Editor’s Introductory Note: Part 1 of this article on the Mexico currency devaluation was posted on Tuesday, January 29, 2019. Today, Part 2 concludes this article.
—
In Part 1, I described how, while I was living and teaching in Mexico in 1982, there was a nearly 50% devaluation of the Mexican Peso, resulting in major economic hardship for the average citizen. In this installment, I would like to share a few lessons I learned from experiencing a currency devaluation –essentially an economic collapse– and how these lessons can help us prepare for a similar, or much worse collapse in the future.
I would like to start by re-visiting my Lesson #1: Rules can be broken. I thought I was safe by having my money deposited in a Mexican bank in Dollars instead of Pesos. Wrong. As I mentioned in Part 1, I was shocked to learn that in order to withdraw my dollars, according to the new rules, those dollars first had to be converted to pesos at the new exchange rate and then, I would get my Dollars. So, figuring I might as well get something instead of possibly seeing the bank closing and getting nothing, I went ahead and withdrew my money.
The Shocks Will Come in Waves
Before the Mexico currency devaluation, the exchange rate was 27 Pesos to the Dollar. After the first of two devaluations, the rate skyrocketed to 45 Pesos to the Dollar. Six months later, there was a SECOND devaluation, sending the rate to 69 pesos to the dollar. So, suppose you have $1,000 in the bank. Pre-devaluation, those dollars are equal to 27,000 Pesos. (Yes, it was common back then to carry 500 or 1,000 Peso bills around). So, in that initial devaluation, we all lost nearly 50% or our buying power, and in the later devaluation, another 20% or so. So, since rules can be, and in fact, have been broken, who do we really believe? If you have your money deposited in a bank, remember, even though you have been told your money is safe, is it really? From past experience, I would say “no.” But what about certificates of deposit (CDs) for example? So what if you can earn 2.8% interest on a six month CD? If the bank closes down, or institutes capital controls, how “safe” are you then?
Continue reading“I Survived an Economic Collapse – Part 2, by Siempre Listo”