Hi, everyone!
I’ve decided to start republishing some of my Mexico News Daily articles here on my Substack (Wednesday is the day I’ve chosen, pretty much arbitrarily). I won’t be re-publishing all of them — truth be told, they’re not all necessarily worth a re-publish — but I’ll try to put what I believe to be the most relevant ones here, as well as some of my own notes about the subject.
For today, it’s Go, Super Peso, Go?, originally published on March 11, 2023. It’s been a couple of months now, and unfortunately, the peso continues to “gain strength” which I think must be a very good thing at a much higher economic level than most of us are at, and a bit panic-inducing for the majority of us who are counting our dwindling pesos down here on the ground. Strangely, it’s hard to find any writing on the subject that addresses how regular workers are dealing with it, and I’d really like to read something other than my own work on the subject. If you’ve seen anything else (in English or in Spanish), please do point me in the right direction!
Anyway, without further ado: the first re-published MND article on The In-Between!
Yay?
If you’re like me and earn your money in dollars, a position that most Mexicans see as plenty enviable, you might have conflicting worries of guilt and alarm at the improving performance of the Mexican peso this year.
Gone are the days of getting 21 pesos or more for a dollar…and coming are the days of – gulp – possibly getting 17 or so. (Don’t ask me when or for how long; most of my research turned up such wildly different predictions that anything I repeated here would be ultimately untrustworthy).
All in all, it’s still a great exchange rate; when I first came to Mexico back in 2002, the peso-to-dollar rate was roughly 10-to-one. But the peso’s recent strength has come as somewhat of a surprise, and if the peso happens to get even stronger, a lot of we dollar-earning immigrants are going to have to think very hard about how to reduce our budgets to accommodate a not-insignificant reduction in our spending power.
Why is this happening? Honestly, I don’t know, and I’m certainly not the person to explain it. Whenever I try to make sense of anything in the world of finance, which is basically a collectively agreed-on imaginary concept symbolized by pieces of paper and metal coins (and digital numbers now too, I guess?), I pretty much go brain dead from boredom.
The above article cites higher remittances, increased investment and spending from foreign countries, a weakened dollar, and high official interest rates. How those things translate to currencies being “worth” more or less is not what I’m here to discuss.
My biggest question is regarding how this will affect people “on the ground” who don’t spend their days in the world of the stock market.
I’m on the ground, and can confidently say that things have gotten mighty expensive over the past couple of years, with many food items and household goods nearly doubling in price. Over the past couple of months, it’s done so simultaneously with a reduction in the number of pesos my dollars are worth.
Though there are claims that there’s an end in sight (to inflation, anyway), I don’t think most of us are seeing it. I’m not optimistic that consumer goods will get cheaper; the best I can hope for is that prices will stop rising so quickly. That said, I’m always open to being pleasantly surprised.
Please, finance gods? The 99% of the world could really use some mercy.
But, to me, the bottom of the article on inflation that I cited two paragraphs above says it all: “’Companies’ hesitancy to cut and/or reduce the pace of recent price increases as the economy remains resilient and cost pressures abound’ … could affect the pace at which inflation declines.”
What is inflation, I suppose, if not a feverish upward-bound tornado of prices? On the one hand, the things that companies need to make and sell their products become more expensive, and that expense is most often passed on to consumers with a shrug and an “Inflation, man — we know it’s rough, but what can we do?”
Having shareholders absorb some of those blows in order to keep the same amount of food on families’ tables would simply not be playing the game of capitalism correctly, and they’ve got to have enough money for universe-sized bonuses for the corporate elite, after all!
The problem, of course, is that most of us are not big, important shareholders or CEOs of giant companies. Most of us are also not getting salary or wage increases as a result of these higher prices, and few corporate decision-makers are saying, “Gosh, I guess we’d better pay our workers more now, eh?”
There’s no “rising tide lifting all boats” here; the rising tide is simply drowning some people and keeping most others treading water really, really hard.
