The Mises Institute monthly, free with membership
October 1995
Volume 13, Number 10
Mexico's Benefactors
Greg Kaza
Finally, thought some Mexicans, part of the $50
billion that Western taxpayers sunk into the
bailout would get to native investors. In late August, Finance
Minister Guillermo Ortiz waved
$1.1 billion in the air for indebted individuals and companies.
The result: the peso sunk like a
rock, again.
Is there no way to shore up this sunken ship? There is, but
Mexican officials and their
international lenders have other ideas in mind. Trouble is, they
keep backfiring. It was widely
and rightly assumed that Ortiz hadn't been hiding this money in
his mattress from forwarded U.S.
funds. It had been manufactured in the old fashioned way: printed
by the central bank.
Ortiz's announcement came one day after an intriguing IMF
study on how the Mexico meltdown
had occurred in the first place. It had previously been assumed
that foreign lenders suddenly
decided to pull out after Nafta passed. But it wasn't primarily
foreign lenders at all, but Mexican
depositors, most likely the large and connected ones, who
converted their pesos and sent them
out of the country.
But this puts the U.S.--Mexico's primary benefactor--in an odd
position. Taxpayers are now
paying the Mexican government to lend money and pay bills that
Mexico's own most
sophisticated investors refuse to touch. This piles ignorance on
ignorance.
If Ortiz's stash of cash didn't do the job, what can we say
about the new $58 billion IMF fund
created by the G-7 to counter private currency trading it doesn't
like? Clinton had an idea: "We
must work to identify and prevent potential economic problems
like Mexico's before they
become disasters and wrack the global economy. And when crises
occur, we must have efficient
ways to mobilize the international community."
Speaking in the government's echo chamber, Treasury Secretary
Robert Rubin and IMF director
Michel Camdessus said the same thing. At one level, the fund
represents an attempt by the U.S.
government to force its trading partners to shoulder more of the
bailout burden. U.S. elites still
suffer politically from the Mexico bailout.
The bailout fund is also meant to show private financial
markets that the government is boss.
Investors fled the peso when Mexico got its treaty and stopped
pegging the currency to the dollar.
A reality check revealed that Mexico had issued a mountain of
short-term debt to create a
Potemkin Village. The run on the peso gained in strength as
speculators "shorted" it and the
dollar against the yen and D-mark.
The fund is meant to prevent financial markets from
discounting government financial
instruments, even when reckless fiscal and monetary policies
suggest they should. Looked at in
this way, the fund is an attack on the free market itself.
Let's recall why it is that markets rule in the first place.
They impose rigid discipline on
governments that engage in irresponsible economic policies. When
the Mexican central bank
inflated the money supply prior to the 1994 Mexican national
elections, the signal sent to the
markets was: sell! Nafta only made matters worse by linking the
fate of Mexico with the U.S.;
thus the dollar fell proportionally.
Clinton, Rubin, and Camdessus are betting that the new bailout
fund will allow the IMF to rig the
game, preventing private financial markets from taking the same
decisive action that greeted
Ortiz's $1.1 billion debt fund. The IMF wants the world's central
banks to inflate, while creating
a mechanism to interfere with markets.
But won't this tempt every government to inflate to the brink
of ruin? This can be "considered in
theoretical terms," said Camdessus, "but not in real terms."
Which only goes to prove how unreal
the world can seem when you're not spending your own money.
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Greg Kaza is a member of the Michigan legislature
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