Food for thought on the strength of the peso...

Foreign investment in peso-denominated money market obligations jumped US$12.23 billion in the first nine months of this year. Those volatile capital inflows were the equivalent of ¾ of remittances in the same period, 85% of direct foreign investment, and 55% of crude oil export revenues. Portfolio investment can leave as easily as it comes into a country. If the European authorities do not succeed in containing the Europe-centered financial crisis and there were to be a resurgence of risk aversion on the scale of the six months between October 2008 and March 2009…

Where the elderly in the US get their income...

The numbers speak for themselves... (Source: http://krugman.blogs.nytimes.com/?nl=todaysheadlines&emc=a212)

Portfolio investment inflows welcomed in Mexico

The interest rate premium (between peso and dollar investments) creates an attractive “carry trade” opportunity, especially when coupled with a stable or appreciating exchange rate. Investors who can borrow in dollars or other currencies where interest rates are low can invest in higher yielding peso instruments, reaping the interest rate differential and generating handsome profits. Obviously, if the peso devalues, profits can disappear. The Fed's QE2 (the second round of quantitative easing) adds fuel to the carry trade fire.

Mexico is only one of many countries in which investors are playing the carry trade game. The peso has appreciated less than the exchange rates of some other “emerging countries”, whose governments are quite concerned about the impact of a strengthening currency on trade flows and the creation of stock and property bubbles.

Governments ranging from Chile and Brazil to Thailand and Malaysia have imposed measures ranging from taxes to limits on investments in short-term money market instruments to try to dampen the negative effects of an appreciating exchange rate based on portfolio investment flows. Mexico has not.

Mexico’s policy was summed up by Banxico Deputy Governor Manuel Sanchez in a November 18, 2010 speech delivered at a Cato Institute symposium: “…capital controls may lessen investor confidence in these economies [countries that impose capital inflows], generate black markets, and inhibit the entry of capital necessary for innovation and productivity improvements. Currency interventions, in turn, are hardly effective and tend to impose financial losses on the central bank. Furthermore, the most important threat generated by these actions is a widespread movement toward protectionism that could hamper the sustained recovery of the world economy. Thus, it is preferable to completely avoid these measures.”

Glass half empty or glass half full?

Mexico's GDP grew 5.3% (year over year) in the third quarter, well below the second quarter's 7.6% rate but above expectations. The second quarter rate benefitted from the "base effect": the economy was in such bad shape in the second quarter of 2009 (-9.6% versus the second quarter of 2008) that the year over year comparison looked good with any growth. In the third quarter of last year, GDP contracted "only" 5.5%. So, is the glass half empty or half full? It looks fuller to me.

If, as seems quite feasible, GDP grows 3.0% year over year in the fourth quarter, the growth rate for the year will be 5.1%. The flip side of this year's good news is that next year's growth rate will be lower -- we'll be measuring it against a higher base.

What comes in can go out...

Today's jump in the fix rate put the peso at its highest level of the last 17 trading days. It's no coincidence that the cost of a dollar climbed $0.18 between last Friday and today, the first working day of this week: the concern over Ireland is rocking world equity markets as well.

X-Box for planners!

Making the INEGI an autonomous entity has paid off big for those of us who use their information. Check out the nifty new "growth cycle" indicator (see the following link).

http://www.inegi.org.mx/sistemas/reloj_cicloseco/default.aspx

INEGI has also developed a tool that will be of great help in business planning. For those of you who are interested in seeing it, I'll invite someone from the INEGI to the December Economex meetings to demonstrate how it works.

Ireland: damned if you do and damned if you don't

In spite of being lauded for the rapidity with which it implemented draconian measures to deal with its banking crisis and government debt levels, Ireland once again finds that the premiums investors demand to buy its debt have climbed. Fortunately for the country, it has already funded its borrowing needs through the middle of next year so it can opt not to place debt at these rates.

Why do Ireland's problems matter to Mexico? For several reasons... First, if the Europe-centered financial crisis were to erupt again, the dollar would strengthen and the peso along with it. In the worst of cases, we could see financial markets freeze up again. Second, Ireland's position now is a vivid reminder that markets can be fickle: portfolio investment that comes in can go out in as long as it takes for someone to press the "enter" key. Being the markets' poster child -- slashing government spending, saving its banks, and sticking to its austerity program -- doesn't guarantee that the premium for issuing debt later won't soar.

