A Tidal Wave in Mexico

William Pitt

Like Argentina before it, Mexico is about to be overtaken by a "scissors crisis" of simultaneous hyperinflationary financial and hyperdeflationary physical economic processes. In Argentina, the scissors took the form of the demented "zero deficit budget" implemented by Finance Minister Domingo Cavallo, at IMF insistence.

The concept is simple ... and thoroughly incompetent. First, interest payments on the public debt are pronounced sacrosanct, and will always be paid, regardless of the consequences. Second, the government will only spend what it has left over from collecting taxes and other revenue, after subtracting out its debt payments. In other words, the government will not run a deficit and borrow money to cover that deficit: it's deficit must equal zero at all times.

But what happens if interest payments keep rising, and tax revenues keep dropping, as has been occurring in Argentina? For example, interest payments rose from 11% of the total budget in 1998, to 15% in 2000, and to 18% in 2001, while the tax base simultaneously contracted. In December of 2001, tax revenues plummeted at a shocking annual rate of -33%. The parasite is rapidly growing bigger than the host.

In this fashion, a hyperinflationary debt payment process was unleashed in Argentina, along with a hyperdeflationary process of contraction of the real physical economy. The results are visible: Argentina's work force is unemployed; its pensioners go hungry; its tax base has collapsed; its banking system has ground to a halt; and political chaos is the word of the day. Rosario Archbishop Msgr. Eduardo Mir?s recently warned that "A people cannot die to pay the debt." But that is exactly what Argentina's creditors have demanded; and it is exactly what the last few governments have tried to do.

LaRouche Explains How to Create Credit

The week-long presidency of Adolfo Rodriguez Sa? was beginning to move Argentina in the right direction, before he was driven out of office by London and Wall Street.

* He announced a unilateral moratorium on the foreign debt, and called for a full investigation of the legitimacy of the debt nominally still owed.

* He developed his own version of a "zero-deficit budget," under which necessary social expenditures would be fully maintained, but debt service would be sharply curtailed in order to balance the budget. Debt payments were to be slashed by more than two thirds, from $12 billion in 2001 to $3.5 billion in 2002.

* And he announced the creation of a new currency, the argentino, to help lift the country out of depression, including by creating 1 million new jobs.

All of that is good, but not sufficient for Argentina, and for every nation across Ibero-America. As Lyndon LaRouche explained in a December 21 statement, additional urgent measures include the creation of a sovereign, national currency, which would be decoupled from international currencies such as the dollar. And Argentina has to use the double-edged sword of its large foreign debt, to help bring about the bankruptcy reorganization of the global financial system.





To justify the arrangement, the mass of our populations has been cast in the exclusive role of "consumers" thriving on the cheap goods flooding in on us through the open gates of "globalization." What is glibly passed over is that people come on stage as consumers only when they have found employment as producers. And globalization adds the wretched of the Third World to the dead weight of the planned domestic unemployment to keep our commodity prices flat.

William Krehm

1. Keynes, John Maynard (1930), A Treatise of Money. Vol. 2. New York: Harcourt Brace & Co., p, 387.

2. Keynes, John Maynard (1932). Essays in Persuasion. New York: Harcourt Brace & Co.

3. Keynes, John Maynard (1936). The General Theory of Employment, Interest and Money. London: MacMillan & Co. Ltd.

4. Kindleberger, Charles P. (1973). The World in Depression-1939 (rev. ed.). University of California Press.

5. Maier, Charles . (1997). Dissolution, the Crisis of Communism and the End of East Germany. Princeton University Press.

--from Economic Reform, November 2001