MXN Peso vs. US Dollar – “Saving 19 Cents on a $1000 Debt?”

People around the Web have recently asked about the effects of inflation on life here in Mexico, along with the effects of falling US Dollar values.

In short, yes, inflation has affected food and fuel costs here in Yucatan, but these increased costs have been more than out-stripped by typical Mexican investment gains and MXN peso gains when exchanged for US dollars and US goods (where the Peso has strengthened 4.4% in less than 2 months). Still, people who do not have investments, land, or lots of Mexican pesos, etc. are being squeezed.

This leads to the question of exactly where US dollar values are heading versus the Peso?

When in doubt, it can help to consult the experts. Both a key Chinese rating agency, Dagong, and Standard and Poors are publicly reporting significant long-term US Dollar weakening due to the US President’s and Congress’s refusal to reign-in Public Debt and US Federal deficit spending. Dagong is trusted for non-political currency ratings and their recent downgrading USA’s Treasury bonds from their classic AAA ratings, and even Standard and Poors (a modestly politicized agency) downgrading of future US dollar strength seem to forecast trouble for the US dollar.

This means trouble for people who depend on the dollar, like US ex-pat retirees with USD savings & investments. (If you think Mexico is a risky place to invest, check out the Bolsa’s strength & performance over the past 5 years vs. Wall Street.)

The US dollar will likely continue to slide versus the MXN peso, unless Bernanke, the US Treasury Dept, Obama, and Congress make serious course changes, to keep the US public debt from exceeding US GDP, (US Debt currently @ $14 Trillion – Up an additional $4 trillion under Obama & the Democratic Congress). The much heralded “deal” between Obama and Congress to cut the US Government budget by $40 billion, actually turned out to have only $380 million of real spending cuts. This shows that US politicians do not have the intention or the will to actually reduce the $2 trillion per year of govt. overspending. Cutting $380 million vs. the $2 trillion annual US deficit & $14 trillion of debt, is like reducing $1,000 of growing credit card debt by 19 cents a year.

“Yep, we’re cutting back our $1,000 debt, by spending 19 cents less on cheap toilet paper, every year.”

Oil prices are another driver to watch in the inflation/peso/dollar problems. As long as worldwide oil consumption matches or exceeds the 88 million barrels per day worldwide production level, oil prices will remain high (strong) and likely continue to increase, increasing the relative strength of the MXN peso. Pair this likely strengthening of the peso with the US public’s unwillingness to cut their personal govt. subsidies (mortgage interest give-backs, corporate subsidies, etc), and also pair it with the US Govt’s leadership’s unwillingness to take meaningful action (19 cents of cuts on every $1,000 of debt), and it becomes difficult to avoid the conclusion that US dollars will continue to buy less and less in Mexico, for years to come.

Inflation effects? Likely less than the falling value of the US dollar: This all seems to mean that people living on a so-called “fixed income” of US dollars, will actually be living on a declining income, courtesy of Bernanke, Obama, Geitner, Reid, Pelosi, Bush and Boehner. Since the long-term outlook is for a strengthening peso (now under $11.6 MXN pesos per USD & falling?), we’re personally glad that our income is in pesos, and glad that our Mexican investments have been much more productive than their US counterparts.

We also know of a number of US expats here who have recently moved blocks of cash (in the $25K – $50K range) out of the US, into Mexican investments, because the Chinese have been dumping US Treasury Securities for the reasons cited above – and the US Treasury is now asking lots of new & highly-intrusive questions about exactly why ordinary citizens are moving their money, and asking exactly what it will be spent on, before the Govt. approves the release or transfer of these personal funds.**

Hope y’awl have filed your Form TD F 90-22.1 ‘s, on your “FBAR” accounts and fideicomisos (worth over $10K USD).
http://www.irs.gov/pub/irs-pdf/f90221.pdf – filed with the US Treasury Dept. by June 15.

**One interpretation of the increased reporting requirements for FBAR’s and for ordinary people moving their own hard-earned money to the place they think is best, is that these are just the first steps of the US Govt. seeking to further restrict, tax, and control what US citizens do with their money. It wasn’t that long ago that Democrats & Roosevelt taxed “rich” people with 90% income taxes – from roughly 1935 – 1960.

If the Govt. is expecting to raise taxes dramatically on people with assets, then it makes sense that the same Govt. is ratcheting-up their options to stop people from legally moving assets beyond the reach of US tax collectors, no?

* * * *
Feel free to copy while giving proper attribution: YucaLandia/Surviving Yucatan.
© Steven M. Fry