Introduction
Thirty-one years after the infamous “December error,” the debate on whether the Mexican peso is overvalued has resurfaced. The short answer is yes, and the most concise explanation lies in the inflation differentials between Mexico and the United States. According to this criterion, the equilibrium exchange rate should be around 20.50 pesos per dollar, not the current 17.89.
Historical Context: The 1994 Peso Crisis
On December 20, 1994, President Ernesto Zedillo’s government was forced to devalue the peso by over 15%, shifting from 3.4 to 4 pesos per dollar. However, the currency crisis did not stop there; the exchange rate continued to depreciate until it reached 7 pesos per dollar, resulting in over a 100% devaluation.
The causes of this crisis were brewing for six years under Carlos Salinas de Gortari’s administration. To curb inflation, inherited from Miguel de la Madrid’s government, an overvalued exchange rate was maintained, along with high interest rates and the issuance of Tesobonos—short-term public debt instruments denominated in pesos but payable in dollars, used to finance government spending.
This scheme, combined with trade liberalization and the signing of the Free Trade Agreement (FTA), reduced inflation to near 7%. However, artificially sustaining a fixed exchange rate created an illusion of economic prosperity and increased purchasing power, accompanied by a growing trade deficit and current account (CA) deficit. High interest rates attracted capital, enabling the financing of this deficit while also functioning as a second inflation adjustment variable. The combined effect was doubly negative: it was recessionary and accumulated a CA deficit of 7% of GDP, which became unsustainable due to capital flight. This is how the 1994 crisis, known as the “Tequila Effect,” unfolded.
Current Context: Factors Affecting Peso Valuation
Currently, the context is different. There is no fixed exchange rate policy; the rate fluctuates freely. Additionally, there is no significant current account deficit (0.3% of GDP) or shortage of international reserves, which stand at 250 billion dollars. The primary factors explaining the peso’s strength are financial: the wide interest rate differential between Mexico and the U.S.; the carry trade with Japan, where rates, despite reaching their highest level in 30 years at 0.75%, are still low; and the deliberate peso depreciation driven by the U.S. government.
Indeed, according to the Bloomberg Dollar Spot, the dollar has depreciated by over 11% against most currencies in the past year. This trend is speculated to be part of a strategy to “bail out” or “crush” a debt of 37 trillion dollars, equivalent to over 122% of the U.S. GDP. This would resemble the 1985 devaluation, when the U.S. devalued its currency by approximately 25% to boost export competitiveness and reduce the real weight of its debt.
Another mechanism might involve gold, whose recorded value on the U.S. Treasury’s books is only $42 per ounce, while its market price hovers around $4,500. If the U.S. decides to officially revalue its gold reserves—which amount to 8,133 metric tons—it could release up to $1.18 trillion without issuing new debt.
In a context of unprecedented indebtedness, this option is already being discussed. However, the relevance lies in applying a similar scheme to what’s been termed “digital gold,” i.e., Bitcoin (BTC), of which the U.S. already possesses over 250,000 units that could be used as strategic reserves. China, on the other hand, has reduced its holdings of U.S. Treasury bonds by over 40% since 2015 and increased its gold reserves, aiming to support a broader use of the digital yuan by other nations.
We are, as historian Niall Ferguson notes, in a second Monetary Cold War fought not with bombs but with monetary reserves and valuable assets. The U.S. strategy combines gold, debt, and crypto-assets, with stablecoins (USDT and USDC), whose value is backed by Treasury bills, gaining significance. This configuration will shape global monetary policy as we move beyond the first quarter of the 21st century.
Key Questions and Answers
- Q: What is the current debate about? A: The debate revolves around whether the Mexican peso is overvalued, with many arguing that it should be around 20.50 pesos per dollar instead of the current rate of 17.89.
- Q: What caused the peso crisis in 1994? A: The 1994 peso crisis was caused by a combination of factors, including an overvalued exchange rate, high interest rates, and the issuance of Tesobonos to finance government spending.
- Q: What factors contribute to the peso’s current strength? A: The primary factors are financial: a wide interest rate differential with the U.S., carry trade with Japan, and deliberate peso depreciation by the U.S. government.
- Q: What is the speculated strategy behind recent dollar depreciation? A: The U.S. is speculated to be employing a strategy to “bail out” or “crush” its massive debt by devaluing the dollar, potentially through revaluation of gold reserves or utilization of Bitcoin and stablecoins.
- Q: How might gold reserves play a role in this new monetary landscape? A: The U.S. could release significant funds by revaluing its gold reserves, potentially impacting global monetary policy and debt dynamics.
