Toilet Paper Only in the Hereafter

Readers may recall that we have reported on the toilet paper shortage in Venezuela before. At the time our suggestion to the Venezuelan authorities was to simply replace toilet paper with the country's currency, the Bolivar, as evidently there is more than enough of that to go around.

The great leader Hugo Chavez is no longer among the quick. He therefore doesn't have to grapple with the problem anymore – we are assuming that there are no toilet paper shortages in the Hereafter. So one way of getting a decent wipe nowadays if you're a citizen of Venezuela is to follow the great leader of the revolution into the Great Beyond.

Back in May of this year, Venezuela's rulers made the following promise:

 

"The revolution will bring the country the equivalent of 50 million rolls of toilet paper. We are going to saturate the market so that our people calm down."

 

But wouldn't you know, in spite of their near complete control over the country's economy, the darn capitalists have somehow thwarted them again!

Obviously, the revolution has a lot of work left to do in order to create the socialist Utopia Venezuelans have been assured will be theirs. The Land of Cockaigne, where the roasted chickens will fly into the comrade's mouths unbidden and toilet paper will be abundant – its creation continues to be obstructed by the machinations of evil capitalist hoarders. So the revolutionaries have decided to strike at the root of the problem.

 

Bloomberg writes:

 

“Venezuela's government is known for its state-must-do-it-all mindset, inherited from late President Hugo Chavez and his radical followers, known as Chavistas. But late last week, the notoriously inefficient government went above and beyond to shine its populist credentials: It stepped right into Venezuelan bathrooms.

On Sept. 20, President Nicolas Maduro and a new economic panel ordered national price regulator Sundecop to “temporarily” seize plants owned by Manufacturas de Papel CA, orManpa, the company that supplies 40 percent of the country’s demand for toilet paper and personal-care paper goods. Their reasoning? To oversee production, because consumers can't seem to find enough rolls of toilet paper.

 

(emphasis added)

We hereby predict that the toilet paper shortage is going to get worse. It is not the only thing in short supply in Caracas these days:

 

“It's not just bathroom tissue that's lacking: In recent months, food items such as cooking oil and powdered milk have nearly disappeared from store shelves.

But even after a decade of price controls, foreign-exchange restrictions, runaway inflation, currency devaluations, blackouts and takeovers of more than 1,000 companies or their assets, the government still claims the private sector is at fault for the deficiency in consumer staples.

The Manpa asset grab came a week after Maduro introduced the new regulatory committee, which will address product hoarding and other abuses that he blames for missing goods.

Vice President Jorge Arreaza spoke the party line in a recent appearance, when he blamed consumer-goods shortages on “an ongoing economic war” orchestrated by Maduro’s enemies. Food Minister Felix Osorio chimed in: “There are some incidental production failures.” But he added that “an economic coup” was also in motion.

 

(emphasis added)

Apparently the ability of the comrades to convince Venezuela's citizens of their ability to increase the supply of toilet paper by seizing yet another factory is waning though:

 

“Alert Venezuelans aren't buying this. When Commerce Minister Alejandro Fleming tweeted on Sept. 20 that Maduro had "ordered the Superior Body for the Defense of the Popular Economy to temporarily seize Manpa,” Ricardo Sevillano, of Maracay, responded with a key question directed at Fleming and Maduro: “Will you run it into the ground as you’ve done with all the other companies you have seized?”

 

(emphasis added)

We can answer this question for comrade citizen Sevillano: yes, they will! In fact, it was the seizure of a paper company by the late Hugo Chavez that started the toilet paper shortage.

 

“Those curious about where the latest takeover will lead should examine Hugo Chavez’s nationalization of paper company Venepal eight years ago (renamed Invepal by Chavez). One of the first companies seized by Chavez, Invepal still suffers from production problems, its output numbers remain secret, and it relies on the state to cover its recurring losses. As Venezuelan economist Jose Toro Hardy aptly put it in a Sept. 25 tweet referring to the state’s damaging role: “Nothing is more dangerous than mixing incompetence with ideology.”

