The Great Depression Online




Great Depression Online Archive Issue:

The Mexican Miracle

Great Depression Online
Long Beach, CA
June 24, 2008

Inside This Issue You Will Discover…

*** The Mexican Miracle
*** The Peso Crashes Again…And Again
*** Why All This Talk of Mexico
*** And More

The Mexican Miracle

Mexico’s economy experienced robust growth during the mid part of the 20th century.  The period from 1930 to 1970 was later called the “Mexican Miracle” by economic historians for this reason. 

Mexico’s GDP increased 4.2% between 1929 and 1945 and then it accelerated to 6.5% between 1945 and 1972.  Even during the inflationary 1970’s, Mexico’s abundance of oil and other resources helped float a 5.5% GDP between 1972 and 1981.

But the high water mark for Mexico, culminating with the 1968 Olympics in Mexico City, had already surged, and the flow of wealth began to recede, so that by the late 1970’s living conditions were second rate for the broad population. 

During the 1970’s, the successive administrations of Luis Echeverría Álvarez and José López Portillo, dramatically expanded the Country’s social development policies.  In other words, they increased public spending and financed the spending with debt.  During this period, Mexico’s external debt soared over 300% from $6 billion in 1970 to $20 billion in 1976.  The effect was many violent devaluations of the peso, from 12.50 pesos per dollar in 1954 to 20 pesos per dollar in late 1976, which devastated the middle class. 

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This was about the time our father in law and his brothers closed the doors on what had been – before all the government mischief – a successful photography and art studio in Mexico City.  Shortly after they moved their families to Los Angeles…to an economy that appreciated their exceptional talents.  And it was a good thing they had the resources to leave when they did, because then things got worse.

In 1981-1982 oil prices crashed on the international market just as interest rates spiked.  And then the government really made a mess of things.  

The Peso Crashes Again…And Again

In 1982, President López Portillo, just before ending his administration, suspended payments of foreign debt, devalued the peso and nationalized the banking system, along with many other industries that were severely affected by the crisis.  Any hope for a quick return to economic progress vanished.

But ten years later it looked like Mexico had finally turned a corner.  After 12-years of economic malaise, it appeared Mexico was primed for an economic boom.  NAFTA had been approved and everyone just knew that Mexico was going to be the next big thing.  The world took note and foreign investment flooded into the country inflating the value of the peso.

The administration of then President Carlos Salinas de Goratri couldn’t believe their good fortune.  And like any good government…they spent their bonanza – and then they spent some more.  By the end of 1994 Mexico was running a deficit that was 7-percent of GDP and foreign investors had seen enough.  They dumped their holdings and the peso crashed in spectacular fashion.  In the space of one week the peso fell 44-percent against the dollar.  Mexico’s economy crashed too.

Why All This Talk of Mexico

So why all this talk of Mexico?

First, because there may be something instructive we can learn from it.  Indeed, Mexico may offer an ominous sign of things to come for the heavily debt encumbered U.S. Government and American middle class.

For if the dollar’s current slide – due to massive government debt – was to pick up momentum, it’s highly likely that interest rates would spike to slow the bleeding.  What would that do to a middle class that’s already up to their eyeballs in debt?  In short, it would rapidly bankrupt them. 

Second, we’re talking about Mexico because we’ll be leaving this Thursday for there…for a ten day family trip.  We’ll be visiting our wife’s grandmother, and many uncles, aunts, and cousins, who live in Mexico City and the surrounding area.

But don’t worry….  For you’ll still be receiving your regular GDO issues while we are gone…we’ll just be sending them from our various destinations.  But rather than our usual market commentary, we’ll be bringing you observations, insights, and anecdotes from our travels.

We hope you find it an interesting digression.

Sincerely,

M.N. Gordon
Great Depression Online

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