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Unlucky 13
Luis Echeverria became president of Mexico in 1970. These were troubled times for the country. By the end of his term in 1976 every economic variable was running off the rails. Huge inflation, current account, trade and big budget deficits.
To keep the economy alive numerous steps were taken to kick the can down the road through the next election.
The most dangerous efforts that Mexico took were in its debt profile. The public and private sector was borrowing in dollars. The worst part was that the Mexican central bank was printing Pesos like mad in an effort to keep the banks liquid. The Pesos went into the banks; the banks immediately lent it back to the Mexican Treasury which was running a huge deficit. This was an early version of QE. The central bank created credit; that credit was used to fund the government deficit. All of the emergency steps were advertised to be “only temporary”. More stable policies were promised following the next presidential cycle.
In 1976 Jose Lopez Portillio took office and not long after, the Peso was devalued and economic hell broke out in Mexico. Portillio had inherited a disaster. All of the band aides fell off. There was no chance for an orderly economic transition. Only a massive devaluation and wipe out of debts could address the problem.
I was trading FX in this period. I had many US multinational clients with Mexican exposure. Every one of my customers got their faces ripped off. I hadn’t done much to help them.
By 1982 things had again gotten tenuous in Mexico. Portillio did exactly as his predecessor. He kicked the can down the road until after the election. The critical variables were Mexico’s dependence on foreign debt and the central bank’s financing of the government via the commercial banks. To keep a lid on things the Central Bank artificially set interest and FX rates. It was a rigged casino.
In 1982 the new president, Miguel de la Madrid took office. A massive devaluation soon followed. The chaos was so bad that it forced Mexico to default on $100+ billion of foreign debt. The devaluation precipitated what is referred to as The Lost Decade.
In 1982 I was still doing FX. I had a dozen corporate clients who saved a bundled based on my advice that Mexico would go tapioca. I’d learned from the last experience.
1994 was no different. Salinas Gortari’s term as president left the country in a fragile position. The same mistakes were made. Incoming president Zidillo was forced to devalue. In an effort to contain the crisis Bill Clinton was backed into making an emergency $20B loan to Mexico.
In 94’ I had no clients to protect. I made money myself on this deval.
I bring this history up to make a point about what America has set itself up for. In many ways we look like Mexico in the critical years of 1976, 82’ and 94’. In the year preceding an election the country has taken a number of steps to kick the can down the road. Promises have been made that all of those emergency steps will be reversed starting in January 2013. Some of the big issues that have been tabled:
A) The Bush tax cuts on those making more than $200k will expire.
B) The Bush tax cuts on those making less than $200k will also expire.
C) The Patch on AMT will expire.
D) The 2% payroll tax holiday will expire for all workers on 12/31/12 (I’m sure the current holiday will be rolled for another year)
E) The 99-week extended unemployment benefits die on 12/31. (The emergency benefits will also be extended for 2012)
F) There will have to be a budget that is approved. Alternatively, a series of continuing resolutions is required to avert a government shutdown. We have not had an approved budget in over 900 days.
G) 2013 is the first year that there will be mandatory caps on discretionary spending. These limits will result in a YoY decline in government spending.
H) The Federal Reserve has promised to keep interest rates at zero into 2013. While it is possible that the Fed could continue the madness for even longer, the reality is that interest rates have nowhere to go but up.
I) By January 2013 it will be painfully evident that the country’s key social programs, Social Security and Medicare will be running in the red at a pace that is far higher than anyone considered possible. The need for dramatic changes in these programs will have to come onto the table. The implications of this will be significant.
J) In 2013 the issues of Fannie, Freddie, FHA and the Federal Home Loan Banks must be addressed. The problems at the housing agencies has festered too long.
K) The country will face another debt ceiling extension. The last time cost us our AAA.
L) At some point in 2012 economic events (Probably Europe) will force the Fed into yet another round of QE. More LSAP and another increase in the Fed’s balance sheet. But when completed the Fed will have fired it’s last bullet. QE-3 will not achieve any better results than QE-1 or 2. The policy will be discredited as it achieves nothing positive and causes inflation. There are no credible options left for the Fed to fight the slowdown that HAS to occur when the effects of A – K are felt.
America looks like Mexico of the 70’s – 90’s. The last election cycle brought us the biggest economic crisis in 70 years. The next election will be no different. Dozens of landmines have been planted. They are timed to go off in 2013. Some may be fixed, others kicked further down the road. However the odds of the country addressing all of the things that have been programmed to explode is, in my opinion, close to zero. One or more of these things is going to trip us up. There are too many big issues to confront.
