There is corruption at the highest levels of the government: The president, along with key officials in the government, financial institutions, corporations and the military, quietly move their money out of the stock market and banks and transfer their assets into gold and Swiss bank accounts. Once the members of the elite have safely parked their money away, the president suddenly announces a devaluation of nearly 50% of the currency.
The move stuns the stock market, which plunges to epic lows. There is a run on the banks as panicked depositors withdraw most, if not all of their money. The government steps in and takes over the banks. The devaluation hits the average citizen hard. Prices at the supermarket and gas stations almost immediately rise by 50%. Many businesses go bankrupt and shut down. Rents rise by 50%. Many people can’t afford the increase, get evicted, and are homeless. Many people go begging for food on the streets. Violent crime skyrockets. Vigilante groups form to protect neighborhoods from criminals.
It Happened in Mexico
A future scenario? No. All this actually happened, in 1982, but not in the United States. It happened in Mexico, where I was living at the time. Some commentators speculate about what might happen in a future economic collapse. We hear many different theories about how the banks might react, how the government might respond, and what panicked investors might do. Well, 36 years ago, I survived an economic collapse. Not a total collapse, but it was bad enough. Following is my story of what actually happened before, during and after an economic collapse, how I survived it, and lessons I learned from it.
I moved to Mexico in 1979, with the idea of supporting myself teaching English as a second language (ESL). This actually worked well for a while, as I worked not only for a university extension school, but also taught ESL lessons to several companies in private industry, including employees at factories, businesses and even the military sector.
Things were going well until 1982. The economy was more or less normal, businesses were more or less thriving, and many people were prospering. Of course, this is Mexico, so the standard of living is lower than the United States, or else we wouldn’t have the steady parade of people crossing our border, looking for a better life. For the Mexicans living at poverty level, conditions are always difficult. But for the middle class in Mexico, most of these people are able to get by, get an education, and a profession. There is a large and growing middle class in Mexico. Now, for the upper class, life is generally always easy, at least financially.
1982 was an election year, but back then, the Partido Revolutionario Institucional (PRI Party) was firmly entrenched, and it was a foregone conclusion that every new president was going to be a PRI member, and for a single six-year term. The president of Mexico in 1970-76 was Luis Echeverria, and just before the end of his term, there was a massive devaluation of the Peso. It went from 12.50 to the Dollar to 22.69, for a loss of 82% of buying power. Prices for food, gas, rent and everything else skyrocketed.
A Devastating Devaluation
The devaluation devastated the middle class, and especially, the poor. No wonder people flee to the U.S. It’s impossible to support a family on wages that range from $1-$2 a day, which is what a farmworker earns there. But the devaluation didn’t affect the very rich, especially those who were part of the elite. Yes, we’ve all heard of the elite, and they are worldwide, and they are in Mexico. According to many reports I read and heard at the time, what happened was that the so-called “Ricos” (the rich elite) were warned by the outgoing president and his cronies that a devaluation was coming, and to prepare for it. So, what did they do? They immediately yanked out most or all of their money from Mexican banks, and deposited their cash into American and Swiss banks. Then, after the devaluation was over, most of them promptly withdrew most of their money from the American and Swiss banks and re-deposited their money in the Mexican banks again, where it earned a very attractive 20% interest.
So, there was a history linking devaluation to the end of a president’s term based on that 1976 “partial” collapse. Therefore, when 1982 came along, a LOT of people were fearful that history might repeat itself. So many people were fearful of a devaluation, that they switched their accounts in Mexican banks from the Peso to the dollar, an option the banks were offering that seemed at the time to be the wise, safe choice.
Echevarria’s successor as president was Jose Lopez Portillo (1976-1982). In August, 1982, near the end of Portillo’s term, Mexico defaulted on its sovereign debt, due to government deficit spending, and a reduction in demand for Mexican oil (due to increasing prices worldwide). In September, the government nationalized Mexico’s private banking system in order to prevent bankruptcy of the private banking sector and imposed comprehensive exchange controls. So, the government now owns ALL Mexican banks, and, by extension, all the deposits, should they decide to use them.
