of secret code only they understand. Most people can't start to make heads or tails of what's at stake.

But it's important, really important: fantastic sums are at stake. We're talking about the outright theft of a sum roughly 70 times larger than the $16 million Carlos Andres Perez was impeached for misappropriating!

For the non-economically minded, I'll try to make it as painless as possible:

Imagine an economy where the currency is the wristwatch.* Twice a month, you're paid your salary in a certain number of watches. You go to the store, do your groceries, and at the check-out counter you hand over some of your watches to pay. The system has been in place for so long that it's seen as natural by everyone in the society.

However, there are some fairly obvious drawbacks: people are forced to walk around with little bundles of watches to spend, and making change is hard – what good is 0.25 of a watch?

Seeing these difficulties, a bright young technocrat proposes an idea. Why not set up a central repository for the watches - call it the Watch Bank - and have that new institution issue a voucher for each watch a citizen decided to store there. Citizens would consign their watches, and thereafter use the more convenient vouchers for day to day transactions.

Vouchers could be issued for multiple watches, coins worth fractions of a watch could be made available to help with making change, the voucher system would be far more convenient for everyone involved. And, of course, at any time any citizen could back to the Watch Bank and redeem his vouchers for the number of watches they stand for.

Impressed, the government implements this proposal, and the new voucher economy is launched. People like the new system much better: it’s just much less of a hassle than carrying all those watches around all the time.

In time, the country’s constitution is altered to make the role of the Watch Bank more explicit. The Bank, clearly, must be a public sector, not-for-profit institution. Trust in the Bank’s vouchers will become the cornerstone of the financial system’s stability, so preserving their value will be established as the Watch Bank's main goal. Our hypothetical constitution might read (in an Art. 318), “the fundamental purpose of the Watch Bank of Venezuela is to achieve price stability and preserve the value, in Venezuela and abroad, of its vouchers.”

In particular, the constitutional framers will explicitly seek to shield the Bank – and its watches - from the grubby designs of the politicians in power. Some article of their constitution (say, oh, Art. 320, just to throw out a number), might read, “the Watch Bank of Venezuela shall not be subordinated to orders from the executive branch, and shall not aid or finance fiscal deficits.”

The reason is intuitively evident: the watches the Bank holds are not the Bank's property – they are the voucher holders’ property. The watches belong to the voucher holders - this is why every Watch Bank voucher is stamped with the words "pagable en las oficinas del banco" - payable at the bank's offices.

If the Bank suddenly decides to start giving away those watches to the government - or anyone else - some citizens will find themselves holding vouchers for watches that the Watch Bank no longer holds.

At first, say, the Bank holds 100 watches. If it has 100 outstanding vouchers in the economy, the system is obviously solid: plenty of watches to go around.

But what happens if, say, the government forces the Bank to hand over 20 of the watches? Well, then the bank will be left holding just 80 watches, but - big but - there are still 100 vouchers for watches swimming around the economy. If all 100 voucher-holders decide to all go to the Bank at the same time and ask for their watches back, there's gonna be a problem.

If you have 100 vouchers, but just 80 watches in the Bank, what is the real value of each of those 100 vouchers? Is one voucher still really worth one watch? Of course not. For all practical purposes, the vouchers have been devalued. The assets they stand for have been stripped. If those 100 vouchers can only buy 80 watches, each voucher is now really only worth 0.8 of a watch. 20% of their value has vanished.

It’s been stolen.

Substitute dollars for watches, Bolivars for vouchers, and Central Bank for Watch Bank, and this is pretty much the situation we have in Venezuela right now. In demanding the Central Bank hand over a substantial chunk of its foreign reserves to the government, the President is proposing, in the most public way possible, the theft of a billion dollars from the holders of Venezuelan currency. It’s little wonder the current Central Bank directors will not even consider the request: if they went along with this lunacy, they’d open themselves up to massive criminal charges in any future government.

Honest now, I want to hear from a Chavista on this one. Please explain this one to me…because I see this kind of thing and it becomes harder and harder for me to fathom how anyone who’s not on the take can continue to support a government that launches public campaigns to piss all over its own constitution in order to steal from its own citizens.

I mean, some significant line is being crossed here. This isn’t even just bad policy anymore: it’s outright thievery.

*apologies to Alex Dalmady for shamelessly ripping off his analogy…