It seems the world is doomed
to repeat the same mistakes, from wars to large economic shocks that could
have been avoided. All this, without a doubt, is the responsibility of leaders,
who are often blinded by today's apparent prosperity, or by the desire to
postpone the inevitable, leading entire nations to what will eventually end
in tragedy.
The influential forces that these leaders possess, including political,
economic, monetary, and even military, impede for actions to be taken against
them, allowing them to act discreetly and individually.
Of course, this does not imply we should rise in opposition to faulty
government and monetary policies. On the contrary, bear in mind that
rulers often hide or suppress movements and initiatives for change until they
prove unstoppable. By then it is too late for any preventive action and panic
ensues.
In this sense, Mexico has been no exception experiencing several such
episodes in its recent history. Mexico's experiences from the past can
serve as a model for other nations as an example of what to avoid.
It's 2012, and Mexico is nearly thirty years past its period of
devaluations, yet it is once again on a path toward recurring crises, which
have coincided almost exactly with its changes in government every six years.
The famous crisis of 1982 was the unwinding of a global process, not only
relevant to Mexico but to the world, as the first consequences of the break
from the gold standard (Bretton
Woods in 1971) became evident.
Mexican President at the time, Luis Echeverria (1970-1976), did something
that is all too common today. He raised the fiscal deficit and
financed it with freshly printed currency (pesos), very much in the style of
today's Federal Reserve. Mexico was unable to adapt to the realities of
the newly created fiat currency system, and quickly abused it, hoping to
create new wealth with little or no effort.
Inflationary consequences took hold of the economy, which combined with a
fixed exchange rate and low business competitiveness, increased imports and
the trade imbalance.
A political decision was made to avoid a devaluation of the peso at all
costs, this further closed the economy with additional tariffs, while the
trade deficit was financed with more debt. That is, they dug an even deeper
hole than the one Mexico was already in.
In 1976 the bomb went off and Mexico was forced to devalue the peso.
The exchange rate jumped from 12.50 to 20.50 pesos per US dollar overnight
(a sudden 64% currency devaluation).
The president who followed Echeverría, José López Portillo (1976-1982),
used the "boom" in oil prices at the time to justify spending in
oil-related projects, using the country's newfound oil wealth to request
additional borrowing from other countries. Debt levels more than
doubled during this period ($20 to $50 billion). These times were
marked by an artificial boom, yet the economy remained highly
constrained.
During this period the United States struggled to contain its own
inflation. Affected by peaking oil prices, the United States rose
interest rates, increasing Mexico's debt payments which quickly became
unserviceable. Lastly, oil's bull market cycle was concluding, soon to
be followed by a long collapse in prices rapdily destroying Mexico's
previously perceived wealth.
The magnitude of the devaluation during this period was severe, moving
from an exchange rate of 21.25 pesos to the US dollar in 1977 when Lopez
Portillo took office, to 149.25 pesos per US dollar in 1982 (approxomately a 600%
currency devalutaion). This was a crushing loss of value for the Mexican
peso, crippling the purchasing power of the majority Mexico's population.
Few managed to protect their wealth during these crises, typically only
those who enjoyed privileged information from senior government officials
anticipated the currency devaluations.
Worthless Devaluated Mexican Pesos
Today we live in a new age of information, thus the crises ahead will be
different. These advances in communication and technology will be
instrumental in educating and positioning the public on the correct side of
this coming
wealth transfer. The upcoming crisis will be global and its
magnitude will surpass anything seen in history, impacting a global monetary
system.
The era marked by excessive spending, consumption, and debt is coming to
an end. The basic and elemental will defeat the
"sophisticated" and "modern". The United States,
Europe, and Japan will be forced to understand that more deficits, bailouts,
and currency printing ( QE or Quantitative Easing ) will only aggravate and
extend the problem.
Looking at history however, we must understand that their policies will
not change and we must take individual and discreet measures to protect
ourselves and our loved ones. To put it in a clearer way, you need to seek
financial protection in real assets such as gold and silver, which have
demonstrated time after time that they are not a "barbaric relic",
but true money, offering the only time proven store of value.