 

(emphasis added)

 

True Marxists Are Unperturbed

As Bloomberg's report also informs us, the hard-core Marxists in Venezuela's government know quite well that socialism and scarcity go hand in hand. In fact, they seem almost proud at their achievements in this regard. Remember, one of the basic tenets of 'progressive' and socialist theories is that the economy is static. Their entire economic theorizing stands and falls with this assumption.

There exists actually no progress in the 'progressive' ideologies.  In their world view there is a fixed economic pie that only needs to be distributed differently to make everybody happy.  Of course, the static economy is an illusion even if one stops all further progress as socialists are wont to do. Some things will still change – resources will run out, soil may become exhausted, population numbers will change, and so forth. This is why a centrally planned economy cannot work even if after the seizure of the means of production it 'just continues where the capitalist system left off'. The anthill of the evenly rotating economy in which nothing ever changes is only a mental tool, an artificial construct. It does not exist in reality. The cynicism of the hard-core Marxists in Venezuela is in stark display below – but hey, you can always 'wipe with the fatherland':

 

“Things have gotten so bad that Venezuelan Jose Augusto Montiel developed a crowd-sourced, Google Maps-based Android app and a website, Abasteceme (“Supply Me”), that consumers can use to track down stores carrying toilet paper and other scarce products. Meanwhile, late last week the government announced a supervised sale of 21,140 toilet paper rolls seized from manufacturers or distributors, which the government has often accused of hoarding.

Not everyone thinks these shortages spell bad news. Planning Minister Jorge Giordani, an avowed Marxist, famously quipped in 2009 that “socialism has been built based on scarcity.” Elias Eljuri, head of the National Statistics Institute, said in late May that toilet paper scarcity showed “Venezuelans are eating more.” He quickly became the — pardon the pun – butt of jokes on Twitter. Comedian Andres Schmucke tweeted a tongue-in-cheek view on May 23: “According to Elias Eljuri the toilet paper shortage happens because people are eating more. Man, us comedians will be out of a job.”

A frustrated Foreign Minister Elias Jaua only made things worse when he admitted the government “had work to do” to overcome shortages and asked: “Do you want to have the fatherland or do you want toilet paper?”

Critics tweeted their disapproval using a fitting hashtag, #LosChavistasSeLimpianElCuloConLaPatria (#ChavistasWipeTheirBehindsWithTheFatherland),  which was already being used by anti-Chavistas.”

 

(emphasis added)

We should perhaps remind readers that the crime of 'hoarding' is also a major bugaboo of the Keynesian faith. Mr. 'avowed Marxist' Jorge Giordani is quite correct. Marxism and shortages of consumer goods always go hand in hand. It is simply not possible for a command economy to supply consumers with the goods they want. As to the 'frustrated' foreign ministers rhetorical question: we actually believe most Venezuelans would prefer the toilet paper. Just a hunch, mind.

 

But There Is a Boom On!

We want to take this opportunity to show an update of the hyper-inflationary crack-up boom that is accompanying these widespread shortages of consumer goods. Readers will recall that we mentioned in our missive on 'forced saving' that hyper-inflationary crack-up booms give us an excellent opportunity to see the economic effects of inflationary policy in a temporally compressed manner. One major effect is that investment moves into the higher stages of production (capital goods) to the detriment of the lower (consumer goods) stages.

In other words, the production of consumer goods begins to suffer as more and more production factors are deployed in the production stages furthest away from the consumer. As a consequence, titles to capital – i.e., stocks, tend to rise strongly in value, not least because they are seen as an effective means to  protect one's savings against the ravages of inflation. What is currently playing out in the US economy on account of 'QE' is merely a milder version of the very same principles.

 


 

caracas

The Caracas stock Exchange Index. Since we last reported on it in May, its value has more than tripled! – click to enlarge.

