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.