The peso problem refers to a situation in the 70s in which Mexican interest rates were higher than the US rates, though the Mexican peso was fixed to the US dollar. The term has appeared in a number of economic blog posts. Uncle Milt would say that the higher interest rate was the price of potential default, and that over time investors forgot about this problem.
In QM theory we have a different take. The problem arises from term mis matches in the yield curve, the Mexican yield curve having less precision than the yield curve of the large US economy. So, the finite number of active terms along both yield curves did not match. Though the Mexican yield curve had a nominal one year term point, for example, the actuall active shortest term would likely be closer to 1.5 years. The Mexican economy being smaller is acting like a four bit computer, the US curve acting like a five bit, and the weighting on the bits do not match. The result was that Mexican bankers try to attract funds by creating an artificial term, and a form of Kelly betting must take place.
The result is a form pof Austrian mal investment. The proper way to execute a maximum entropy trade like this is to over lay the Mexican yield curve over the US yield curve, and try to borrow from one and lend to the other so as to make the two curves independently closer to maximum entropy. But with finite terms, the investor has to mix and match.
More details later, gotta go.
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