When history looks at this period it will point to the incredible mismanagement of the economy that has taken place. A crisis is being programmed. It will go off like clockwork; it is now set on autopilot. I blame the partisan politics in D.C. for setting the country up for a big fall. But the reality is that the politicians are deeply divided because the voters are equally divided.
Not all these problems are Obama’s doing. But he, and his Treasury Secretary, Tim Geithner, have done everything they could to kick the problems of the day to just 13 months from now. It kills me that TG is still considered the fair-haired boy. I doubt history will agree with that assessment.
.
Note:
A thank you to readers on my blog:
http://brucekrasting.blogspot.com/2011/12/one-million-thanks.html
»
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Ya better hope it's not located in Cheyenne Mountain! :>(
Well said.
Just read "Currency Wars" which suggests US will find ways to devalue dollar. Gold confiscation, forcing other nations to accept cheaper dollar or other means is inevitable. Only problem this time is China which is immune to pressure from Wash. Therefore a collapse of developed economy financial system is hightened. Question is who will suffer most ? Answer is the US which now derives 40% of wealth from financial / service sector compared to 5% 30 years ago. China on other hand has a more balanced economy and understands hardship by the masses
China is not immune from Washington and its owners. China needs markets for the industrial powerhouse it has become. 200 million + out-of-work Chinese without a social safety net could be a problem. The Chinese bureaucrats walk a tight rope between domestic upheaval and getting the most possible out of their huge dollar surplus. And one shouldn't forget that they are bureaucrats, state employees that don't have the same business instincts that someone like Buffet has.
An unpleasant post for someone who has been betting on Unhappy 12.
Financial history is fun because it will repeat as you correctly pointed out. Thank you for the article. Andrew Gause's book is chcok full of history about banking, economies, etc and is very easy to read:
http://www.amazon.com/Secret-World-Money-Andrew-Gause/dp/0965658902
Good luck!
How are these guys, Bernanke, Geithner, Obama, etc. positioned personally?
Are they positioned like Corzine was? i.e., when the shit hits the fan, they simply claim surprise & ignorance & go on their merry way, financially insulated from the fallout they themselves helped create?
Sorry - I don't subscribe to these guys being that dumb that they don't see what is coming for the 99% - they are simply using their positions to protect themselves while "giving the people what they want" - they are career politicians using their office for personal gain (of themselves & their cronies) rather than providing real leadership & get away with it since there are too many dumb or apathetic citizen/voters.
Ironically, when the shit hits the fan, the blind and ignorant "herd" will be culled in a "self-correcting" market cleansing. Those who see it coming and aren't in a position to stop it need to protect themselves best they can.
Got gold?
I bet Obama and Geithner have been stashing away gold since the day they took office. They know the score.
Would bet some of that Gold was obtained from the NY Fed stores...couple bars here & thereallocated within the vaults in a specially designated area...In this way the gold never leaves the vaults - just allocated to TPTB - Who would notice - not like they have ever been concerned about the rule of law, ethics, morals, or the like...
I always enjoy your articles Bruce as they are well researched and have an intellectually honest component to them. Whilst I don't always agree, they are nearly always cause for some deeper thinking or re-evalution. In my view, TPTB currently enjoy a good measure of momentum and must act before enough sheeple wake up and enter the ever-building anti-establishment movement. 2012 would seem to be the opportune time as the hysteria and anxiety surrounding the year will reach its zenith.
I wish we were like Mexico, less than a 100 Million people, lots of arable land, seacoast, minerals and resources. A healthcare and education system not even half as complex as ours, and therefore easy to maintain. All the mordida is up front, the country is in control of gangsters right now, but we know how to fix that. And I think you can own gold, but you can't own guns? El Norte has the currency problem, not Mexico.
Seriously? We couldn't fix Mexico's cartel problem anymore than we can fix the seemingly endemic corruption in our own government.
TSA -
"We couldn't fix Mexico's cartel problem.."
Fix it? Its working perfectly. This is the way it is designed and supported. This is the way is supposed to work. Where do you think those massive drug profits go? The Mexi and US govts are taking a fat cut at all levles, city, state, fed, you name it. The cops deal in protection, drugs, distribution, just like the feds. Don't believe it, read Dark Alliance by Gary Webb. Watch the 60 Minutes story on how the US feds imported one ton of coke then "lost it" as part of a training exercise. Reade up on the history of the Los Zetas Cartel - "Some of the initial members of the group received specialized military training in counter-insurgency and locating and apprehending drug cartel members in the United States at Fort Benning, Georgia in the early 1990s while still members of the Mexican military."