The crippling blow, however, was when the government devalued the Peso by nearly 50% in relation to the dollar. Though this helped Mexican exports, it hit the poor and middle class hard, just like the 1976 devaluation. Of course, the elite Ricos again were warned by their government insider friends ahead of time, and pulled the American/Swiss bank switch, so they effectively sidestepped the crisis.
An Account Not Really in Dollars
I’ll never forget the day I heard about the devaluation. People were in an absolute panic. My first thought was to get to the bank. I had my money deposited in Banamex, or Banco de Mexico, the oldest and supposedly safest bank in the country. As I walked closer to the bank, I noticed a long line of people, all looking very nervous. Finally, I got to the teller and said, “I would like to…” and then she finished my sentence by saying “close your account.” I said, “Yes, I have my account in Dollars”, thinking I was safe from any problems related to the Peso. Wrong. She replied, “of course, you may withdraw your money, but first we will need to exchange your Dollars to Pesos at the NEW exchange rate, and then, we can give you your Dollars.” Wow. This is when the reality sets in that it doesn’t matter how secure you think you are, because a bank, or the government, or whoever is in charge, can do whatever they decide to do at any time, to change the rules to protect their interests.
Lesson #1: Rules can be broken. You think something like that couldn’t happen here in the good old U.S.A.? Think again (more on that later). Rules in banking and government are being broken all over the world. Something similar happened in the Cyprus “bail in” in 2013, when any depositor with an amount exceeding $130,000 lost 9.9% of their money. Just like that. Depositors with amounts less than $130k were clipped for 6.75% of their deposits, even if they were insured. The banks (and the government) needed the money to avoid going broke, so their board of directors sits around and writes a new rule, giving them the authority to charge whatever amount they choose. And the depositors can do nothing about it.
But back to Mexico, 1982. I walked away from that Mexican bank with about half my original deposit. Prices of groceries and gas almost immediately skyrocketed about 50%. Products imported from the U.S. were so expensive they were mostly out of reach for most people. My rent was jacked up by 50%. Everybody else was raising rents, leases, etc. My father-in-law had bought a Chevy Blazer a week before the devaluation for about $1,800 in dollars. The deal was done. The money had changed hands and the paperwork all signed. The lady who sold him the vehicle came back to him in a panic, demanding that he give her the vehicle back, because of the devaluation. He refused and told her it was a done deal. She finally went away, shouting in a fury.
And Then The Crime Rate Jumped
Before the devaluation, crime in Mexico was already a huge problem. Of course, we are all aware of the violence accompanying the drug cartels, which is getting worse all the time. I’m referring just to the average person, who is unemployed and sometimes gets to the point of stealing to feed his family or to support his drug or alcohol habit. In Mexico, after the devaluation, crime got worse. My in-laws in Mexico even had their plastic water tank stolen. They would even take the battery out of their vehicle to prevent it from being stolen. Their house was broken into a few times, even though they have bars on all the windows. Kidnapping for ransom is getting worse all the time. When some people are hungry or needy, they do desperate things. My own apartment was broken into and money stolen.
How did I survive this crisis? I tried to hang on for a while, teaching English lessons to private industry in addition to my low-paying University extension school job. By the end of 1982, though, I realized my only future was to move back to the States. I did so, completing my teacher’s credential and worked as a teacher for over 30 years until retiring a few years ago. But I will always remember the years I spent in Mexico, where the average citizen just wants to work without being surprised by a devaluation or some other broken rule, to benefit the elite, and step on the little guy.
In Part 2, I will discuss the lessons I learned from the Mexico devaluation, and how they can very well apply to a future economic collapse not only here in the United States, but worldwide.
Editor’s Note: Part 2 of this article will be posted on Wednedsay, January 30, 2019.