Sobreviviremos

Is this supposed to happen?

Dec. 29 (Bloomberg) — Mexico’s foreign reserves may show a sixth straight weekly increase as a gain in the peso this month curbed central bank purchases of its own currency.

Reserves may rise “slightly” in the week ending Dec. 26, said Ruben Fernandez, a currency trader at Grupo Financiero Monex SA. Reserves climbed 5.6 percent to $85.4 billion in the week ending Dec. 19 from Nov. 14. The Bank of Mexico is slated to publish data on foreign reserve holdings tomorrow.

Peso purchases by Mexico’s central bank using dollars from its foreign reserves have tumbled in December as the Mexican currency heads for its first monthly increase since July. Banco de Mexico has bought $751 million worth of pesos this month, compared with $1.29 billion in November and $13.1 billion in October, when the currency plunged to a record low.

“There isn’t so much angst-based demand for dollars” from investors, Fernandez said in a telephone interview from his office in Mexico City. “The peso will strengthen a bit by the end of the month.”

Mexico’s peso has risen 0.2 percent so far this month after the U.S. Federal Reserve cut lending rates to as low as zero, buoying demand for higher-yielding assets. The currency plunged 15 percent in October and 5 percent in November when the deepening global credit crisis throttled demand for emerging- market securities.

With derivatives, income from oil is locked in for the next year (at about twice the barrel price) and there are plenty of foreign reserves to offset the drop in exports to the United States. No one expects the peso to return to 10 to the U.S. dollar, nor will there be any huge growth rate over the next year, but so what? The U.S. economy, dependent on continued growth seems to have forgotten that “what goes up must come down”… and the “higher you climb, the further you fall” and all those other basic truisms.

Between a government public works program and more emphasis on the domestic market the downturn won’t be so bad here.  And, there’s another factor I don’t think anyone has noticed.

Local governments do not self-finance, but are dependent on federal revenues.  Paul Krugman, writing in the New York Times, notes that the U.S. down-turn is going to be worse than it could be because state and local governments are having to cut back on public expenditures just as they should be expanding them:

… these governments, unlike the feds, are subject to balanced-budget rules. But even if they weren’t, running temporary deficits would be difficult. Investors, driven by fear, are refusing to buy anything except federal debt, and those states that can borrow at all are being forced to pay punitive interest rates.

With a few exceptions, there aren’t state or local taxes in Mexico, and local governments are not faced with cutting off social services in hard-hit areas. If anything, the need to boost domestic consumption may mean MORE funding for poor areas, not less.

And, then too, Mexico has always managed to muddle through.