The unwelcome landmarks continue to fall. Last week, US inflation rose above 9% for the first time in four decades, and the value of a euro dropped below the value of a dollar for the first time in two. Round numbers shouldn’t matter, and both continued trends that had been around for a while. But of course they do.
To try to gain a perspective, let me offer how all of this is perceived in Mexico, where I spent last week. The grand country of 129 million that shares a long border with the US has a frustrating recent economic history of failing to grow despite many sincere attempts. But Mexico’s story does cast the battle against inflation and the strength of the dollar in a new light.
And given that Mexico’s growth continues to disappoint, while organized crime is tightening its grip over ever more of the country, some of its performance is surprising. Turning to inflation, remarkably, it is lower in Mexico than in the US, as I showed last week:
Meanwhile, the peso has held up very much better than most currencies as the dollar has surged. This is how the euro and the peso have performed compared to the US dollar since the beginning of 2000. Despite everything, Mexico’s currency has held its value slightly better over that time than the euro:
If we look at a ranking of emerging market currencies against the dollar so far this year, the picture of Mexican resilience continues. It has barely given any ground against the dollar, while two other Latin American nations, Brazil and Peru, have gained slightly. For others, it’s a different story:
All of this has happened as Mexico churns through the fourth year of the presidential term of Andres Manuel Lopez Obrador (known as AMLO, his initials), an aggressive populist who had scared foreign investors throughout the two decades he acted as the left’s figurehead and campaigned for the presidency. AMLO has not made the mistakes many had feared. He may well, however, have made some very different but equally serious ones whose pain is not yet totally apparent.
Austerity, AMLO Style
The big thing that many didn’t grasp about AMLO is that frugality is his thing; he hates spending money and regards tight spending as virtuous. That meant that Mexico did less in fiscal terms than any comparable country to alleviate the hurt caused by the pandemic. Looking at the budget deficit of Mexico and the US as a percentage of gross domestic product, it’s impossible to tell that the pandemic even happened south of the border, while it led to a historic deficit north of it:
Hair-shirt economics like this help to strengthen the country’s currency and credit rating. After various economic disasters in the last 50 years, this is a big deal. AMLO witnessed the last two presidents to attempt sweeping populist growth policies suffer severe peso crises and hyper-inflation as they left office: Luis Echeverria in 1976 and Jose Lopez Portillo in 1982. Both borrowed and spent heavily. He has successfully avoided making the same mistake. But is this a good idea? Weirdly, many of his critics on the right in Mexican politics, along with many allies on the left, now complain that he has been too conservative.