Convulsions and Markets

Luis Rubio

The world appears to be going into convulsions with decapitations of journalists, civil wars, the overtaking of sovereign territories and referenda that could alter long-standing national realities. The geopolitical changes in Crimea and Ukraine, the territorial reconfiguration that the ISIS is currently generating in Syria and Iraq (countries already immerse in bloody civil wars not very distinct, in concept, from those of Sudan and Libya), have modified the international panorama. Venezuela threatens another convulsion, now that accounts that are the product of years of atrocious economic management have finally come knocking at the door. Catalonia and, recently, Scotland, vote on whether to remain in their respective countries or go off on their own. The U.S. government, the heart of the international system over the last decades, has lost direction, is clearly devoid of a strategy or the apparent capacity to comprehend the nature of the phenomena confronting the world. Conflicts are proliferating wherever one turns and, however, the financial markets seem impassive.

The normality that characterizes the financial markets is intriguing. While the great statesmen of our era evince enormous concern and issue alerts on the risks that the planet faces in view of the collapse of the old political arrangements (derived from the 1648 Peace of Westphalia), which recognized national borders and the right to the self-determination of nations, the financial markets have displayed nearly irrepressible surges in recent months. The specialized media affirms that the markets have achieved such maturity that they can ignore these events. That is, what happens in the world will not affect the viability of enterprises or the capacity of countries to comply with their payment schedules. Is there any sense in this explanation?

At a conference in which I participated recently, the present moment was discussed in terms of its economic as well as its political dimension. A highly recognized British economist offered an interesting explanation for the economic situation: first, the Chinese continue to put half of their GDP into savings, a factor that was irrelevant when China’s economy represented 1% of that of the world, but that entails severe recessive consequences now that it is equivalent to 12% of the world’s GDP. The economist’s specific asseveration was that “you can save an infinite amount but you cannot borrow an infinite amount”. Second, the U.S. economy has brought down its deficit and adjusted rapidly, “maybe too rapidly”, creating a new geopolitical situation: the collapse of its spending on defense has resolved its fiscal deficit, but has given cause for the movements of Putin. Third, after years of waiting, the information economy has begun to yield spectacular growth rates in productivity, providing hitherto unsuspected sources of economic growth: “It is no longer only computers helping in offices, but new sources of investment, ideas and developments”.

An old statesman proposed that the world faces a challenge similar to the one at the beginning of the XIX century which requires, in the best Kissingeresque style, a new international arrangement. The old schemes no longer work, the notion of a “new international order”, spoken of at the end of the Cold War has passed to a better life and the huge disorder that exists in the world threatens to collapse all semblance of stability. At the end of his address, he supplied his reading on what is happening in the financial markets: these are turning a blind eye to political events not because the latter are irrelevant but because the financial analysts don’t know how to price that risk. In consequence, “they overreact because they fear the unknown”. That is, there’s nothing that would not be affected if things take a turn for the worse.

The stability of the financial markets is a matter of primary importance for Mexico on two planes: first because every abrupt movement is susceptible to raising the cost of the Mexican debt and could affect exchange stability, increasing our costs and diminishing capital available for investment. Second because the country entertains grandiose plans that require financing, above all in the energy, which could be placed on hold if the financial markets enter a stage of turbulence. That is, what transpires in those markets affects Mexico directly and inexorably.

The question is whether there is something that we could do to mitigate the risk of this occurring. There are two evident things that Mexico could and should do to lower the inherent risk of what is taking place in the world, and neither of these is unknown or exceptional: the first would be consolidate the fiscal accounts, lower the governmental deficit to virtually zero and improve conditions for the rise of productivity and to attract foreign investment in massive form. The former goes against what the government is doing, while the latter leaves much to be desired, even with the reforms in energy and telecommunications: there’s a serious deficit in institutional matters, property rights and the Rule of Law that transcend these reforms.

On the other hand, nothing would be lost by procuring the growth of domestic private investment, which would require gaining the trust of the private sector and, in general, that of the population. No novelty there, but something indeed novel at the present time.