The drop in the peso...

The average monthly cost of a dollar has risen each month for over a year. In July 2014, the fix rate averaged $12.98. In the first six days of August of this year, it's averaged $16.24. That's a 20% jump in the cost of a dollar.

There hasn't been a panic, testimony to the effectiveness of a flexible exchange rate regime.

Some facts about income in Mexico...

The average Mexican household’s monthly income was just Ps$13’240 last year (US$995 at the average 2014 fix exchange rate). The average obscures wide disparities: the income of the bottom 10% of households averaged Ps$2’572 a month (US$193) while that of the top 10% averaged Ps$46’928 (US$3,527). 

Just over half – 51% -- of income went to the top fifth of households last year. The bottom 50% of households (deciles I – V) received just over a fifth (20.8%) of income. The sixth, seventh and eighth deciles received 28% of income.

Wage growth and productivity: the US experience

Increasing productivity is the key to raising wages -- at least, it's supposed to be. A very informative graph published in the July 17 New York Times (see the link: http://www.nytimes.com/2015/07/15/business/sizing-up-hillary-clintons-plans-to-help-the-middle-class.html?ref=international) suggests that the longstanding relationship has fallen by the wayside. Since the 1970's, wages have stagnated in spite of rising productivity.

At the same time, economic research comparing what happens when a state raises the minimum wage and its neighbor doesn't has demonstrated that raising the minimum wage doesn't have to mean fewer jobs. It appears that the direct effect of higher labor costs is offset by better morale, reduced turnover and increased productivity...

When can a central bank stand against the markets?

What central bank can hope to fight off successfully a run against its currency? Maybe the Chinese central bank: the country's US$3.8 trillion in reserves gives it a fighting chance at beating off an attack. To put the number in perspective, that's more than three times Mexico's GDP. It's also a sixth of total world reserves.

While Chinese exporters would be happy with a weaker renminbi, Chinese companies and banks have borrowed an estimated US$1 trillion over the last five years, mostly dollar-denominated, short-term loans. They certainly aren't happy with a depreciating renminbi.

Mexico has run sizable capital account surpluses in recent years, which the peso's movements have reflected. In 2013, US$64 billion of capital flowed (net) into Mexico; in the first nine months of 2014, net capital inflows were US$40 billion. Capital flows are a different order of magnitude in China. In the fourth quarter of 2014, capital outflows from China were US$96 billion!

The same is true of the two countries' tourism position. Last year, Mexico posted a record US$6.6 billion surplus in the tourism account. In the fourth quarter of 2014, China ran a US$36.4 billion deficit in its tourism account.

Not only did Banco de Mexico reduce its growth forecast...

Yesterday, Mexico's central bank cut its projection for this year by half a percentage point, to 2.5% - 3.5%.

More telling was the concluding paragraph of the summary of the bank's quarterly analysis, which baldly stated that macroeconomic stability isn't enough to improve societal well-being. "Adequate implementation of structural reforms is indispensable" if Mexico is to be more competitive and productive and the domestic economy, a more important motor of growth.

The eye-opener was the Bank's ringing endorsement of the rule of law: "It is of the greatest importance to work on the institutional transformation of the country, in order to build a more solid rule of law and create greater judicial certainty for society." 

What's middle class?

Income isn't the only way to define "middle class". Education is another. Aspirations are as well. Last week's blog took a look at the evolution of the US middle class -- defined as a household earning between US$35,000 and US$100,000 a year.

I thought it would be interesting to see to which income decile a Mexican household with that income would fall. Here are the numbers for 2012, the most recent year available from INEGI.

Households earning US$32,037 a year were in the top 70% of the income distribution in Mexico. Household income of US$40,857 were in the top 80% while US$56,329 were in the top 90%. Household income for the top 10% averaged US$123,587.

The American middle class...

A fascinating look (in graphs) at the composition of the middle class in the US between 1967 and 2013... Until 2000, the middle class declined because people were moving into the upper class. Since 2000, movement into the lower class drove the shrinkage of the middle class. See:

http://www.nytimes.com/interactive/2015/01/25/upshot/shrinking-middle-class.html?abt=0002&abg=1