Dollarization: Intervention by Other Means

In a note that we published recently, the possibility arose that the dollarization of the Venezuelan economy ends up being the “Black Swan” of all this history that already has consumed us for at least 6 years. When we talked about “Black Swan” I basically said it in the sense that although such a possibility may seem like a surprise to many, in reality, when you look at things in retrospect, it is not so much.

To our way of seeing, in fact, never has this possibility seems so feasible as now. Possibility that, as we said, there would be nothing surprising. Unless, and this is the crux of this editorial, it be the way it is evolving and the forces that are animating it for a while now.
It is not the first time we alert about this. And in itself, in general terms, our argumentative scheme remains the same: in these moments, more than in a dollarization per se we find ourselves in the midst of a forced “debolivarization”, that following the leading trend can give way to monetary anarchy, in the sense of a phase where the bolivar formally disappears or remains in a kind of “zombie” existence among several other currencies but counted as the weakest.
In this last point it is in fact more or less in which we are: one where a weakened bolivar survives as a less and less hegemonic means of payment, displaced by the Colombian peso and the Brazilian real in the respective border areas, a US dollar more and more positioned even for retail, a euro that circulates in some more exclusive markets and an indefinite variety of cryptocurrencies still with marginal scope but advancing. To this “basket” of currencies we must add the barter, which some underestimate as a means of payment but which has also been positioned as a clear signal of the increasing irrelevance of the bolivar as the only legal currency in the country, just as the Constitution mandates it.
The issue is that this monetary anarchy – similar to the one suffered by Zimbabwe after hyperinflation and the disappearance of its national currency – will most likely lead to a definitive dollarization , even independently of the political trend it is governing. And this we say because the surprising thing about the current progress of dollarization is that it is being produced largely by the effects of the economic policy used by the current government to “combat hyperinflation” and “stabilize the exchange rate.” That is, ironic as it sounds: it is a direct result of the “revaluation equilibrium” policy aimed at protecting the bolivar.
We have already explained with sufficient clarity the peculiarity of this economic policy in its current phase: consists, on the one hand, in imposing a monetary anchor destined to restrict as much as possible the monetary issuing in bolivars. The logic behind this practice is that it is based on the principle that inflation (now hyperinflation) has exclusively monetary causes, derived from the “excessive” issuance of bolivars, which would push prices up but also the exchange rate. In this virtue, according to this criterion, the solution then passes by eliminating said “excess”, what is sought to be achieved by decreasing the monetary issuance, both the so-called “monetary base” (notes and coins) and the monetary liquidity in broad terms (all means of payment, including electronic money in accounts, loans, etc.), which in turn is achieved by restricting the monetary multiplier, that is, the bank capacity (public and private) of issuing new money basef on the original BCV monetary base.
Speaking in concrete terms, this policy was expressed in the cocktail of exchange rate shock plus monetary lobotomy applied in a first dose between November 29, 2018 and January 28, 2019 and administered in additional doses thereafter to date and that will continue to be applied, as announced in a brief note by the BCV. The first dose started with the detaching of the sovereign bolivar to the Petro and the anchoring of both to the dollar in the DICOM auctions, which gave the bolivar a devaluation rate that made it lose 98% of its value with respect to its “revaluation” of August 20. In nominal terms this implied that the official exchange rate went from 60 sovereign bolivars to the dollar in August 2018 to 3,300 on January 28, 2019, when with the help of the suspicious “Interbanex” their last megadevaluation was made, of 5,400% accumulated since the start of the stabilization plan in August.
The immediate effect of this dose has been the strong monetary contraction that meant that liquidity in real terms was reduced by around 90% in the same period of time. But it is more, and this is the determining factor for our theme, this accelerating the displacement of the bolivar as a means of payment, because the fact that today is increasingly common to see payment with dollars or in fact easier to pay some amounts with dollars than with bolivars is due precisely to that policy. And it is that not only are there less physical bolivars circulating (bills and coins) than they should be, with denominations already outdated for the price levels, but also the new limits imposed on bank credit through the reserve method (case of the credit cards), added to the wage freeze since November and reinforced in January (which currently keeps it at US $ 5 a month and in average US $ 30), as well as the slowdown of para-salary bonds (Patria system) has meant that bolivars are not enough to finance family expenses.
So for us to see this displacement in numbers: if on Monday, April 8, 2019, we divide the total in bolivars of the monetary liquidity reflected in the last report of the BCV dated 02/23/2019 (Bs. 273,774,451,197) between the official exchange rate in force (Bs. 3,302.24), that gives us 1,294,204,676, as well as the amount of dollars equivalent to the total of ALL our monetary liquidity. But if we take into account only the bills and coins in circulation, the dollar equivalent of those sovereign bolívares notes and coins circulating is US $ 66,532,868.
Put it in another way: if today in a supposition denied, the government decided to dollarize the economy, it would get only 1.2 billion US dollars to dollarize all the monetary liquidity and just over 66 million US $ to change the bills and national coins for those coins of our enemy from the north.
So that we can get a clearer idea of what we are talking about: according to the most conservative estimates, some 2 billion US dollars in remittances were sent to the country last year. However, in reality, of that amount of dollars, not all entered the country, because much remains in international accounts. But necessarily a part of it does enter the country. If we assume -being conservative- that only a quarter of those two billion entered as bills. And we add the circulation of already existing dollars hoarded or entered by other meanss, we can easily conclude that at the current moment, in official exchange, there are in real terms (value) more dollars circulating than bolivars. That is, in the amount of bills there are more bolivars, but in practical terms, the predominant form of payment for day to day transactions seems to be the US dollar.
