"Mexico's Central Bank Buys 100 Tons of Gold," ran the headlines last week. Isn't that interesting. For years in the United States, the go-to term for a currency that's next to worthless has been "peso." Now here are the masters of that very currency passing on the dollar and accumulating its most formidable substitute, gold. Touché.
Back in the 1980s, one of the Mexican presidents kept saying he would defend the peso "like a dog." When that didn't work out, as Robert L. Bartley of Wall Street Journal fame liked to point out, people started calling the outcropping of villas the man retired to "Dog Hill."
Why on earth Mexico has never fixed to the dollar – up to now – is anyone's guess. Canada has pursued the same policy too, of a floating currency, rather unsuccessfully until the last few years. But now it looks like the game is up. Forget about NAFTA: any advantage to the decline of trade barriers among North America’s finest nations will be cancelled by currency fluctuations. The chance that either Mexico’s or Canada’s currency tries to mimic Ben Bernanke's dollar has trended to zip.
The world is a funny place when the US abjures currency leadership. People do things like trade in big for fairly non-fungible assets like gold. The last time this happened in a major way, the 1930s, the next step was for lots of places to make a bid for complete national economic self-sufficiency. Germany and Japan weren't quite satisfied with their own natural resource endowments, however, and you know what happened.
Not only is it a justified insult of the US for Mexico to procure the gold, in tonnage no less, it is a sign that other countries are finally despairing that there will be a stable major currency in the world. This portends autarky and probably poverty – at best. Mexico on its own! The way to arrest the process: make the dollar freely convertible to gold at $2000 an ounce. Bernanke will calm down with the QE larks, everyone's investments in gold will be fully justified, and people globally will once again get down to the business of prosperity on the basis of a reliable means of exchange.