Pleasant surprises on the growth front in Mexico

Fortunately, we don’t have to clean the tomb of the economy here in Mexico on the Day of the Dead (Día de los Muertos). The IGAE, a monthly indicador of growth, is a precursor of the quarterly GDP figures. The September IGAE reading makes it all but certain that the Mexican economy will grow 5% (year-over-year) in the third quarter, putting the growth rate in the first nine months of 2010 at 5.6%. Even if the economy grows only 3% (year-over-year) in the fourth quarter, the annual growth rate would be 5%.

The economy’s surprisingly strong rebound from the 2009 plunge will combine with the portfolio investment-strengthened peso to put Mexico’s GDP in dollars back above a trillion dollars. This year’s GDP should fall short of 2008’s by less than US$50 billion.

The domestic economy...

The growth rate Hacienda is projecting for 2011 (3.8%; now, thanks to the Chamber of Deputies, 3.9%) is higher than the 3.6% consensus projection of the economists surveyed by the Banco de Mexico each month and the 3.5% I'm projecting. Why? Hacienda is assuming the domestic market will play a more important role in driving growth next year. How likely is it that the domestic market will step up to the plate?

Three factors are critical: 1) job creation; 2) real wage growth; and 3) the growth rate of bank lending to consumers. I'm not overly optimistic on any count. Job creation will continue to be inadequate. Real wage gains will be small. Bank lending to consumers will grow but at modest rates.

We'd better hope that US exports do well and American consumers become more animated.

An excellent review of recent publications on narco violence in Mexico

In "The Murders of Mexico", Alma Guillermoprieto reviews two recently published articles (in Spanish) and one book (in English) examining the narco-violence that's afflicted Mexico. You can find her article in the most recent issue of the New York Review of Books. Here's the link. It's well worth reading.

http://www.nybooks.com/articles/archives/2010/oct/28/murderers-mexico/

Money is pouring into Mexico...

The US government is far from the only beneficiary of the money pouring into the bond markets. If there is a "bond bubble" being inflated, the "emerging markets" are part of it.

Mexico, like other "emerging markets" countries, is the recipient of portfolio investment inflows that are strengthening the currency. That demand for the one hundred bond Mexico placed on October 5 was 2.5 times the billion dollars raised says everything that needs to be said about investors' appetite for emerging market debt instruments.

The one-month Cete rate is posting new historical lows each week. In today's primary auction, the government's paid 4.03% for 28 day funding. Not only is that a new low, it is below the central bank's 4.50% reference rate.

Competitive devaluations?

Not for Mexico. Statements made by Banco de Mexico Governor Agustin Carstens (cited by Bloomberg) implicitly reaffirm the central bank's commitment to a floating exchange rate regime. It seems likely that the bank's Board of Governors will not raise the Mexican reference rate until the second half of 2011.

Cooling off...

As expected, Mexico's recovery is cooling off. Leading indicators such as the Indicador IMEF show a consistent trend since the summer in which both the manufacturing and non-manufacturing sectors continue to expand but at less vigorous rates.

Will the domestic market be able to propel growth next year, as Hacienda is counting on? It would be nice.

The story of the stock market...

No change in interest rates

As expected, both the US Federal Reserve and the Banco de Mexico did not move interest rates when they met last week (on September 21 and 24, respectively). It is surprising, though, when in the monetary policy communique issued at the conclusion of its meeting, one of those central banks, the Fed, effectively says it thinks inflation is too low.

That's not an issue in Mexico, where the central bank, Banco de Mexico, cautioned that although recent inflation rates have been lower than expected, inflation will rise "towards the end of the year" before declining again in 2011.

What adjusting to global imbalances could mean for Mexico

Last month in Economex we talked about different explanations for the global imbalances that helped produce the US and European financial crises that sparked the "Great Recession". Here are some thoughts on how the eventual adjustment to those imbalances might affect Mexico.

If the weight of the adjustment to global imbalances falls on a deficit country like the US, "adjustment" will mean slower growth in the US, obviously bad for Mexico. If the dollar follows the usual adjustment pattern and devalues, US exports will be more competitive. The peso will follow the dollar and Mexican manufactured exports will become more competitive. If other countries do not allow their currencies to revalue against the dollar, though, it will mean: 1) deflation in the US; 2) positive real interest rates in the US, boosting the government deficit and the cost of servicing debt for businesses, households and the government; and 3) a cutback in US imports. Under this scenario, we would not see deflation in Mexico, where the quasi-monopolies in key sectors of the economy would ensure that prices don't fall. Real interest rates would have to rise to keep money in Mexico, with a similar impact on the government's finances and everyone's debt servicing costs. If the growth of Mexico's manufactured exports slows, unless the growth rate of the import bill slowed by as much or more, Mexico could conceivably face difficulties financing its current account deficit, triggering a classic balance of payments crisis.

