Asset Bubbles in the 1970s: The surge in loans to Mexico and other developing economies

Asset Bubbles in the 1970s
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November 26, 2020
Asset bubbles have been one of the most feared phenomena by many investors. During these instances, the valuation of a particular asset such as gold or currency becomes too inflated that its underlying value cannot support such prices. In turn, this leads to an abrupt decline in the prices of such assets during a period of panic and hysteria. Accordingly, this article would focus on the 1970 asset bubble in several Latin American countries, which is more commonly known as the 'Latin America Debt Crisis'. Notably, the author would focus on how the surge of loans given towards these countries, brought about the misconception of their producing power has led to a severe economic decline that was felt around the world. All in all, the author believes that similar to any asset bubble, the increased speculation coupled with the lesser economic growth caused this event.
The Case
The Asset Bubble of the 1970s is brought about by the belief that Latin American developing nations could support consistent economic growth. Significantly, during the period before the 1970s up to its early years, Mexico has experienced significant economic growth and stability as the inflation rate was able to keep up with the average economic growth during those times CITATION Fer94 \l 1033 (Ferraro, 1994). However, during the term of President Echeverria, State policies aiming to expand its fiscal policies were implemented. This led the country to borrow massive amounts of money from other countries and international banks. This was followed by other Latin American countries who also applied for bigger debts from various financial banks and organizations in order to fuel their industrialization.
Since most of these economies had a stable performance and rate of growth, international organizations and private institutions loaned billions of dollars believing that the growth of these countries would accelerate in the future. In one instance, for example, Mexico loaned placed a loan on future oil revenues valued in US dollars believing that its economy would be able to handle any recessions that would happen. This goes the same for some other Latin American countries, as many believed that sovereign debts would continue to increase due to the number of international investors continually funding th...