Living in a World of Unintended Consequences – Part 1

Last week we were invited to speak at the 2013 Arizona-Mexico Commission Summer Plenary sessions at the wonderful Montelucia Resort in Paradise Valley.

Our topic was, “Global Monetary Policy: Living in a World of Unintended Consequences.”  We were asked to elaborate on how the current monetary policies are affecting the US/Mexico cross-border trade.  Of course there is much to cover in that broad topic, but for our spot on the panel we focused on the fact that we are now in a time where an understanding of the US/Mexico relationship is incomplete without also understanding how China also fits into the picture.

This should raise a few eyebrows, and in order to frame this position we should begin by highlighting a few of the events that led us to the levels of global debt we now live in.

Realistically, the origin of the 2007 financial tsunami had its epicenter on Wall Street, where by 2008 the American banking system was severely crippled with casualties that included bailouts, bankruptcies, and forced mergers.  Sub-prime mortgages had once been rated “AAA” and were sold globally as sound investments… by the spring of 2008 they looked like hot potatoes in the hands of investment bankers reeling to get any hint of them off their books. As the crisis began to ripple like a tidal wave, the global fear of counter-party risk happened so quickly that government bonds and private investment banks were literally frozen. All investor confidence was lost.  Banks didn’t even trust each other in the overnight bank to bank lending markets.  Institutions doubted each other’s solvency as no one knew who would be the next domino to fall.  One of the many consequence of this scenario was that US banks were now limited from lending outside the American borders.

This is where our friends in Mexico enter the story.

Mexico had historically relied on foreign lending and investment to improve infrastructure, and the private banks in the United States had been strategic and willing financial partners for many years.  This sudden halt in American access forced Mexico to look at other global partners to help support their national economy.  One of the logical partners that emerged in during this crisis was China.  This was particularly interesting given the complicated nature of the relationship between these two countries, especially as they both related to the US.

There is much more to share about this unique relationship and how it relates to our current American and global economies. Please follow our blog for the continuation of this story as we lay out the critical factors of living in a world of unintended consequences.

We welcome your comments and your questions, and we encourage feedback with any alternative views. Thanks for reading.

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This post was written by Conscient Capital