If the surplus companies (like China) participate in the adjustment, US growth would not be as hard hit. A weaker dollar would allow exports to become the driver of US growth. All that would be good news for Mexico. As the revaluing renminbi pushes costs up in China, Mexico would become relatively more attractive to direct foreign investment.

The US recession ended 15 months ago; is another in the works?

The National Bureau of Economic Research, the body responsible for dating recessions, announced that the US recession that started in December 2007 ended in June 2009. The 18 month recession is the longest since World War II. The prior post-war record was 16 months (the 1973-1975 and 1981-1982 recessions). The NBER committee "did not conclude that economic conditions since that month [June 2009] have been favorable or that the economy has returned to operating at normal capacity."

That the recession ended over a year ago doesn't guarantee sustained growth: the danger now is that the US recovery could turn into a double dip recession.

The US recovery has driven growth in Mexico this year. If US growth slows or turns negative, Mexico will fell the fallout -- through its manufactured exports, remittances, and incoming tourism.

"The Slump Goes on: Why?"

An answer is to be found in the September 30, 2010 issue of the New York Review of Books. The article, by Paul Krugman and Robin Wells, summarizes four different explanations of the 2008 crisis and the policy prescriptions for responding to the crisis and its aftermath. It's a thought-provoking article, one well worth reading. Here's the link.

http://www.nybooks.com/articles/archives/2010/sep/30/slump-goes-why/

How much has the renminbi devalued?

Remember back on June 19, just before the G-20 summit meeting, when China announced it was going to allow the renminbi to revalue against the dollar? It has -- all of 1%. Interestingly, most of that 1% revaluation occurred in the last few days, just prior to the congressional hearings on China's currency policies starting Wednesday.

Treasury Secretary Geithner, who is scheduled to testify on Thursday, has told the Wall Street Journal that the Chinese have "done very, very little".

Mexico had no trouble attracting capital in the first half of 2010

Capital poured into Mexico in the first six months of 2010. Foreign investment in the first six months of this year reached US$20.4 billion, nearly double its level in the first half of last year.

Direct foreign investment (DFI) totaled US$12.2 billion, just US$1.8 billion short of the DFI in all of 2009. Reflecting Mexico’s success as a manufacturing export power, 62.8% of DFI in the second quarter went into manufacturing. Commerce and financial services also received DFI (17.1%, 12.8%, respectively, of the total). Over US$5 billion of DFI was due to Heineken's acquisition of Femsa. Without that acquisition, the DFI figure wouldn't have been so impressive.

In the first six months of 2010, portfolio investment totaled US$8.2 billion. That was US$0.5 billion more than in all of last year. Foreign investment in fixed income instruments came to US$7.6 billion, more than double 2009’s total. Foreign investment even rose in equities (US$0.6 billion). It might not seem like much but contrast it to the US, where investors withdrew US$33.1 billion from domestic stock market mutual funds in the first seven months of this year. If that pace continues, the withdrawals will be greater than in any year (except, of course 2008 where investors withdrew US$151.4 billion) since the 1980’s. Money is pouring into bonds: between January and July, investors put US$185.3 billion into bonds. That is on track to approach the 2009 record.

International financial markets are open to Mexican borrowers and Mexican firms are taking advantage of that, once again borrowing abroad. In 2009, Mexican companies (excluding banks) repaid US$3.7 billion (net) in foreign debt. In the first six months of this year, they borrowed (net) US$6.6 billion abroad. Commercial banks reduced their net foreign debt by US$1.2 billion in 2008 and 2009; in the first half of this year, they took on (net) US$1.9 billion.

Unemployment in the US: how it's evolved

There's a fascinating map of the evolution of unemployment in the US by county since January 2007. While the unemployment rate is a lagging indicator, watching the map change colors makes it easy to understand why so many Americans are skeptical about how much of a recovery there's been.

http://cohort11.americanobserver.net/latoyaegwuekwe/multimediafinal.html

On the cultural front...

There's a very interesting play "Arizona" being presented at the Circulo Teatral. I highly recommend the work, which tells the tale of four women crossing the desert into Arizona. It's especially timely, given the passage of SB1070.

The Circulo Teatral is at Veracruz 107, Colonia Condesa. You can catch the play on Friday at 8:30, Saturday, at 7:00, or Sunday, at 6:00. The phone numbers of the theatre are 5553-1383 or 5553-5039. It's across the street from the Hotel Condesa, which has a lovely rooftop garden. There's also parking.

