The Little Book of the Shrinking Dollar: What You Can Do to Protect Your Money Now

Tequila Crisis 1994

In Mexico they call it “el error de diciembre”—or “the December Mistake.” That’s when the new president of Mexico abandoned tight currency controls. It was the classic cycle: Election year stimulus—which can’t be paid for—leads to post-election blues.

Mexico didn’t have the foreign exchange reserves it needed to preserve the value of its currency. So it had to devalue. Investors took one look and ran. They wouldn’t buy the debt the government hoped to sell. Default loomed. The paralyzed banking system couldn’t add confidence. The government couldn’t keep the peso steady on their own. They allowed it to float.

Then–U.S. President Clinton stepped up with a line of credit for Mexico to buy pesos and give its currency some backbone. The United States backstopped Mexico’s loans to keep it from defaulting.

So it should come as no surprise that Mexico’s four largest banks, and 77 percent of all bank assets, are in foreign hands. The government is still paying bonds it used to buy bad debt from banks as a cure for the crisis. It took about a decade for credit to get back to “normal”—just in time for the next global crisis.