This partly explains why, as was evident after the electric blackout, the dollar already circulates so openly in the shops of cities and towns, almost as much as the bolivar. It is not just a question of operations being calculated in dollars, which has been happening for a while and is a direct effect of hyperinflation (that a currency considered “strong” takes the place of a unit of account). And neither that when saving people leave the bolivars and go to dollars or other currencies and cryptocurrencies, which also has been happening for some time as a result of hyperinflation (the reserve value effect is that the currency also considered strong against those that are weakened), but already in the simplest function of a currencies – to serve as means of exchange, that is, to pay and collect – the dollar now has as much presence as the bolivars.
The flexibilization of the foreign exchange market and the monetary order is the other leg on which this policy of “defense of the bolivar” is sustained, which is destroying it. We have already mentioned it recurrently but it is also public: the government has been making the conditions that allow an increasing number of financial and commercial transactions in dollars more flexible. In some cases, it has done so directly, such as Foreign Exchange Agreement No. 33, which established the rules for foreign currency transactions in the national financial system, or No. 36, which allows the international services lent by tourism operators to be collected in dollars. The most important of all measures is the repeal of the law of exchange rate crimes, ambiguous enough to leave a loop hole regarding the possibility of paying anything with foreign currency, as in fact is happening with international credit and debit cards. In other cases, flexibilization has been indirectly, as is the case with all cryptocurrencies, which in fact has contributed to the displacement of the bolivar as legal tender. The most recent are the SENIAT measures for the payment and collection of tax in dollars and currencies, which already seems a beginning to formalize of law what has been promoted in fact.
In that piece on dollarization as Black Swan it was concluded that, paradoxically, what has been preventing forced dollarization from going deeper than it already is, are the unilateral measures and the US blockade, whose tourniquet is aimed precisely at avoiding foreign exchange earnings. Now, this “paradox” has to be rethought about what was said last week by Larry Kudlow, at that time, Director of the White House Economic Council, as well as Trump’s main economic adviser and, of course, his personal friend.
In fact, in statements that were collected by various means Kudlow pointed out that different US government agencies are working on a “very comprehensive plan (…) a rescue plan, a restructuring pla, a plan that will bring cash to the country . “The elaboration of this plan would involve” the Treasury Department, the Department of Commerce, the National Security Council, the presidential headquarters itself and even the International Monetary Fund (IMF).” According to Kudlow, the routes used to execute the program would be: ” banks, iPhones, apps and many smart ways to carry cash there”, who emphasized that the money sent to Venezuela “will not be bolivars, they will be dollars, at least at the beginning, because there is no demand for bolivars. “
Although evidently the plan described by Kudlow supposes the exit of President Maduro’s government – in fact he says it explicitly – there is no doubt that in such a scenario it would not need to start from scratch, since all they would have to do is inject US money into an economy where the amount of bolivars circulating is at critical levels, but in addition, in practice, it has already been operating with a large amount of dollars in circulation and with all the institutional scaffolding that both the “de facto” and the legal are being prepared for. In itself, taking the data reflected in number 8 as a reference, the figures required for such a “rescue” operation would be ridiculously low. So much, that they could give themselves “luxury” up to tripling it, to the level proposed by Francisco Rodriguez (Henry Falcon’s Economic Advisor) during May 2018 Presidential Campaign and that Chavistas and oppositionists and spokesmen of the same government agreed to denounce it as a madness from which it would be very difficult to return.
Beyond all the other warnings that we have already made about how dangerous and harmful a dollarization would be for our country, in this specific case we must reiterate that its main effect would be a total and absolute loss by the central government of both the governance over the economy as the “simple” application of economic policy: a country that has no control over its currency and uses another’s, in this case, its main enemy, is a country subject to the designs of the economic authorities and policies that own the currency you use. In this regard, the Greek case after the referendum in 2015 sserved as an example where, by more than 60% of the votes, the people decided to support the government’s proposal not to comply with the adjustment imposed by the European troika and take another path. Well, being a peripheral country without its own currency and therefore without a Central Bank or full economic direction, the troika passed over to the democratic will of the Greeks and their government simply by restricting access to cash and money (in this case the euros) by applying a monetary financial “corralito” in fact that left the country practically out of monetary mass (cash). We can discuss whether or not the “socialist” government could have endured more, but what is beyond dispute is that such financial-monetary manipulation meant the defeat of the Greek cause, the shameful capitulation of its government and the submission of Greece to a package of adjustment worse than the one originally proposed and administered by Syriza itself, in good measure for the revenge of the European plutocracy for daring to challenge them.
All this finally to say that this government that explains and argues so much about the multidimensional war, broad spectrum, financial, monetary, commercial, etc., should realize not only that at the same pace that conventional military intervention disguised as humanitarian aid failed, what is being imposed is a monetary intervention that sooner rather than later will check it a bit like the virus that infected the SEN (National Electric System) . Hopefully, this realization, as in the latter case, will not occur when it is already quite late, the same as with PDVSA and many other examples. But also that, as is now evident in these same cases, it must know what is being done within its own ranks by omission or commission, consciously or unconsciously, in favor of that threat. Let it never be said that nobody raise alarms about it and they were taken by surprise. The dollarization that is at the very base of the current war, which is an old dream longing for the enemies of the Bolivarian revolution, as long as it is allowed to continue advancing with impunity, it will end up meaning the end of the Bolivarian Revolution.