The US consumer: deleveraging but still up to the ears in debt

The Quarterly Report on Household Debt and Credit published this month by the NY Fed puts total outstanding consumer debt at US$11.7 trillion at the end of the second quarter. Although consumer debt fell for the sixth consecutive quarter, it's still only 6.5% below its peak posted in the third quarter of 2008. The delinquency rate stood at 11.4%, up from 11.2% a year earlier. Of the US$1.3 trillion in consumer debt that was delinquent as of June 30, US$986 billion was past due 90 days or more.

On a positive note for Mexico, auto loans rose 25% between the first and second quarters of this year, nearly 32% higher than in the first quarter 2009, their trough. However, loan balances were well below their 2005-2006 levels.

Between the second quarter of 2010 and the second quarter of 2009, Mexico's economically active population expanded by 1.43 million people. The good news is that most of them (1.31 million or 91.7% of the entrants to the labor force) found work. The bad news is the extent to which job growth is concentrated in the informal economy: the number of people working in the informal economy rose by 0.66 million, half the growth in employment. In the second quarter of 2010, 28.8% of people with jobs worked in the informal economy, a 0.7 percentage point increase compared to a year earlier.

Differing inflation paths...

The risk of deflation will dominate discussions in the US Federal Open Market Committee meeting today. When to take action to counter deflation and which actions to take are being openly discussed.

In contrast, in Mexico, inflation most likely has bottomed out: the annual rate in July, published yesterday, was 3.64%. In its quarterly analysis of inflation, published July 28, Banco de Mexico stayed with its projected inflation ranges, which put the average inflation rate in the fourth quarter of this year at 4.75% - 5.25%.

It would seem that the impact of the output gap and weak demand on inflation is much more restrained in Mexico than in the US. Gee, could quasi-monopolies have anything to do with that?

Hedonic adaptation: what does it mean and what does it mean for for business?

Revisions to the US savings rate show that since the crisis Americans have been saving more than we'd thought. In June, the savings rate hit 6.4% of disposable income, a whole new ball game compared to the 1% - 2% pre-crisis savings rate.

The New York Times article referenced in the link below discusses "Great Recession"- induced changes in buying habits. "Hedonic adaptation" is the term psychologists used to describe people's ability to adapt quickly to great changes, bad or good, in order to maintain their level of happiness: in other words, the pleasure derived from purchasing a new item, be it a TV, car, or clothes, is quickly absorbed.

As a result of the recession, households have been deleveraging and families, forced to turn towards sharing experiences rather than purchasing big ticket items. If the conclusions suggested by current research on happiness -- "unlike consumption of material goods, spending on leisure and services typically strengthens social bonds, which in turn helps amplify happiness." -- are correct, we'll see spending shifting towards the purchase of services and experiences and away from goods.

http://www.nytimes.com/2010/08/08/business/08consume.html?_r=1&th&emc=th

Hot potato

Who's going to pick up the bill for the pensions promised to retiring workers? That's the question at the heart of the controversy over the size of the pensions to be paid to retiring private sector workers sparked by the recent Supreme Court ruling, which reduced the maximum pension from 25 minimum salaries to 10.

For the estimated 1.2 million individuals who qualified for a pension of up to 25 minimum salaries prior to the Supreme Court's ruling, cutting the maximum pension to 10 minimum salaries means, roughly, slashing the maximum monthly pension from Ps$42,000 / month to Ps$16,000. The savings for the government (via reduced transfers to the Social Security Institute) will be substantial.

The employees of those companies who have complementary pension plans won't be affected since their employers will have to make up the difference between the pensions they've promised their employees and the pensions paid by the Social Security Institute. The companies, however, will find themselves footing a much larger pension bill than they'd planned for. The monthly income of future retirees will be slashed if their employer doesn't have a complementary pension plan and if they are eligible for a pension of between 10 and 25 minimum salaries if the Supreme Court jurisprudence stands.

In the end, it comes down to who will pay for the pension promises made in the past, the bill for which is coming due. The Supreme Court's ruling effectively passes the cost of paying for promises that contributed to winning elections to companies and individuals.

The root of the problem goes back to 1997 when the private sector pension reform was approved. Then, workers who had contributed to the existing pension program were given the option of choosing between retiring under the 1973 law or the new law, the SAR, which introduced individual retirement accounts. Over time, Congress raised the limit of the maximum pension from 10 minimum salaries to 25. With the maximum pension at 25 times the minimum salary, there's no question that workers who have the choice of which system to retire under will opt for the 1973 law: the pension benefit is greater.

