Topics: Subsidy
28 Dec 1994

From: "DG Ervan Darnell"

The peso fell 30% last week. This created fairly serious consequences for a
lot of people. An article in Friday's Chronicle began by saying "the
[Mexican] government decided to allow its currency to trade freely against
the U.S. dollar." Well, duh. What did they expect? The Mexican government
has been buying (mil) pesos at around $0.25 when they were really only worth
$0.20. Mexican taxpayers paid the difference. Speculators reaped the
profit by playing the margin before the final correction when reality caught
up with the Mexican government.

Regardless of that, the whole purpose of this intervention in the currency
market was to produce stability. It had just the opposite effect, it
created exact short stability but large long term instability. That's not a
good trade-off. I thought this lesson had been learned when the U.S.
finally got tired of sending all of its gold to Europe because of Bretton
Woods nonsense about fixing currency rates. Nonetheless, the second
paragraph of the article was "the United States and Canada [rushed] in to
help prop it up." Oh good, now my taxes can go to subsidize more
speculation before another correction arrives.

If that isn't foolish enough, later in the article it reports the government
is trying to fix one problem by creating a even bigger one by passing "a
government order that domestic prices be held steady for at least 60 days."
After trying to pretend that it could define the real value of exchange and
failing, the Mexican government has decided that it can define the real
value of goods to be what it wants. This is a market oriented reform