Friday, February 20, 2009

Money, it's a crime/ Share it fairly but don't take a slice of my pie...

My first trip to the bank in Mexico was thrilling. While the exchange rate had been $10 for 100 pesos as long as I could remember, the cost had shrunk to $8 in the six months since I had last visited. While it certainly made the math a little harder (and we all know that math is not my strong point), it sure made things a heck of a lot cheaper. As my friends struggled with euros in the face of a shrinking US dollar, everything for me became a discount.What should have been my $250 rent was now only $200.

Over the next month, I would routinely take out 1,000 pesos for my expenses. Looking over my bank statement, however, I soon realized that this was costing me even less than before. Starting at $76, by the end of my first month by statements showed that those 1,000 pesos were only costing me $69. 

What I had considered a luxury at first, however, was now turning seriously sour for the Mexican economy. While a 20% discount rate is nice, in the last few days that rate has reached 35%. And I am willing to take bets that, unless some drastic changes occur, 100 pesos will be bought for $5 by the time I leave in June. That is a 50% devaluation. 

Looking back, I suppose I was OK with profiting a little bit at the country's expense. After all, with the exchange rates down for the US, too, I figured it was a more or less "normal" part of the recession. And I think I was just happy to get the "discount." But as the rates continue to slip, Mexico increasingly sinks into hot water. 

While exchange rates don't technically affect the prices of domestic products, it does change the prices of imports and exports. Mexicans are now getting less money for the things they sell abroad and are paying more for the things they bring in. And what are they bringing in at higher prices? eighty-five percent of their rice, 65% of their wheat, and 48% of their meat. Mexicans also import 15 million tons of corn from the US each year, a grain that makes up for 59% of their caloric intake, half of their energy, a large part of their protein and is a significant source of fiber and calcium. With the exchange rate getting worse and worse every day, the prices they pay for things are increasing by 20-40%. 

Because so much is imported, domestic prices, too, are beginning to rise. Even a local shopkeeper or shoe-shiner needs to charge more so he can eat. And the currency is growing less and less valuable by the day, reaching an all-time low this month. As the Mexican Fed tries desperately to save the currency, there is not much they can do: lower interest rates too much and they risk stagnation, a combination of inflation and low to no growth. 

Honestly, I don't understand why the exchange rates have changed. According to conventional wisdom, the US dollar began to drop during the mortgage crisis because foreign investors no longer trusted their American investments. Less foreign investment means less demand for dollars and a weaker exchange rate. As for Mexico, the best explanation I have heard so far comes in the form of a popular maxim: when the US sneezes, Mexico gets a cold. Right now, they are certainly worse off than their neighbors to the north. 

With this in mind, I have concluded that the peso is weak because a) less people want to invest in Mexico (just as fewer are investing in the US) and b) the American economy is weak. 

But in Mexico, as far as I can tell, nothing much has changed. The country still ticks along much as it did six months ago. There is no new president, no drastic new policies, no new domestic crises. They are still capable of producing as much as before and have the workers and resources to do it. The only thing that has changed is the amount of money available. And it is this that makes financial recessions particularly hard for me to grasp.

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