President Clinton, in his State of the Union Address, smugly announced that "We should all be proud that America led the effort to rescue our neighbor, Mexico, from its economic crisis. And we should all be proud that...Mexico repaid the United States--three full years ahead of schedule--with half a billion dollar profit to us." The reporting of this pay-back and the State of the Union Address was all favorable, highly praising the administration. The bailout was bipartisan so leaders of both parties were pleased with the announcement. International finance, just as it is with international military operations, is rarely hindered by inter-party fights that get so much attention. But there are several reasons why we should not be too quick to congratulate the money manipulators.

FIRST, they merely celebrate the postponement of the day of reckoning of their financial Ponzi scheme. It took 50 billion in U.S. dollars to save creditors who had unwisely invested in Mexico prior to the crisis of two years ago. Much of this $50 billion also included U.S. credit extended through the IMF, the World Bank, and the Bank of International Settlements, much of which is yet to be repaid.

SECOND, foreign government welfare, and there is no better name for it, takes money out of the productive sectors of the economy -- the paychecks of middle-class Americans -- to reward economic mismanagement and political corruption. Such "welfare" exacerbates Mexico's suffering: social disruption, economic stagnation, debt crises, and declines in real incomes.

THIRD, a new fund set up under the IMF will serve to bail out the next Mexico in trouble. The plan calls for the establishment of a $25 billion credit fund with the US "ponying up" $3.5 billion. This fund is in addition to the IMF funds already available for such crises. Mexico has also received help from the Inter-American Development Fund; again, indirectly supported by U.S. taxpayers. These funds indirectly guarantee the newly-issued Mexican government bonds and undermine the normal incentive for investors to police governments.

As such, more confidence is now being placed in new Mexican bonds enabling Mexico to refinance its old loans. Of course, it is at slightly lower interest rates, but they are more than doubling the time of repayment. All investments involve some risks. The rewards of such risk-taking are appropriately realized by investors as loans are repaid. American taxpayers should not, however, be forced to subsidize the Wall Street financier any time such entrepreneurial ventures are unprofitable. The true test of the professed confidence in Mexico will come from the level of private investment into the productive sectors of the economy.

FOURTH, the Fed is allowed to hold Mexican bonds and use them as collateral for our own Federal Reserve Notes. It does so, even though it will not admit it, and refuses to reveal just how much it holds. It is quite possible that the newly issued Mexican bonds will find their way into the Fed's holdings. How far down the road we have traveled from constitutional money when we are backing the dollar not with gold but with Mexican bonds!

FIFTH, a likely motivation for this fanfare regarding the repayment of the loans, and the so-called profits engendered, is to get the U.S. Congress to go along with using this money to pay our back dues to the United Nations. How about paying our so-called U.N. back dues with our Mexican bond holdings?!

The use of the Exchange Stabilization Fund to bail out the peso was illegal and unconstitutional, and yet now we have a precedent not only established but praised for its great success. This precedent encourages political currency manipulation over sound fiscal and monetary policies as well as establishes the US as lender of last resort for all governments with bad policies.

President Clinton claims that "We stand at another moment of change and choice--and another time to be farsighted, to bring America 50 more years of security and prosperity." He earlier told us the "era of big government is over," but calls for full burden sharing through the IMF in a multilateral way with the Mexico agreement. We need to end this shell game of masking economic mismanagement by circumventing both the Constitution and Congress.

We must stand firm in our opposition to the establishment of new extra-governmental agreements that will reward governments with irresponsible policies which, at the same time, punish their own people and erode U.S. sovereignty. Such policies take us one step further from a constitutional rule of law, and institutionalize the United States as the world's lender of last resort--all at the expense of the American taxpayer.

Political and economic factors can override, only in the short run, the subtle reality that the fiat nature of the dollar guarantees its inherent weakness and steady depreciation. This new easy credit scheme that the government creates by fiat only expands the World Dollar Base leading to U.S. dollar depreciation and reduced buying power.

In essence, the bailout of Mexico and the financing of the pay-back with interest, to the sheer delight of the politicians and their Wall Street constituents, were done on the back of the U.S. dollar and the U.S. taxpayer. The real consequence, however, will not be felt until dollar confidence is lost which will surely come and be accompanied by rapid inflation and high interest rates.

Ron Paul, M.D.
Member of Congress