Is this really the best we can do, economic system-wise?
None of my Mexican friends (except the person that I personally employ) have received any pay increases as a result of rising costs, and I certainly haven’t either, though admittedly, I could tread water a lot longer than most. I suspect that a slowing inflation is more the result of getting to the top limit of what people are able to pay than it is the wizardry of raising interest rates.
As already pretty freaking privileged immigrants, we are not entitled to a special exchange rate, of course; there will be no “hazard pay” to fight the effects of a weakening dollar and out-of-control inflation. Most of us are already giving ourselves special economic treatment simply by choosing to live in a place without fully embracing the reality of its employment economy (for ourselves, anyway). We’re “gaming the system” in a way; but as many of us are learning, there’s no guarantee that the system will continue to play nice with us.
Well. As any good Buddhist will tell you, the only constant out there is change.
So we’re finally facing it. This is the risk of working in a currency that’s stronger than that of the country in which you reside: there’s no guarantee the low cost of living is going to stay that way.
All Mexicans of a certain age have lived through some pretty serious depreciations of their own currency. I imagine there might be some out there who see this weakening dollar as a bit of cosmic justice, and, hey, they might not be wrong about that.
Still, most of us non-wealthy people are in the same boat. The difference for those of us who haven’t been fully participating in the Mexican economy is that the water’s coming up to the top deck where we’ve been luxuriating; we’re not used to feeling this financially nervous.
Anyway, I’ll be having some humble pie tonight for dessert — if I can find it at a good price.
Go Super Peso, Go?
This is indeed a worry. I bought a large house in CDMX in March of 22. Fortunately I bought most of the pesos for that purchase after Thanksgiving of '21, and got what even then was a good exchange rate. Now? It was amazing. One of my fears of buying here was that I'd purchase and then the exchange rate would immediately take a dump. While I'm delighted that that hasn't happened, I do have to confess to mixed emotions. The house itself (which I recently named "Vicios Ocultos") is in need of extensive remodeling. I have about a half-million pesos bought at the same exchange rate I got last year, but I'm using it fast. But alas, I still have considerable work ahead, and I'll have to buy more pesos at (gulp!) maybe 17.5.
As for inflation, there's what the Fed was calling "transitory," mostly due to the giant supply chain backup. That's over. And then there are what are called "base effects." This means that, for example, if gasoline goes from $3 to $5/gallon, there's inflation along the way, but once it stops going up, there's no more inflation, but you aren't paying any less for gasoline either. In terms of energy, which affects a large portion of inflation, we are now well into base effects, and oil has not gone to the moon (despite many such a prediction). There are other base effects happening too. But services are still rising briskly. All of this refers to USA inflation.
In Mexico, the inflation has been less for several reasons. One, the consumption basket weighting is different. Two, for internationally-traded goods (like energy, manufactured goods, etc.) Mexico's strong peso has helped to shield the blow. Third we didn't seem to suffer from bird flu like in the USA, so egg prices, while up, haven't gone through the roof. (Or taken off, if you want a bad pun.)
As for the future of the peso, I have to say that I'm a bit confused myself. I spent a career in financial markets, pretty much consumer-related equities (stocks), so I'm no expert in foreign exchange. I did a little digging myself, but didn't come up with any satisfying explanations. Yes, AMLO has been fiscally conservative. Supposedly. But then looking at government deficits, they haven't really changed. Nor has Mexico's trade balance (still mostly in deficit). But there's one factor that's hugely in Mexico's favor, though this doesn't move all that fast: national debt. Mexico's government debt-to-gdp ratio is well below that of the "developed" world. And that developed world, led by the USA and Japan are piling on debt at truly unsustainable rates. I sometimes wonder if Mexico couldn't be something of a refuge in a first-world debt crisis. As that day draws nearer, investors in first world currencies are likely thinking the same.
And if that's the reason, then don't expect any radical depreciation of the peso any time soon.
Cheers,
Kim G
Roma Sur, CDMX