The National Bureau of Economic Research marks June 2009 as the conclusion of the Great Recession. This indicates that the U.S. economy has been in recovery for close to three years. While this characterization holds true—thanks to stimulus measures and monetary easing pushing GDP into positive territory—one must question the quality of this recovery.
According to the latest CNBC All-American Survey, only 36 percent of Americans believe the economy will improve in the coming year. This reflects a 9 percent increase from the figures reported in November 2011. However, it’s important to note that a significant 64 percent still anticipate no improvement in the economy over the next year.
It is evident that the public recognizes serious issues within the economy. People across the nation are beginning to comprehend that perpetual borrowing and spending cannot lead to lasting prosperity. Eventually, debts must be addressed—through either inflation or outright default.
Recently, we discussed Japan’s financial troubles, including its staggering debt-to-GDP ratio of 200 percent, its first trade deficit in over three decades, and the potential for covering budget gaps through debt monetization. After receiving several requests for a follow-up, we aim to offer some insights on how to prepare for an impending crisis. While we lack definitive answers, we can share useful anecdotes.
The looming debt crisis in Japan may serve as a precursor to a similar situation in the United States. Initially, as Japan’s financial instability escalates, the U.S. may seem comparatively stable. Investors divesting from Japanese government bonds could redirect their investments into U.S. Treasuries, thus lowering treasury yields and providing the U.S. government with temporary leeway.
Nonetheless, the U.S. will ultimately face its own reckoning. At some stage, foreign creditors may sell off their treasury holdings, prompting the Federal Reserve to resort to money printing to mask the government’s budgetary shortfalls. This scenario would mark the end of the era of the dollar standard.
During times of rapid currency devaluation, tangible assets—such as gold, silver, oil, and farmland—have historically proven to be reliable means of wealth preservation. Hence, those in a financial position to do so should contemplate diversifying a portion of their savings into these well-established inflation hedges.
For the rest of us, who are striving to make ends meet, practical measures include food storage, acquiring gravity flow water filtration systems, and cultivating a vegetable garden. Shortly, we will share a set of actionable tips, including a 12-point plan to help individuals navigate these challenges. But first, let’s reflect on the lessons observed during visits to Mexico City.
Lessons from Government Overspending
Mexico City is truly a marvel, boasting a population more than twice that of Los Angeles. The frenetic pace of life can make even the busiest Californian highways feel orderly by comparison.
The striking contrast of ancient ruins, medieval Spanish architecture, and contemporary skyscrapers is both captivating and thought-provoking. Each visit serves as a vivid reminder of the consequences of reckless government spending and currency inflation—a cautionary tale that could just as easily apply to the United States.
Like the U.S., Mexico’s economy experienced significant growth during the mid-20th century. This period, known as the “Mexican Miracle,” saw GDP growth of 4.2 percent from 1929 to 1945, accelerating to 6.5 percent from 1945 to 1972. Even throughout the inflationary 1970s, Mexico’s wealth of oil and other resources helped sustain GDP growth of 5.5 percent from 1972 to 1981.
However, the peak—marked by the 1968 Olympics in Mexico City—was fleeting. By the late 1970s, overall living conditions had deteriorated significantly for most citizens.
What caused this decline?
In the 1970s, the administrations of Luis Echeverría Álvarez and José López Portillo substantially expanded social development initiatives, primarily through increased public spending financed by debt.
As a result, Mexico’s external debt skyrocketed from $6 billion in 1970 to $20 billion in 1976—a more than 300 percent increase. This led to a series of severe devaluations of the peso, plummeting from 12.50 pesos per dollar in 1954 to 20 pesos per dollar by late 1976, which devastated the middle class. The situation deteriorated further after the crash of oil prices in 1981-1982, coinciding with rising interest rates, leading to economic chaos.
In 1982, as his presidency neared its end, López Portillo suspended foreign debt payments, devalued the peso, and nationalized banks and other industries affected by the crisis. Any hope for rapid economic recovery vanished.
Yet, a decade later, Mexico seemed poised for renewal. After enduring 12 years of economic stagnation, optimism surged with the approval of NAFTA, and foreign investment began flooding in, inflating the peso’s value.
But the government, led by President Carlos Salinas de Gortari, could not resist the temptation to spend. By the end of 1994, Mexico’s budget deficit had ballooned to 7 percent of GDP, leading foreign investors to lose confidence. The result was a dramatic crash of the peso, which plummeted 44 percent in a single week, devastating Mexico’s economy.
Currency reliability has shifted dramatically over the years. Once considered as dependable as the dawn, currencies now often reflect government mismanagement. This is evident when we compare the tangible value of silver coins from the past to today’s paper currencies.
The Peace Dollar, a United States silver coin minted in the 1920s, is an example; at that time, one dollar contained 0.77344 troy ounces of silver. Similarly, the 1932 Un Peso contained 0.3856 troy ounces of silver. The exchange rate was straightforward—two pesos equated to one dollar. Today, however, it takes about 13 pesos to buy one dollar, showcasing a dramatic shift in value.
The reality is stark. It used to require $1.29 to purchase an ounce of silver; today, the price has surged to $31.98, marking a 2,479 percent increase in dollar terms. In contrast, in pesos, silver’s price has skyrocketed from $2.58 in 1932 to $407.75 today—a staggering 15,804 percent increase.
The situation in Mexico City serves as a vivid illustration of the perils of government mismanagement. The once-vibrant middle class has been eroded, visible in every corner through signs of decay. It serves as a cautionary tale for the consequences of imprudent financial policies that might soon affect the U.S. as well.
Strategies for Economic Survival
In response to numerous inquiries, we previously offered practical advice to navigate the economic crisis. Given the lasting relevance of these suggestions, we revisit them here, with some updates:
- 1. Always take what’s yours—and a little extra. You’ll likely need it as economic conditions fluctuate.
- 2. Never shake hands with your right hand without first crossing your left fingers behind your back.
- 3. Prioritize your well-being while maintaining awareness of those around you.
- 4. If you choose to help those in need, consider it a means rather than an obligation.
- 5. Be honest with yourself while remaining flexible with others—especially concerning insurance matters.
- 6. While compassion is important, ensure you’re not enabling unhealthy dependency.
- 7. Only tip service workers who genuinely provide a good experience.
- 8. Show kindness to those in genuine need, but exercise caution with others.
- 9. Don’t stress over what you lack; focus instead on what you can control.
- 10. Recognize the folly around you and strive not to fall into its traps.
- 11. Losing a job isn’t a personal failure; the economy has impacted many.
- 12. Keep in mind that challenges are temporary; remember to look for the silver linings.
Thank you for reading.
Sincerely,
MN Gordon
for Economic Prism
Return from Japan Will Take the World’s Breath Away, Part II to Economic Prism