Hypeinflated Arepa Index (HAI) Part VII: Inflation Accelerates

I arrived to Caracas thinking that after the big jump in the price of my favorite arepa, the arepa de queso de mano (hand cheese, a uniquely Venezuelan cheese) in the last two months, there would be a lull and the pace of increase would slow down.

But it was not to be, the price actually jumped 46.7% since five weeks ago, a jump actually quite similar to that of the April to May change. At this pace (average so far in seven plus months), we would be at Bs. 675 by November 17, the first year anniversary of the index, which would be a 337% increase in the HAI (Hyperinflated Arepa Index) for 12 months, but since it is clearly accelerating (46.7% in 35 days is close to 5,000% per year!), we should see a higher number.

Since some people have asked, I eat this arepa, which is delicious and my favorite, at the same arepera close to where I stay in Caracas, in order to be consistent in the measurements.I will not say which one, to protect my source of these delicious arepas.

That prices are accelerating is very clear to anyone coming here. I always keep a few Bills  to buy stuff on Sundays at the Mercado Libre where I like to shop. I only buy three or four identical things. Well, lately, I have begun paying with credit cards, so as not to run out of cash.

A second observation is that I went to buy bread and there was none in my usual bakery, due to the lack of flour. And at a drugstore, full of empty shelves, I was told the “sought out” item of the moment is toothpaste, either because there are shortages, or because there are rumors that the price is going to jump up. I was also told that when this particular drugstore receives locally made toothpaste, a swarm of “bachaqueros” (the name given these days to anyone that lives off the arbitrage of regulated or scarce products) shows up, mostly in motorcycles, soon afterwards and buys the whole inventory.

Exponential Growth Of The Unmentionable Parallel Exchange Rate

Since people are so scandalized by the recent surge in the unmentionable parallel rate, I decided to look at it on a logarithmic scale to see if the recent movement was out of the ordinary. Thus, I simply plotted that rate of how many Bolivars you need to buy a dollar if you can find one for sale and I must say I was truly surprised at what I found: The first thing that is surprising is how from August 2012 to February 2014 the process was simply exponential: It took about 16-17 months for the rate to change by one order of magnitude and I could draw the straight red dashed line quite easily through the rate for that period. Then, it turns out that the rate of growth slowed down for a period and then from about August 2014 to a month ago, the rate became, once again, exponential, you can see the green dashed line (which is also hand drawn) has roughly (even if it is less regular) the same slope as the red line. Then, recently, there was this increase, which is really small in the scale of things, and which simply wold be catching up to where it should be if there had not been a pause last year (Which was caused by expectations that the Government was ready to “do something” about the multiple exchange rate system)

What does it mean that it grows exponentially? Nothing profound, simply that the rate of growth (in this case 177%) is a constant. That is, for example, if you have $1000 and you get 7% interest, your money will more or less double in ten years, then double again in ten more and so on. Which implies that in ten years you have $2000, in twenty $4000 and in thirty $8000, grow exponentially, if you plot it logarithmically it will give you a straight line.  Thus the rate of growth above just says that the rate is a constant when the line has the same slope. Since so many factors drive this, it’s hard to say what is the main driver. If one looks at the growth in M2 in a linear scale for the same period as the graph above: you can see that the growth of M2 is like 65% per year in 2013 and 2014, with jumps in November every year (which gives you a one year rate of about 71% for M2). However, as you can see the slope has actually increased lately, but not above 100%, so that you would have to factor other things like scarcity of goods and foreign currency to explain the 177% “natural” rate of growth of the parallel rate.

What all of this does mean, is that if nothing changes in the way the economy is run, any absurd number someone may throw at you for the end of the year, may actually be quite “natural” and that recent changes are nothing out of the ordinary, even if scary.

Santero Economics Will Not End In Venezuela With The Upcoming Elections

The Venezuelan Economy has been run in the last few years with a limited, random and incoherent set of principles, that reminds me a lot of Santería, which is composed of a set of beliefs taken from various religions, which are some times incoherent and even contradictory and which are based on hope, spiritual beliefs and ideas with little fundamentals. Thus, we can characterize the current policies as Santero Economics, as the policies are equally incoherent, based on hope and many times go against each other, with no relation to known economic principles and fundamentals.

By the end of last year, the typical narrative (including mine) was that in January Santero Economics would be set aside, as inflation and scarcity would force Maduro to do so, but as we know, nothing happened. By February, I was convinced nothing would change this year.

The current narrative in most analysis abut Venezuela is very similar: Maduro is afraid that adjusting the exchange rate, increasing prices and the like would create a backlash and he is simply waiting for the upcoming Parliamentary elections before making any changes in his Government’s policies.

Well, I now believe that this is simply wrong, as Santero Economics is here to stay, as long as Nicolas Maduro is President of Venezuela, as he has been convinced by by both local and foreign advisers that the problems of the Venezuelan economy are caused by the oligarchy and the opposition and economic indicators such as inflation have little to do with the Government’s policies.

The ideas of these pseudo-gurus, who are close to Maduro, have now taken over, overcoming the opinions of those in charge of the economy, whose proposals get rejected time and time again.

At the core of Santero Economics beliefs is that deficit spending, salary increases and increases in the monetary supply have little to do with inflation, which is a political phenomenon. Thus, at the core of the problem is the economic war being waged by the oligarchs. The solution is simply to import more stuff, control more of the economy and try to bypass the current private sector. It makes no sense to change the Bs. 6.3 per US$ exchange rate, because all of those imported products would have increased prices.

According to the Santero Economics Mythology, it makes no sense to continue giving foreign currency to a private sector that has half a trillion (??) dollars abroad . If they want to produce, let them bring the dollars back and invest them in Venezuela.

Similarly, the Santero lore states that the bachaqueo of Venezuelan products into neighboring countries is an essential part of the Economic War, set up by the oligarchy, which uses the proceeds from this activity (As if the Venezuelan military did not exist) to bring back the money and continue its attack against the Venezuelan currency. Thus, the only rationale for increasing the price of gasoline, for example, is to remove a weapon from the arsenal of the enemy in the economic war. substituting that subsidy by a direct subsidy to the people.

The final part of the plan is to use the communal power to supervise, oversee and denounce unfair prices as a way of controlling inflation.

Everything else is apparently perfect in the world of Santero Economics. There is no answer to the question as to why if deficit spending does not matter why not n-tuple spending without limit. And if the monetary supply is irrelevant, why not increase the money supply without limit and make everyone really wealthy.

Maybe they could visit Greece and solve their problems too.

Meanwhile, Maduro is happy, everything is going well and he can devote his time to other things: