The Great Depression Online

Great Depression Online Archive Issue:

How Governments Impoverish their Citizenry

Great Depression Online
Long Beach, CA
May 21, 2010

Inside This Issue You Will Discover…

*** Ominous Warnings from Mexico
*** Peso Crash Redux
*** How Governments Impoverish their Citizenry
*** And More

Ominous Warnings from Mexico

We dropped our wife and young son off at LAX early yesterday morning.  They’re off to Mexico City to visit great grandma and other family.  We’re staying home, holding down the abode, tending to our usual business, and missing out on the travels.

Mexico City, if you’ve never been, is quite a sight.  It’s more than double the population of Los Angeles.  What’s more, the pace of activity makes Los Angeles feel sleepy and southern California’s Highway system seem, calm, organized, and sound.

The juxtaposition of pre-colonial ruins, Medieval Spanish architecture, and modern skyscrapers is extraordinarily fascinating.  But for us, with each visit, what we find fascinating is the ever present instruction of what happens when overzealous governments overspend…then inflate their currency to pay their debts.  So, too, we find ominous warnings of what may come for the United States if the money shenanigans continue.

Like the United States, 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.

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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.

What went wrong?

Peso Crash Redux

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. 

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.  

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.

How Governments Impoverish their Citizenry

Currencies, both north and south of the Rio Grande, ain’t what they use to be.  Not long ago they were as reliable as a rooster at dawn; now they’re as crooked as a politician’s spine.  We know this not by reading the history books, nor by hearsay, but by the honest, verifiable, silver dollar and silver peso we’re holding in our hands.

The Peace Dollar is a United States dollar silver coin minted in the 1920’s.  At the time of its mint, one coin equaled one dollar…and each dollar contained 0.77344 troy ounces of silver.  The 1932 Un Peso is a Mexican silver peso.  At the time of its mint, one coin equaled one peso…and each peso contained 0.3856 troy ounces of silver.

The exchange rate, you see, was real simple.  Based on their silver content, two pesos equaled one dollar.  Nowadays, both pesos and dollars are merely paper promissory notes from the government.  Their value is derived by their government’s track record of stewardship.

Today it takes about 13 pesos to buy one dollar.  As you can see, the Mexican government has been less upright in managing its currency than the United States has over the years. 

But when you use silver as the measuring stick, the picture changes.  Where it took about $1.29 dollars to buy an ounce of silver in the 1920s, today it takes $17.72 dollars to buy an ounce of silver.  In other words, silver costs 1373-percent more in dollars than it use to. 

In pesos, however, it’s a downright disgrace.  Where it took $2.58 pesos to buy an ounce of silver in 1932, today it takes $230.36 pesos to buy an ounce of silver.  In other words, silver costs 8928-percent more in pesos than it use to.

Here’s the point…

It doesn’t take much time touring around Mexico City to discover that behind the hustle and bustle of big city life, not only has the government successfully vaporized their currency, they have successfully vaporized their middle class.  You can actually see its nonexistence everywhere you look…and, if you squint your eyes just right, you can see the ashes of its prior existence within the cracks of decay.

Mexico is a textbook lesson on how governments impoverish their citizenry.

One day, perhaps soon, if the U.S. government keeps it up, their mischief will be splattered across El Norte too.


M.N. Gordon
Great Depression Online

P.S.  The stock market got slammed again yesterday.  “The economic recovery story has started to look like a mirage,” said Tom Samuels, manager of the Palantir Fund in Houston. “If that’s correct, stock prices are well ahead of economic reality.”  Yes, it’s a deflating world for now.

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