Foreign direct investment will soar in 2012...

Foreign direct investment (FDI) just went through the roof. InBev's announcement that it will pay US$20.1 billion to assume control of Grupo Modelo could well put this year's FDI above the 2007 record of US$31.3 billion. No need to worry about 2012's capital account surplus -- unless portfolio investors were to abruptly liquidate their holdings of money market obligations.

Remember: although the US$20.1 billion InBev will pay Modelo's shareholders counts as FDI, it does not mean that money will swell the supply of dollars for sale in the exchange markets which, all other things being equal, would strengthen the peso. Watch for the effects of this transaction in the capital accounts in the balance of payments the rest of this year.

The evidence on supply side economics...

The Institute on Taxation and Economic Policy looked at growth rates in states with and without an income tax. The conclusion: per capita growth in the nine "high tax states" between 2001 and 2010 was higher than in the nine "no tax states" and than in the 50 state sample.

The numbers: average increase in per capita economic output, 2001 - 2010

50 states                   8.1%
9 "no tax" states        8.7%
9 "high tax" states   10.1%

Change in median household income, 2001 - 2010

"no tax" states       -3.5%
"high tax" states    +0.7%

For more, see http://www.itepnet.org/pdf/junkeconomics.pdf

Pass through...

For many years when the peso devalued, inflation rose. Theoretically, only the price of "tradable goods" should rise with a devaluation. In practice, in Mexico, all prices increased. One of the major accomplishments of the macro-economic stability forged over the course of the last 25 years is that the link between devaluation and inflation, the "pass through" effect, was broken.

In the 2009 crisis, the average fix exchange rate devalued 17.5%. Notwithstanding that, inflation fell from 6.5% in 2008 to 3.6% in 2009. It's a striking contrast to 1995. That year, the average annual fix exchange rate devalued 45.1%. Inflation soared, climbing from 7.1% in 1994 to 51.2% in 1995.

That the pass through is no longer automatic doesn't mean that it no longer happens. The average monthly fix exchange rate devalued 9.6% between March and June 1-22. The inflation figures for the first half of June show that the devaluation is finally hitting price levels. In the first two weeks of this month, merchandise prices (the component of inflation in which the impact of a weaker peso shows up first) rose 0.26%, more than the overall inflation rate. In 15 days, merchandise prices rose by nearly as much as they did, on average, in each of the prior three months. If the peso doesn't revalue, inflation could exceed 4% this year.

The finances of US households...

The Fed's portrait of the "median family's" finances in 2010 has some sobering figures. Things got worse, not better for American families between 2007 and 2010.

INCOME AND NET WORTH: Median family earnings in the US dropped 7.7% between 2007 and 2010. Median family net worth (half of families' net worth was higher and half, lower) came in at $77,300 in 2010. The housing crash explains 3/4 of the drop from 2007's $126,400 median net worth. The median amount of home equity fell to $75,000 in 2010 (from $110,000 in 2007).

SAVINGS & DEBT: The percentage of families who saved during the year fell from 56.4% in 2007 to 52% in 2010. Since total savings have risen, it means that a smaller group of families is saving more. Nearly three-quarters (74.9%) of families still had debt in 2010. The median amount of debt in 2010 was the same as in 2007. So much for the success of households in deleveraging... The percentage of families without credit cards rose from 27% in 2007 to 32% in 2010. The percentage of families with credit card debt fell to 39.4% (from 46.1%). The median balance dropped 16.1%, to $2,600.

Spain succumbs

As much as he tried to avoid it, Spain's Prime Minister Rajoy had to ask for a rescue package. While the symptoms of Spain's woes -- high funding costs, contraction and soaring unemployment -- are similar to those of Greece, their causes are different. Greece shows the "sovereign" face of the European crisis. Spain reveals the "financial" visage.

Spain's rescue will be channeled through its banking rescue fund to confront the consequences of a real estate bubble. Although the Spanish government's debt to GDP ratio is high now, it wasn't before the crisis. The Spanish central government's finances were in order. Recession and soaring borrowing costs were the culprits for the sudden deterioration of the central government's finances.

Of course, the pre-crisis housing and construction boom contributed to the health of Spain's finances. We now see -- as we did in the US -- how the extension of loans that couldn't be repaid contributed to the boom. How much the bursting of the real estate bubble will cost Spanish taxpayers remains to be seen. How much of the up to €125 billion in funding will be extended will depend on the conclusions of the two audits due out June 21.

Chicken?

The European situation is as tense as it was last fall -- or worse. This time, though, the European Central Bank (ECB) didn't come to the rescue. Last December, the ECB opened the funding doors to European banks, a move that temporarily defused the crisis. At the conclusion of today's meeting, the ECB didn't make any dramatic announcements. The high-stakes argument over how money to bail out banks will be channeled -- directly to the banks or through their governments -- hasn't been resolved. The ECB's lack of action puts more pressure on governments to come to a decision.

Which sectors of the US economy are most exposed to Europe?

From the June 4 New York Times, an interesting table on the European sales of US companies in different sectors...

Figures are estimates for 2011 and 2012. *Excluding telecommunications companies and banks because the index only includes regional banks and companies in those sectors whose business is restricted to the United States. †Excluding sales in Canada and the Carribean

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Sources: Company reports; Citigroup Global Markets