Talk about bad timing, or bad luck, or both. Just when Mexico appeared to be enroute to full recovery, the eternal song and dance about our unhealthy dependence on the U.S. economy rears its ugly face to remind us that we are far from being independent.
The possibility of a double-dip recession north of the border could not come at a worse time for Mexico, which is embroiled in a catastrophic war on drugs that has claimed nearly 40,000 lives in four and a half years; a lame duck presidency with 18 months to go; and a costly presidential campaign that will leave productive infrastructure spending by the wayside.
Already, major economic indicators are beginning to taper off. Manufacturing is down, and so are capital investments. Speculative foreign capital, attracted by high interest rates and a key factor in the selective liquidity our markets have enjoyed for the past few years, could fly the coop in the blink of an eye the minute the political situation begins to deteriorate due to the electoral process, as it usually does.
There is no denying that no matter where you turn, concern grows that the double dip is just around the corner. Consumers up north are scared, and those here in Mexico are constrained by a loss in purchasing power, despite Finance Secretary Ernesto Corderos assertions to the contrary. Remember, Cordero is only talking as a presidential hopeful, not as the man in charge of the nations macropolicies.
As reported last week, the U.S. housing market is crippled, with prices still falling. There were even more disappointing figures on jobs and manufacturing. Fridays closely watched payroll numbers were worse than expected. Analysts had predicted 175,000 new private sector jobs, which would have been low; there were 83,000. The unemployment rate rose to 9.1 per cent.
To make matters more complicated, in a few short weeks, Washingtons federal borrowing will collide with the legal debt ceiling, raising the possibility of default. As weve witnessed in the last few days, talks to prevent the dreaded default are not progressing. The Capitols gridlock is reminiscent of the Mexican Congress, only not as bad.
Elsewhere, the Feds second program of quantitative easing, or QE2, has essentially ended. Even though results are debatable, some folks are calling for a QE3. Higher commodity prices are pushing inflation up.
Taken together, these factors should have lowered the price of U.S. government debt, pushing long-term interest rates higher. But concern about the flagging recovery runs so deep that 10-year rates fell to less than 3 per cent last week, lower than they have been all year.
As the Financial Times noted Monday, even with a government that worked, remedial action would be hard to devise. Fiscal and monetary policy are both stretched, the options for more action limited and risky. But the very notion of optimal policy just now is Utopian because Washington does not have a government that works . If it did, the clock would not be ticking down to a congressionally mandated default even as the economy is dangerously grinding towards stagnation.
In such a dismal context, what could Washington do? It should combine renewed short-term stimulus (in forms that subsidize jobs) with measures to reduce borrowing (revenue increases and entitlement reforms) in the longer term. How could something so obvious be controversial? Actually, there is no controversy: Democrats and Republicans are both rejecting this out of hand.
Republicans, excluding every other consideration, want to cut spending as deeply and quickly as possible, adding to the risk of a second recession. For them, further short-term stimulus is out of the question.
For their part, Democrats reject the idea of long-term fiscal control. This is camouflage, they think, for dismantling Medicare (health insurance for the elderly) and Social Security (pensions). Once you start worrying about long-term deficits, they say, you have conceded half the argument to the other side. In Washington, you concede nothing.
So, as the economic policy debate worsens in Washington, the Mexican government should be thinking about measures to minimize the impact of the U.S. double dip.