 


 

The shortage of consumer goods in Venezuela is in fact what the 'forced saving' consists of. The pool of real funding, i.e., the pool of final goods that sustains workers, has shrunk and many of the items required to sustain them are not even available anymore at all. We suspect that by now, the damage is so great that the boom can not be kept going for much longer.

Below is a chart of the Bolivar currency, showing the true black market rate compared to the official exchange rate. Unfortunately we have no more recent update, but the black market rate has since then fallen considerably further. In fact, as Reuters reports, there is a brisk arbitrage trade going on. Venezuelans pretend to travel overseas in order to buy dollars at the official exchange rate, and then sell them on the black market, where the dollar currently trades at a new record high of 7 times the official rate.

 

“After a decade of currency controls set up by late socialist leader Hugo Chavez in 2003, the disparity between the official and black-market rates for the local bolivar currency is higher than ever. Greenbacks now sell on the illegal market at about seven times the government price of 6.3 to the dollar.

There are strict limits on the availability of dollars at the 6.3 rate, but Venezuelans are cashing in on a special currency provision for travelers. With a valid airline ticket, Venezuelans may exchange up to $3,000 at the government rate. Some are not even flying, leaving many planes half empty.

"It is possible to travel abroad for free due to this exchange rate magic," said local economist Angel Garcia Banchs.

The profit is realized from an arbitrage process known locally as "el raspao," or "the scrape."

 

(emphasis added)

 


 

hanke-7182013-globe-9bg

The bolivar's official and black market exchange rates up until May 2013 – click to enlarge.

 


 

In order to visualize the current status, just consider that the rate is now approximately at 45 bolivar to the dollar instead of the 33 recorded in May. Venezuela is yet another excellent case study for the end game of an inflationary policy.

It is quite amazing that we still get to see so many of these crack-up booms in modern times. Only recently there was the Zimbabwe case and currently we can observe the still ongoing Venezuelan and Iranian hyperinflation regimes. The boom in Caracas is well advanced, so the final collapse cannot be too far away. Stay tuned.

 

 

Charts by: Professor Hanke / Cato, OnVista


 

 
 

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9 Responses to “The Hygienically Challenged Crack-Up Boom”

  • timlucas:

    Pater said:
    “We want to take this opportunity to show an update of the hyper-inflationary crack-up boom that is accompanying these widespread shortages of consumer goods. Readers will recall that we mentioned in our missive on ‘forced saving’ that hyper-inflationary crack-up booms give us an excellent opportunity to see the economic effects of inflationary policy in a temporally compressed manner. One major effect is that investment moves into the higher stages of production (capital goods) to the detriment of the lower (consumer goods) stages”.

    Hello Pater.

    Firstly, thank you for the thought-provoking articles.

    Secondly, with respect to your assertione above, I’m not sure that this is necessarily the case is it? I think that the change in productive structure that you describe occurs when newly-created money is inserted into the loan market. This artificially lowers the interest rate below the originary rate. However, as the boom has progressed, it would seem that things may have changed. The inflation that is described here, hyperinflation seems quite different to me. It is a reaction of the people to the ongoing inflationary government policies; a dishoarding of the national paper currency in preference for other currencies and real goods. This I would think is not simply ‘inflation’ (as defined by central bank printing followed by an injection into the loan market) accelerated, but a different phenomenom. The reason for the stock market increasing terms of the bolivar is simply that the bolivar is less-widely accepted as a useful currency and so has devalued against all real goods, of which the stock market is one.

    Of course, the central bank keeps printing and – I suspect – that this is also going into the loan market, so as always there are many effects occuring simultaneously. However, perhaps a better way to illustrate your point of a lengthening of productive structure might be to look at the change in activity in higher-order goods production, or maybe to measure the price of the stock market in units of toilet roll or something! However, if one gets to the point of susistence/starvation and continued dishoarding of the currency in preference for things that are widely valued instead – i.e. the monetisation of real goods – I suspect that higher-order goods will cheapen in price relative to consumer goods. Although I don’t know!