The all out drug war is just what the TPTB want. Coming to a country near you.
a currency is worth the things it can buy, and most of the crap i see isn't worth owning.
Yes you can, by stop using and paying high prices for drugs, Gringo..
Good luck with that..
legalize and tax. problems solved.
Wonder if we had spent half as much on rehab that we've spent on trafficking... The product will always go where there is a market. It's not the availability that is the problem; the problem is that there are customers.
Hmm, by customers I assume you
mean Police that need some easy
crimes to solve, Private prisons
that need to be filled, Racists
that have to be mollified by
putting "Cocaine-crazed Negroes"
down, "Lazy, dope-smoking Mexicans"
to deport, CIA programs that need more
funding than Congress will
allocate, -- in short, the customers that
actually buy the drugs are just
a side-effect -- check yer premises.
Now there's an eye-opener. Thanks for the expanded view. Sorry to have been hindered by blinders all this time. Sometimes my own naivete amazes me. Still, some rehabs would be nice, eh? As a member of AA, our groups take meetings into prisons, but the authorities don't, in general, make it comfortable nor easy for us.
It's not "we can't" fix. We won't. THE POLITICS OF HEROIN A. W. McCoy and DOPE INC. E.I.R.
At the end of the temporary tenure of either party (i.e. when they are thrown out by voters), each party claims US is better off, but US never is. N E V E R. Both parties contribute to decline into socialism and bankruptcy. Both.
I'm re-reading HOW THE WORLD REALLY WORKS and thinking perhaps it's mostly true.
What were interest rates doing in those days in Mexico pre-devaluation? ZIRP? Did you know of banks basically not wanting deposits?
Was one year money at 10 basis points? Did 3-month money keep teetering into negative nominal yields?
If the US were to devalue, against what currency? If you tell me IMF SDR's or gold, tell me how that conversion can be accomplished virtually overnight? Look how long it took to get the euro created. You are reciting the problems everyone knows and giving us a conventional answer (among other different conventional answers). But if this is so, why is the US dollar in short supply in Europe? Was the Mexican peso ever in short supply globally during the periods you describe?
IMHO the situation is vastly more complex than you imply. The authorities, and perhaps random events, could take things in all sorts of directions. Trying to forecast even beyond the next Merkozy summit seems to me more difficult than guessing at New York City's weather on a specific day in April 2013.
"If the US were to devalue, against what currency?"
We devalue against all currencies everytime the FED prints.
Devalue against all the stuff you need to live.
devaluation=inflation
Bruce, tho you accurately list pointers to US economic disaster, do consider that you really have not digested the political reality of the United States.
You write:
« I blame the partisan politics in D.C. for setting the country up for a big fall. But the reality is that the politicians are deeply divided because the voters are equally divided.»
A little bit of thought, and you'll see this cannot be true. The 'Democrats' and 'Republicans' do not represent two 'sectors' of the American people. As Gore Vidal said long ago, and Huey Long decades before that, there is only really one party in America, pretending to offer 'two parties' as choices.
Consider:
Why is it that nearly all US Congresspeople and Senators (aside from a half-dozen or so), vote nearly unanimously for US 'Defense Department' spending and the wars ... when huge chunks of Americans are glad to cut these things?
Why is it that they nearly all voted for TARP and bailouts, against the nearly unanimous disapproval of voters, faxing in and calling like mad, the only division among people being that between 'No!' and 'Hell no!'
It is ultra-clear that the US Powers That Be, get anything they really want out of the US Congress ... so why do you think that this 'partisan politics' charade, all of a sudden means anything on some economic issues?
As the TARP vote showed, even on economic issues, when the US oligarchs want something, they get it on a silver platter.
The Democrats and Republicans even get their campaign funding from the exact same companies and people! The policies of Bush and Obama are fundamentally identical. Et cetera.
The 'partisan bickering' is another stage-show, pretty clearly ... Bruce, you are often so smart on things, I am surprised you don't see this yet. You still think these US 'elections' mean something.
Exactly correct. The people are not responsible for this total fuck-up.
The POTUS has been a figurehead since the Kennedy brothers were murdered. Any POTUS since then knew what the consequences were for "going renegade" and bucking their masters.
Yes, bank guy in Brussels you point out exactly what Bruce left off. We have been captured by corporatism not partisan politics. Crony corporatism is the obstacle to problem remediation. Campaign finance reform and term limits must be instituted by constitutional convention so they are above court review. If we act as civilized adults this will be our path. Otherwise there is no other choice but revolution.