Like most budgetary snowballs, politicians have known that this one is building for a while. No one has wanted to tackle it for obvious reasons. Now that it's out in the open, we'll see whether the same political considerations that created the problem perpetuate it or pass the bill on to parties who believed in the promises the government made to them.

Re-examining central banks' role

The financial crisis that shook the world economy has prompted a re-thinking of central banks' role. Until the crisis, a consensus had developed that central banks should focus on controlling inflation.

In today's ceremony at Los Pinos in which President Calderon created Mexico's Financial Stability Council, Banco de Mexico Governor Agustin Carstens emphasized another of responsibility of central banks: overseeing the stability of the financial system. With the creation of the Financial Stability Council, Mexico is at the vanguard of implementing G-20 initiatives to forestall the repetition of the kind of US-originated financial crisis that rocked the world economy in 2009.

Risk management for countries

The prevailing orthodoxy used to be that interfering with capital flows was just plain bad. That's changed: as eminent an authority as the International Monetary Fund now writes that capital controls may be appropriate under some circumstances.

Brazil enacted a 2% tax on foreign purchases of stocks and fixed income investments in October of 2009. Last month, South Korea announced new restrictions on trading in currency derivatives and the uses to which loans from foreign banks can be put. June also saw Indonesia announce it is requiring investors to hold SBIs, debt issued by the central bank, for a minimum of one month.

What justifies capital controls? Think of it as countries practicing risk management. Reserves alone aren't always enough to insulate the value of a country's currency from capital flows, either in or out. When the exchange rate floats, capital inflows can provoke an appreciation that feeds asset bubbles and distorts trade flows. If, as was the case in late 2008 and early 2009, there's an abrupt reversal of investors' tolerance for risk and capital flees, a nasty devaluation follows, one that may have nothing to do with the underlying fundamentals of a country's economy. Investors taking advantage of carry trade opportunities (borrowing funds in a low interest rate country which are then invested in another country where interest rates are higher) complicate monetary policy.

As with most things, it's a question of "when" and "how much" with capital controls. A tool that might be used for prudent risk management on the part of one government could be seen by another as an instrument for controlling the exchange rate by another.

How countries can make the most of volatile capital flows while minimizing their risk is a policy issue that's here to stay.

Losing even when you win...

The PRI won nine of the twelve gubernatorial seats up for grabs in Sunday's elections. So, how is that a loss? They were expected to sweep all twelve. Instead, PAN-PRD coalitions eked out victories in Oaxaca, Puebla, and Sinaloa. The coalition triumphs are especially telling in the former two states, amongst Mexico's poorest and noted for their traditional politics.

Even though the PAN-PRD alliances did better than expected, the coalition candidates did not win in the three states the PAN and PRD governed going into the July 4 elections.

a fascinating read...

William Cohan's HOUSE OF CARDS tells the tale of Bear Stearns, a Wall Street powerhouse, that disappeared in just ten days in March 2008. Bear's acquisition by JP Morgan Chase underwritten by the US taxpayer was the first in a series of unprecedented events -- the intervention of Fannie Mae and Freddie Mac, Lehman's bankruptcy, the US Government's support of AIG, the doubling of the Fed's balance sheet to provide liquidity to frozen markets, the US Government's bailout of GM and Chrysler -- that contained the fallout from the financial crisis sufficiently so that we got a "Great Recession" instead of another 1930's style depression.

HOUSE OF CARDS is worth reading now for two reasons. First, in Washington, Europe and at the G-20, governments are debating the kind of regulatory framework necessary to reduce the chances of a repeat of the financial crisis that threatened the world economy. Second, as the European sovereign debt crisis continues to roil the markets, it's worth remembering that crises that seem to have been surmounted can come back to bite.

The future of the peso depends on Europe

Where the peso will close the year depends on the denoument of the "Greek tragedy", which has become a European one. If the European Community's stabilization efforts don't succeed in calming the markets, the peso will feel the fallout.

The swings in the peso are not about what's happening in Mexico. The peso's ups and downs are about volatile capital flows, returns, and investors' appetite for (or aversion to) risk. Obviously, sound macro-economic management will help us to weather the tempest that broke out in the Mediterrean; sound policies won't, however, keep us immune.

Back on the roller coaster

Yesterday, the peso took a nosedive, along with the Euro. Stock markets plunged. Once again, investors are heading for the safety and liquidity of US government debt.

