Those Who Cannot Remember the Past are Condemned to Repeat It

I started this blog as I have always been intrigued by the culture of Latin American countries. It is a region I want to explore and learn more about. I had very little understanding of the history behind the region's economy and I wanted to change that. There were three main questions that I wanted to find answers to: "What happened, who had been affected and what can we learn from this?" Sometimes revisiting history can teach us valuable lessons. George Santayana, the famous Spanish-born American Author once said: "those who cannot remember the past are condemned to repeat it". I conducted my research with this quote in mind.

Analysing the Latin American Debt Crisis and the fall out that ensued in the years following highlighted two main things for me:

1. Contagion spreads like wildfire, once the first domino falls. In the case of the Latin American Debt Crisis, Mexico was this first domino that initially defaulted on their loans, and the domino effect ensued across the region.
2. The direct impact on the general public who are already suffering at the hands of high poverty rates is devastating.

In international macroeconomics, the “impossible trinity" describes a situation where countries cannot simultaneously maintain independent an open capital account, a fixed exchange rate, and monetary sovereignty. Many countries over the years, particularly but not exclusively Latin American countries, have opted to sacrifice monetary sovereignty in the name of a fixed exchange rate and economic stability, or so they hoped. The thinking behind this was that importing policies from countries with proven track records on inflation would lead to improved outcomes at home.

However, monetary sovereignty is actually very useful. Oftentimes the domestic circumstances of the countries doing the pegging do not line up perfectly with the domestic circumstances of the countries they are pegging themselves to, which inevitably leads to problems.

In the short video below professor Tim Kehoe of the University of Minnesota describes how above all else, the Latin American Debt Crisis should teach us that countries in the European Union need more disciplined fiscal policies.