There’s a certain charm to the sound of a rooster crowing at dawn, especially when heard from a cozy farmhouse in the countryside. This morning call carries a unique appeal that resonates with rural life, yet it loses its magic in urban environments.
Today, we were jolted awake by the loud crowing of roosters—though not from a picturesque barnyard, but from rooftop coops in a bustling neighborhood of Mexico City.
Specifically, we find ourselves at Calle Norte 86, in Colonia La Malinche in the borough of Gustavo A. Madero within the Distrito Federal (Mexico City). Our reasons for being here are twofold.
First, we are visiting various family members—and a few unconventional characters—who reside in this area. Second, we are conducting research to understand the long-term effects of excessive governmental borrowing and the inflationary tactics employed to alleviate debt burdens.
While there is already ample written material on this topic, our goal at the Economic Prism is to gain firsthand insights into the consequences stemming from over fifty years of financial mismanagement, particularly as it might mirror future scenarios in the United States.
A Downright Disgrace
In a recent article titled Adventures in Currency Debasement, we briefly discussed the rise and fall of the so-called “Mexican Miracle” economy. We aimed to explore what actually occurred, the reasons behind it, and its ramifications.
One important observation from that piece is that less than a century ago, both the dollar and peso were made of silver, allowing for a straightforward exchange rate: two pesos equaled one dollar. Today, however, as both currencies have devolved into mere paper notes, their values have significantly diverged.
As of March 2017, it takes approximately 19.56 pesos to purchase a single dollar. This starkly highlights the Mexican government’s less-than-stellar track record in currency management compared to that of the U.S. over the past century. Yet, when evaluated against silver, the context shifts dramatically.
In the 1920s, an ounce of silver cost about $1.29. Today, that same ounce commands around $17.75, indicating that silver is now valued at 1,276% more than it was a century ago. This suggests that the U.S. Treasury, with the aid of the Federal Reserve, has mismanaged the dollar severely.
In the case of pesos, the situation is even graver. In 1922, it took only 2.58 pesos to obtain an ounce of silver. Today, the cost has soared to 347.19 pesos, marking an astonishing 13,356% increase in peso terms since the 1920s.
The Mexican government’s ability to erode its currency over the decades has resulted in numerous unintended repercussions, most notably the decimation of the middle class. This reality is one of the trade-offs implied when politicians promise the unattainable free lunch that comes with deficit spending.
Since mid-2013, the peso has plummeted nearly 50% against the dollar, a trend that escalated following the election of President Trump. Although the nosedive has stabilized somewhat, we believe the damage may be long-lasting.
Off the Beaten Path in Mesoamerica
If all goes as planned, next week we will share some insights from our observations here. Meanwhile, our explorations of this sprawling megacity continue, often leading us far beyond the typical tourist trails.
For instance, we recently visited the small town of Tepoztlán, located around 80 kilometers south of Mexico City. There, we met Tío Carlos, the brother of our mother-in-law, who possesses extraordinary skills.
Tío Carlos has never attended medical school or received formal training, nor is he capable of performing open-heart surgery. We’re not even sure if he can use popsicle sticks to set a broken finger, but to the townspeople, he is known as El Doctor.
When individuals believe they’ve been afflicted by evil spirits, they turn to El Doctor for a “Limpia”—a spiritual cleansing ritual. Armed with nothing more than a raw egg, he can supposedly absorb negative energy from a person’s body into the egg, turning it into a sort of energetic sponge.
This practice may sound peculiar, yet it’s been a part of Mesoamerican culture since pre-Columbian times, long before the advent of central banking.
While it’s unlikely that Tío Carlos has any knowledge of central banking, he surely understands the alarming transformation of his country’s banknotes into virtual currency with little worth.
Though a bit eccentric, Limpias seem to be relatively harmless. In stark contrast, central banking stands as a categorical madness, leaving a trail of destruction in its wake.
Sincerely,
MN Gordon
for Economic Prism
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