The peso's 5.1% drop (fix rate) in a week vividly illustrates how fragile a foundation for the exchange rate portfolio investment is.

What are the best paid jobs for Mexicans sending money home from the US?

According to a Banco de Mexico study from 2007, these were the best paid jobs for Mexicans working in the US who sent money back home.

Driver US$2,958 / month
Auto mechanic US$2,396 / month
"Others" US$2,364 / month
Construction US$2,301 / month

Is it any wonder that remittances are still falling?

In the first two months of this year, remittances were 14.9% less than in the first two months of 2009. It's not surprising when you consider that a fifth of the Mexicans working in the US in the last quarter of 2008 (the latest data available from Banxico) had construction jobs.

Vehicle production accelerates Mexico's recovery

In the first quarter of this year, total production in Mexico averaged 174,147 vehicles a month, just 0.6% below 2008's record levels. The vehicle production figures make it very clear that exports are behind Mexico's stronger than expected recovery. Production of vehicles for export averaged 144,574 a month, 4.2% above 2008 levels; average monthly production for the domestic market was 14.7% less than in 2008.

Before the crash, exports drove the growth of vehicle production. In 2005, production for export accounted for 74.3% of total vehicle production. That percentage has grown steadily. Even last year when vehicle exports plunged 26.3%, exports' share of total vehicle production rose 2.2 percentage points, to 81.4%. In the first quarter of this year, exports' share was 83.0% of total vehicle production.

As goes the US, so goes Mexico?

The NBER, the official dater of when US recessions begin and end, met today. Pre-meeting leaks said that the group of economists will hold off declaring that the US recession is over. Yes, GDP has grown for at least two quarters, but other measures, like employment and consumer confidence, aren't looking so good.
What does this mean for Mexico? It's a reminder that the growth rate of US industrial production matters more to Mexico than the growth of US GDP. Fortunately for Mexico, the US industrial production index hit bottom last June and has grown every month since. Even so, the February industrial production index was still below its December 2008 level. In Mexico, industrial production began to rose (versus the previous month) September - December, dipped in January, and rose 0.59% in February, a month in which US industrial production rose 0.1%.

Service or subsidy?

US$87 billion -- or, maybe, it's just US$67 billion -- is at stake. That's the amount the US government pays banks each year to administer the Pell Grant student loan program. The Obama Administration proposed that the government cut out the middleman and run the lending program itself. The House approved the measure. Its fate depends on whether the measure gets bundled into the budget reconciliation bill. If it does, a majority vote in the Senate will make it law. If it goes to the Senate on a stand alone basis, 60 votes will be needed to pass it and 60 votes aren't there.

When doing better is still bad news...

Tax evasion has been dubbed Mexico's national past time. A recently concluded study by the ITESM brings good news: the rate of tax evasion in Mexico dropped from 40% in 2000 to 24% in 2008. The bad news is that nearly a quarter of taxes that should be collected still aren't. Still, progress has been made.

Consistency...

Winston Churchill called consistency "the hobgoblin of small minds". If that's the case, there's no problem of small minds in the governing party, the PAN. If it hadn't happened, it would be hard to imagine a scenario as absurd as that played out last week. Interior Minister Gomez Mont, whose father was a founder of the PAN, resigned from the party after the PAN's leadership endorsed running a joint gubernatorial candidate with the PRD.

Although Gomez Mont didn't say so, it appears that last fall he promised the PRI that the PAN would not forge electoral alliances with the PRD in exchange for the PRI's support of the budget.

To preserve any vestige of credibility with the PRI, Gomez Mont had to deliver his party or resign. He obviously couldn't do the former. Where is the President and what is his strategy?

Budgets and deficits

Mexico's public sector spends the equivalent of 22% of the country's GDP. The 2011 fiscal year budget proposed by President Obama is about 25% of US GDP.

Assessing the "TARP tax"

David Stockman, head of the Office of Management and Budget during the Reagan Administration, has this to say about the 0.15% "financial crisis responsibility fee" proposed by President Obama.

"Not surprisingly, the bankers are already whining, even though the tax would amount to a financial pinprick -- a levy of only 0.15% on the debts (other than deposits) of the big financial conglomerates. Their objections are evidence that the administration is on the right track.

Make no mistake, the banking system has become an agent of destruction for the gross domestic product and of impoverishment for the middle class. To be sure, it was lured into these unsavory missions by a truly insane monetary policy..."

See his whole argument on the Wednesday, January 20, op-ed page of the New York Times.