Monetary History – The Day After the 1976 Peso Devaluation…

A personal story extracted from swissmetalassets.com link provided below.

In 1976 Mexico devalued her peso vs the US$ by 50%

“Everyone in the country was in shock. People’s net worth had devalued more than 53% overnight. The value in savings accounts dropped in half and neither merchants nor consumers knew how to react because they had never been through something like it before. Luckily for me, I had also exchanged my money and my salary had been set in US Dollars when I signed my contract with the company to work in Mexico. For me, it was like getting a 100% raise, since for a long while; my house rent remained the same as well as utilities, clothing etc. I remember that on my boss’s next trip, he bought himself a couple of nice suits at a nice discount.

Businesses were unable to immediately raise their prices. (Note – ‘financial repression’ – price controls in force, also capital controls ie a 33% tax if you sent money out of the country to an overrseas bank). They had to do it slowly, and through many sacrifices. The positive side was that the company had a loan in Mexican pesos for an expensive property and was able pay it off with the new dollars at, practically a 50% discount. (Note – we, as speculators, must always borrow the weakest currency). Before the devaluation, we had been leasing other properties, some of which had expired and had been on a month to month basis. Thankfully, immediately before the devaluation, I renegotiated and signed some of the leases with modest increases for a term of 5 years. (Note some property cos in the UK have ten year leases with 3% cieling price increases.. this is a disaster. Note also that many defined benefit pensions have cieling price increases applied.. be very careful of your DB pension fine print!). After the devaluation occurred, the landlords wanted to renegotiate these leases, but because of the terms, we enjoyed low rents for that period. Later, as we leased new properties, the owners introduced clauses tying the annual increases to the value of the US dollar, which appreciated every year until the recent fall of the dollar in the exchange rate.

Our attorney in his 50s, of German descent, who spoke English and Spanish with a German accent didn’t take my advice on the oncoming devaluation. After the devaluation, he was so desperate that he came into my office one day, accompanied by another attorney that worked for him, carrying an old-fashioned suitcase, which he placed on my conference table. He opened the suitcase, which was completely filled with high denomination peso bills. I had never seen that much cash in my life and I was completely surprised. He pleaded with me to accept the money right then and allow him to purchase shares in our company. I told him that this was not the proper procedure, but he asked me to consult with corporate headquarters and insisted I put the money in our safe. As I expected, corporate said no and much to his distress, I returned the money to him.

People were so desperate to exchange their pesos into dollars that the supply of dollars dried up and some, who had them, sold them at a premium in the black market. The situation was so dire that a presidential order was passed banning the banks from allowing customers to open US dollar bank accounts. (note this point! Open overseas bank accounts now!) A few years later, when the peso stabilized, this practice was reversed. (note Mexico finally emerged from her currency debasement/inflationary policies some 15 years or so later”.

Its a very sad and desperate story created by an overhang of debt and political promises that could never be met. Savers in Mexico were destroyed. Those with equities survived. Those with a spread of world assets and local debt prospered. The rich became super rich in Mexico during this period as they always do in money printing environments. Perhaps it should be no surprise that luxury brands sales and profits are surging or that the art world is booming. Equally it should be no surprise that the richest man in the world is Mexican. Its both a paradox and opportunity that the developed world private capital holders are mainly in cash and government bonds.

For Mexico the 1976 devaluation was simply the start of the long process of the complete destruction of middle class savings.

“In August 1982, the Mexican government announced that it could not meet its scheduled debt payments. When a severe recession shook the Mexican economy in 1982, the government nationalized the country’s banks and imposed severe tariffs on imported goods to protect domestic producers. This was the beginning of a period of economic contraction; real per capita GDP growth from 1981 to 1988 was -2% per year. The government was forced to cut spending on many social and economic programs including education and health care”.

The process took a total of 2 decades to really complete. Only then was the ratio of cash so low that any QE type initiative was rendered useless. Here is a graph of the US$ to the Peso over the 1978 to 1984 period. The devaluations started before this chart and ended after well after this chart.

Stock Market wise:

In 1979 the Mexican stock market index mid price was 1,250

In 1988 the Mexican stock market index mid price was 160,000

As capital holders we would do well to remember every line of the Harare Stock Exchange’s CEO, Emmanuel Munyukwi, wise words.

“Negative interest rates and inflation had caused a stampede for assets, which had driven share prices to record highs, even in real terms. It’s quite embarrassing because the exchange is supposed to mirror the reality of the economy. We have benefited from the distortion of the market.”

Rich

p.s. Here below another currency being very purposefully, yoy, debased. We also see today Brent and Nymex crude oil surging upward in value as currencies are debased as unemployment rises as gdp flat lines, real incomes decline as corporate profits grow. Burberry announces record profits..

This process has plenty of historical precidents. A very basic understanding of history will point you to what is unfolding and about to unfold.