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Politics : Foreign Affairs Discussion Group -- Ignore unavailable to you. Want to Upgrade?

To: Hawkmoon who wrote (203526)	9/19/2006 10:59:32 AM
From: Hawkmoon	Respond to of 281500

Monday, September 18, 2006 The robolution at its best: Piensa mal y acertaras! The biggest economic problem confronting the Chavez administration today is inflation. Four months of hyperinflation in the Food and Beverages category, reaching 19.9% between May and August should be enough to have the Government call for emergency Cabinet meetings to attack the problem. But it has not happened. Instead, we have gotten a slew of wishy washy statements by various Government officials, as our tropical Marco Polo travels abroad doing what he likes best: Avoid the local problems he can not tackle and promote his intrenational image. It is clear that the inflation problem is easy to understand; the financial system has been flooded by money as the Government has increased spending dramatically in the face of the December elections. So, the solution is simple: reduce liquidity. There are a numbers of ways of accomplishing this: --Have the Central Bank absorb liquidity. This would help, unfortunately, it has already been done so much, that the Central Bank is losing money and can not afford to do increase it --Spend less: the Government has clearly stated it refuses to do that. Are you kidding me? Chavez is very good at announcing, not doing. --Have CADIVI approve everything that is submitted to it; It is already doing so, imports will be close to US$ 30 billion for the year. Local industry is getting killed. --Increase interest rates so that people are encouraged to save. The problem is that they would have to increase it so much in order to make it attractive, since interest rates are deeply negative. --Remove exchange controls. Sure, as if this Government is ready to give up such a political and powerful tool. --Issue dollar denominated bonds in exchange for local currency, much like the Government has done in the last two or three years. This would be the easiest way to absorb liquidity. Despite this, the Government has been talking about doing it, but postponing it for no reason. As the problem gets worse, it announces it may do barely US$ 500 million by mid-October. What gives? Aren’t they interested in reducing inflation? How can they not do this, given that it is so simple, sell a bond for Bolivars, remove those Bolivars from the system, presto, easy economic recipe! Not so fast. As the Spanish saying goes: “Piensa mal y acertaras!” (Think badly and you will be right on target!) You see, if the Government were to issue a large bond, say two billion, in US$ and sell it to the public and institutions at large, it would have to do it in a more transparent way and would be competing with the sale of Argentinean bonds that is done weekly by Fonden, which has no transparency and is enriching a number of people beyond their wildest dreams. You see, these sales are done with total discretion and no transparency by the financial authorities as to who gets the bonds and at what price. Apparently, it mostly goes to "friends" of the administration who reportedly have to pay someone for each dollar assigned to them. Every week a few hundred million dollars are assigned this way to friendly institutions, without any transparency. Imagine someone making a profit of say only Bs.100 per dollar. Multiply by one hundred million a week. Get the picture? If a huge two billion dollar issue were sold publicly, not only would it not go to the friends, but it would seriously compete with the weekly sale of these Argentinean bonds and its corresponding “profits”. It would just kill the goose that is laying the golden eggs. Thus, no bond issue has been placed in the market despite many announcements to that effect in the last few months. Maybe those involved are worried about the outcome of the December elections, maybe they are not, but just in case, it would not hurt to make a few more million dollars, before the "you know what" hits the fan. Inflation? Chavez' popularity? The people? They could just care less. You see, when these bonds are sold, no liquidity is removed from the financial system, Fonden simply exchanges its dollars for the Bolivars to spend in its projects. The Boliars stay in the system. So the mechanism competes with “their” market, but it does not have the desired objective in terms of the Government. It has no effect on inflation Such is the way of the pretty robolution… blogs.salon.com