Take physic, pomp

Venezuelan economics and “forgetting” the facts that don’t fit your rant

Over at Caracas Chronicles, Quico has today continued his diatribe against the Venezuelan economic policies concerning international currency reserves (IKN picked up on his politically charged but generally excellent post of a couple days ago right here). But today Quico has obviously decided to “forget” some pretty basic economics in his rush to condemn the Vzla gov’t and its economics, basically because he’s the kind of partisan analyst that hates Chávez so much he could never say anything remotely in favour of the guy. As I said the other day so be it, I’m not my brother’s keeper etc, but he does himself a disservice by his error of omission.

So what’s the problem? The problem is that Quico picks up on this official MINCI PR and takes issue with a passage thus (his full post linked here):

“…Most irksomely, the press release parrots the meaningless concept of an “optimal level of foreign currency reserves”, which immediately flags it as a work of rank hackistry. For the Nth time, calling any absolute level of reserves “optimal” is simply meaningless. It’s a bit like confidently declaring that 2 kg. is the “Optimal Level of Harina Pan reserves.”..”
That, unfortunately for Quico, is simply untrue. In serious economics circles there is a clearly defined concept of optimum foreign currency reserves. I’m not going to get all wonky on you here (those so inclined to dust dry economics can run the names “Garcia and Soto” though Google with keywords like ‘currency’, ‘GDP’, ‘reserves’ etc and have a nice afternoon) but to hit it in simplified bullet points:
  • It actually costs a country money to hold currency reserves. This cost is usually defined as local interest rates minus world benchmark interest rates (usually LIBOR). Even in these rocky times that equation is not to be ignored. This cost is more akin to an opportunity cost than real “gotta pay a bill” cost….but a cost is a cost. Period.
  • There is always debate about these things, but a consensus among economists revolves around having 10% of a country’s GDP available in the reserves to avoid sudden stop shocks etc.
  • In the case of Venezuela, the current U$42Bn really is too much according to these accepted parameters. In fact the U$30Bn that will be left once Chávez extracts his $12Bn soon is as close to optimum as possible.
  • Or put another way, the cost to Venezuela of holding that extra U$12Bn in reserves would be around U$1Bn annually. That’s a significant amount of moolah, folks.
In other words, yer man Quico over there at Caracas Chronicles is telling half-truths and preaching just what the converted want to hear instead of being intellectually rigorous and telling the whole truth. The problem in Venezuela is NOT, repeat NOT the size or non-size of its international currency reserves. The problem in Venezuela (in this case at least) in the amount of money being printed by the Central Bank aka M2. If Quico stuck to that he’d have a decent argument, but until then he’s just another anti-Chávez ranter and can be ignored. A pity, really.

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