Salad days

Lettuce harvest during the Great American E. coli Scare, Oct. 10, 2006, Salinas Valley, California.

Lettuce sure has gotten spendy.

You may have heard that Venezuela moved this year from having two exchange rates to at least four. That is, it used to have the official exchange rate pegged to the U.S. dollar and a weaker free-market rate. The official rate has for the past couple years been reserved for people importing items deemed crucial by an agency called Cadivi. (These whiz kids have routinely allowed the cheap import of designer clothes and putrid food while delaying currency trades for companies buying necessary parts for the oil industry.)

The free-market rate was set, in theory, through trading of Venezuelan international bonds in bolivars. People bought in bolivars, and sold in dollars, so if it took 4 Bs in Caracas to buy a bond that sold in New York for $1, it gave an “implicit” rate of 4 Bs to the $. While it’s illegal to publish any exchange rate other than the official one, the swap rate was frequently published by traders via postings to Twitter and anonymous blogs. Those reports, in turn, not only gave some transparency to legal buyers and sellers of bonds, but also gave a benchmark price for people in the illegal black market. That is, tourists with $500 cash who needed some bolivars for their Gran Sabana vacation could refer to the blogs to ensure the bolivar-selling huckster at the airport was treating them fairly.

Everybody out of the pool! Hotel Meliá, Caracas, charges 300 bolivars for a day pass at the pool, gym and sauna -- $69.76 at the official exchange rate, $33.70 at the lettuce rate, and about a week's income for a minimum-wage Venezuelan. Mostly just a pretty picture to break up a wonky-ass post.

The government banned the swap system a few weeks ago. The well known blogs closed and were replaced by newcomers of unknown reputation and methodology. The scammers got the upper hand. With no official channels for most currency trades, all that’s left is the black market. But now there’s no benchmark for the deals. An acquaintance who organizes black market transactions says nobody is trading via money transfers under fear of arrest. On the street, near the Central Bank, a stranger offered another friend cash U.S. dollars for 12 bolivars apiece. At the airport this week a stranger offered to buy my dollars for 7 bolivars apiece.

In financial terms, the currency black market now has a bid-ask spread of 42%; by comparison the spread at a really crappy exchange house exchanging U.S. dollars for Canadian ones may be about 3%. In non-financial terms, the black marketeers are gouging the public. (All in the name of stopping speculation. Sigh.)

The central bank created a third legal rate (Excel) this week by reopening trading of dollar-denominated Venezuela bonds through a trading system under its supervision. In some bond markets, this would be good for everyone, as the opacity of the bond market normally hurts buyers and sellers and helps brokers. However, in Venezuela, those blogs and Twitters meant the market was already pretty transparent. The Central Bank has so far had infinitesimal trading compared to the demand for dollars. People like me, who hold dollars, have no reason to sell into the Central Bank system, as we’ll get only 5 bolivars per dollar. I can get at least 50% more bolivars by selling money to friends or by selling loot hauled back from the States. Not that I’d ever think to do such a thing.

Hence, the birth of the fourth rate, a supposedly new way to give transparency to the black market: lechugaverde.com, Spanish for “greenlettuce.com.” The site at this moment tells me to expect 8.9 bolivars for every dollar I sell. Call it the lettuce rate.

As explained at Dolarparalelo.tk, the lettuce rate is based on a calculation that was popularized a couple years ago on blogs such as Inca Kola News and the incredibly popular and smart Caracas Chronicles. Divide the number of bolivars in circulation over the number of dollars in the Central Bank’s reserves. That gives an implicit number of bolivars that are backed by each dollar. If you think of the bolivar as nothing more than a few U.S. cents bearing pictures Venezuelan animals, with no value of its own, then this rate will tell you how much those cardenalitos are worth.

The lettuce rate has indeed acted as a bit of a magnet for the swap rate in the period of mid-2006 to the end of 2009. (That’s all the swap rate records I have handy. If you have this year’s swap rate figures archived, please send them to me. I will give you something pretty in return. I promise. Many thanks to Otto for his llel data — that’s a lot of data entry, dude. Lettuce rate calculated from figures from the Central Bank of Venezuela.)

Swap rate and lettuce rate. The lettuce rate diverges from the swap rate by less than 20% about 71% of the time. Not a bad correspondence, but nothing to put money on.

The big problem with the lettuce rate is that it gives only the long-term, big-picture trend for a currency, without taking account of day-to-day changes in supply and demand. If some narcotrafficker decides to come in and flush $100 million or $1 billion into the Venezuela market (and other than narcotraffickers, I can’t think of who else would want that many black market bolivars), that SHOULD drive down the price of dollars for Venezuelans. But the lettuce rate won’t reflect that. This is why the bigshot currency traders poo-pooh this figure.

The lettuce rate was weaker than the legal swap rate all this year until the panic as the government moved to shut the permuta market. That is to say, this year, the lettuce rate gave estimates of the value of the bolivar that were more advantageous to people with dollars, and worse for people with bolivars, than what the market was offering. Who knows, maybe it’s just a function of how the market worked. On the chart, the swap rate was stronger in 95 weekly periods and weaker in 88, so there was no consistent trend.

In any case, the lettuce head isn’t the last word. It is a starting point, nothing more. If someone can and will give me 12 bolivars per dollar, that’s “the price.” And if they can only afford 5 and I accept that, that becomes “the price.” It’s a nice little service, but a head of lettuce is just a head of lettuce.