The Consequence of the United States’ Excesses

The excesses in the U.S. economy during the last 10 years are well-known: an expansion of credit to the private sector made through an extreme leveraging of the financial system, promoting credit transactions of greater and greater risk. These, upon becoming unsustainable, required a bailout by the federal government of the world’s largest financial system. Actions that were assumed to be the exclusive province of undeveloped countries and emerging economies occurred in the world’s largest economy.

The financial crisis obligated the U.S. government to use its balance sheet to rescue private banks as well as the quasi-government entities involved in the expansion of mortgage credit. At the same time, the government was forced to eliminate the investment banks by merging them with commercial banks, which had deposit insurance and a wide and stable capital base. However, this financial collapse not only created a general credit contraction but also induced a severe recession in the global economy, which for the first time in decades saw a reduction in international commerce. This led the other economies of the so-called G-20 to introduce countercyclical fiscal policies — that is, to introduce tax cuts and increases in public spending to offset the drop in consumer and business demand.

All of the above comes to mind because the way in which our neighbor has been managing its economy has not been ideal, to say the least. As in our country, electoral politics have played a role, with the difference being that their economy is the largest in the world, and they have the advantage of issuing the world’s primary reserve currency. During the previous few weeks, the opposition — that is, the Republican Party — has been threatening from Congress to vote down an increase in the debt ceiling, which would have occasioned a literal shutdown of all the functions of the U.S. federal government. Political skill prevailed, and they avoided repeating the events of the ‘90s, when the Republican leader of the House of Representatives, Newt Gingrich, hit the Clinton administration with a temporary government shutdown.

Although the government is still functioning, one of the most important bond and stock rating agencies recently announced that if things continue this way, they will downgrade the rating of the United States’ debt in a similar manner to what they have occasionally done with emerging economies and, more recently, with some members of the European Union. This has not affected the dollar or caused an increase in Treasury bond yields. As a consequence, as Professor Brad DeLong of the University of California at Berkeley commented in the Financial Times, this was a wake-up call for the political class to reach an agreement on how to resolve an excess of spending over revenue that is unsustainable. The 2008 budget deficit was 2.3 percent of GDP; in 2011 it will be almost 11 percent.

The U.S. and Mexico both have problems with their public treasury, though the sizes and causes are quite different. The former has a ratio of debt to GDP of 120 percent. In Mexico the ratio is not quite 40 percent (including quasi-state entities, such as IMSS and Pemex, failed banks and others), although Mexico’s debt has a much lower rating.

The markets are asking the U.S. government how it will pay for its drunken binge and broken dishes, as well as the deficits in its pension system and the cost of its bankrupt, federally backed mortgage agencies. They are not exactly asking for draconian cuts — simply a statement of what will be done to reduce the deficit.

In Mexico, on the other hand, even though two pension reforms have been implemented (IMSS reform of 1996 and ISSSTE reform of 2008), they were insufficient to achieve the highest rating, and the political class and the private interests remain united in blocking the introduction of the deep reforms that are indispensable to setting off a greater and more sustained level of economic growth. Mexico’s oil production and oil reserves have been dropping, though during the last 31 years, oil has been funding a significant part of government operations — a situation that is not sustainable. Will the United States make their reforms first? Or will we beat them this time, to the benefit of millions of Mexicans who need jobs today?