    What do you think? Does this makes sense?

    Best wishes
    Tim

    • worldend666:

      Absolutely correct Tim. I also noticed this but didn’t think to comment on it.

      A shift to production of higher order goods will occur when interest rates fall because the lower interest rate increases the present value of the future goods. Venezuela is in the opposite situation. Interest rates are rising and therefore we can expect long term projects to be abandoned as their present value tends to zero with rising rates.

      The rising stock market is not a reflection of a shift to higher order production. Rather it reflects the protection of capital. The stock market should keep page more or less with inflation, and companies producing projects with a shorter term life cycle should fare better.

      There is a rub though. Venezuela has a statutory maximum interest rate of 29%. This would favour companies with long term production cycles. I don’t know if this interest rate applies to companies as well as consumers, but if it did that would be a significant distortion.

      • It is of course correct that the stock market reflects the attempt to preserve capital (i.e., purchasing power of savings). But it is at the same time a mirror of the shift in production. And indeed, Venezuela’s absurd interest rate ceiling does drive a malinvestment boom.
        Note in this context that during Zimbabwe’s hyper-inflation, the distribution of stock market gains was skewed toward higher order goods producers, even if they were unable to produce anything due to a lack of complementary capital! Thus is happened that shuttered mines that had to be put into care and maintenance because chemicals, fuel and various other inputs were rationed saw their stock prices soar.

        • worldend666:

          The Zimbabwe mining scenario makes sense, not because the mines were producing something with a long production cycle, but because they could eliminate all their short term costs and they would be valued on the commodities they owned in the ground.

    • Hi Tim,

      You are correct about what actuates the process – but then, interest rates in Venezuela ARE of course far too low. What tends to happen during the crack-up boom judging from historical examples is that because a ‘flight into real assets’ is underway, the producers of things like coal, steel, oil, etc. do tend to increase their production and build up vast hoards of these materials. This in turn is an incentive for producers of capital goods used in these production processes to ramp up their production as well. And all of this is essentially paid for by the declining real wages of workers. There is also a tendency to create vertically integrated conglomerates, which are hugely inefficient. Now, I have not looked at Venezuela’s higher order goods producers specifically, but I have studied the Weimar data very closely. In the Weimar era, the central bank directly propelled the credit boom (the commercial banks instead concentrated on trading and trading services); I suppose it is very similar in Venezuela.
      This is what could be observed during the Weimar inflation: unemployment declined sharply, as companies in the coal and steel combines ramped up their production sharply. At the same time production of consumer goods like apparel and even beer declined in parallel with real wages (the ‘forced saving effect’). When the hyperinflation period came to a sudden halt (i.e., after the Reichsmark had for all intents and purposes been repudiated), companies were asked to rectify their accounting by producing new balance sheets in gold terms.
      What was found out by the big iron, steel and coal producers was that their ‘working capital’ was largely bound up in vast hoards of coals and steel that were difficult to sell and worth much less than had been erroneously held during the inflation. Moreover, when looking at their vastly enlarged plant, it was found that a lot of capital widening had occurred, without improving efficiency one iota. They had in effect invested capital in the worst possible manner, by simply creating copies of the existing machinery and plant without any quality improvements; since the true demand for their product was far lower than had been thought, most of these investments had to be written off as malinvestments.
      By contrast, when the so-called ‘stabilization crisis’ began, the production of consumer goods indeed increased noticeably almost immediately.
      So judging from this example I believe we can indeed call it a ‘temporally compressed malinvestment boom’. It demonstrates the phenomenon of capital consumption and the depletion of the economy’s subsistence fund nicely, because it happens so quickly and on such a vast scale. So when I read that there are shortages of consumer goods in Venezuela coupled with an incredible boom in the titles for capital, I instinctively concluded that the same underlying principles are at work, even though of course the historical details of every such occurrence differ.

  • worldend666:

    Property is still very pricey in Caracas. At what point in a crack up boom (if ever) does it become good value?

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