Tim
Absolutely right. Elections are the freak show for sheeple, to get them excited and revved up to punch that card once again though it's just the same old shit -- fool the really stupid people all of the time.
Let's get real. Do we really need the system we have? It's killing us.
Why anyone wants to be POTUS is beyond me.
Good retirement plan and you can let your friends sleep in the Lincoln bedroom whenever you want to impress them. Good food and cheap rent too.
Beats me as well. Why anyone would want the job in this upcoming (perhaps last) presidential cycle is, by definition, crazy as hell. The only reason can be, for Congress, that it's the last dip in the cookie jar before Mom gets home -- just in time and tempting getting caught. As long as there is money/power to be had, there will be politicians. They are all sociopaths.
In The Road to Serfdom, Chapter 10 is titled "Why the Worst Get on Top". Please ignore the sexual double entendre for the moment. The basic point is that people of such moral nature as they are comfortable exercising inappropriate and undeserved power will gravitate toward the job.
Also, there are shallow minded narcissists to whom this would appeal, the sort of people who would give electronics full of their content free speeches as gifts to the english royal family.
Debt bomb. Three ways to handle it, A) declare sovereign default outright and start over, B) massively devalue the dollar by sending every address a check for $100k, and later declare bankruptcy outright, C) Raise taxes to the point (on those that have something left to pay) where revenues are greater than expenses and apply surplus to the debt.
We read a lot of crap here at ZH from posters about deadbeats and attitudes of entitlement by so called poor folk, but from where I sit it is the top 10% NOT paying their fair share that is making a lot of the trouble, at least on the revenue side of the balance sheet, the ultimate entitlement, to be wealthy in the USA and pay virtually nothing in taxes.
If I had ANYTHING to say about it on a national forum I would plead with Americans to stop what they are doing and not restart till government balances the budget and institutes a fair and loophole free tax system that can be filled out on a postcard, just a permanent state of general strike till they stop taking bribes and start doing right by the nation in Washington. We could very well have the same or better government for half the money if they would just fix spending and get business and special interests out of the government that is supposed to be of, by and for we the people.
Focus attention on those huge "charity" foundations. Before doing anythng else, "nationalize" that money. Then the billionnaires and hyper-millionnaires.
Many just plain folks who worked and lived below their means, saved, paid off mortgages and stayed in their homes for decades NOW appear rich, but it was the result of their frugal habits that make them seem so. They paid their taxes and it's too late to blame them if you think their tax rates were low. I'm not talking Buffets but ordinary folks who paid their own way, contributed to their own pensions and benefits, expected nothing from "government"...which is what normal people used to do.
"Focus attention on those huge "charity" foundations. Before doing anythng else, "nationalize" that money."
An excellent suggestion. Kills two birds with one stone. Raises tons of tax money and ends the noxious social engineering that these foundations do.
It will create a quandry: what will the retarded progeny of the rich do to occupy their time?
Those "charity" foundations are a tax dodge created to keep the Buffets and Gates' of the country from paying taxes on their huge capital gains. Much of Gates' cap gains would not exist if not for the efforts of the govt. to enforce American IP standards on the rest of the world. Why should he get those benefits for free?
"Are there no poor houses or work houses?"
"...fair and loophole free tax system..."
We had one prior to the 16th and 17th amendments.
Return to taxing the states and having the states represented in congress. Most of the shit will cease.
don't forget our tried and true way, war
"I) By January 2013 it will be painfully evident that the country’s key social programs, Social Security and Medicare will be running in the red at a pace that is far higher than anyone considered possible. The need for dramatic changes in these programs will have to come onto the table. The implications of this will be significant."
Yes the 'identified patient' in the disfunctional family. All we have to do is frag the "entitlements" meme, and we can ignore the wars.
While I normally enjoy BK's offerings, I find his clinging to popular republican mythology to be too much at times.
So, yer in favor of continuing to rob Peter to subsidize Paul? Check yer premises -- AND your PRINCIPLES!
Good article, I have a feeling history will be very unkind to mr. geithner and bernanke.
They have to know the amount of world-wide human suffering that will come from their can-kicking exercise. They deserve the reputations of Stalin and Beria.
But they will have got rich. Their ratings won't bother them. They're shameless.
But you can't take it with you.
So your saying I shoud tell somone where my PM stash is?
You can tell me, I'll keep yer secret safe -- after all,
I'm just a StychoKiller! :>D
By unkind you mean truth.