The US Dollar Is Creating Huge Problems For One Central American Country
Simon Black, Sovereign Man
Mar. 8, 2012
March 8, 2012
Panama City, Panama
I’ve been having breakfast at Cafe Manolo’s ever since I started coming to Panama, going on ten years now. They make the best ‘batido’ever… it’s sort of like a milk shake crossed with a fruit smoothie. And it used to be ridiculously cheap. Not anymore.
Economists use a term ‘menu costs’ to explain why retail prices are‘sticky’ and resistant to change. The analogy is that, even in the face of rising input costs, a restaurant owner will resist raising his
prices because it costs a lot of money to print new menus.
Apparently someone forgot to explain this concept to Mr. Manolo. Rather than printing new menus, the staff at this once cheap establishment simply scratches out the old prices and scrawls in the
new prices.
Without doubt, Panama is becoming very expensive. And if they handed out Academy Awards for inflation, I’m sure the first person that Panama would thank in its tearful acceptance speech would be none other than one Ben Shalom Bernanke, Ph.D.
As you’re probably aware, Panama is a dollarized economy. In fact, since Panama’s independence was engineered by JP Morgan in 1903, the country has never circulated its own currency. Officially, Panama’s currency is the ‘Balboa’, though it has been pegged to the US dollar at parity since inception, and US dollar notes are the only currency in circulation.
In the old days, this was practically viewed as being on the gold standard. Panama has never had authority to print US dollars and expand the money supply, just like currencies backed by gold in the
19th century couldn’t simply conjure more gold out of thin air.
Decades ago when the dollar was actually a respected store of value, Panama’s dollarization really meant something. Today is a different story. Yet while Panama is still unable to print its own currency, Ben Bernanke obviously has no such restrictions.
The trillions of dollars that Bernanke has created over the last few years have made their way into the financial system and reduced the purchasing power of US dollars. Right now this is being felt acutely
with respect to fuel prices denominated in USD.
The consequent rising prices hit dollarized countries like Panama very hard because there is no central bank here to monetize the debt and finance populist deficit spending.
Case in point– Ricardo Quijano, Panama’s Minister of Industry and Trade, confirmed this morning that the government’s fuel compensation fund has completely run out of money. In the face of rising fuel
prices, the government is now no longer able to subsidize gasoline.
As Quijano said, “We are almost in a national emergency. Oil prices are not going down.”
It seems clear now that the Panamanian government recognizes the challenges of being dollarized and is exploring a number of options to circumvent its limitations.
For example, while the government isn’t able to print US dollars, they do have the authority to mint their own Balboa coins. Only US paper notes are used in Panama, but there are local Balboa coins in
circulation of similar look, feel, and value as their US counterparts.
Until recently, the Panamanian government had historically only minted penny, nickel, dime, quarter, and 50-cent pieces… more out of necessity to make change than anything else. Importing paper currency is easy, but importing coins is costly and inefficient.
Late last summer, though, the government began circulating a new 1 Balboa coin, equal in value to $1. Forty million coins were minted and issued at a cost of roughly 25 cents each, netting the government a cool $30 million in the process… not a trivial sum here.
As you could imagine, 2 Balboa coins ($2) are now on the table, making all of this a rather bizarre twist in the global currency wars of competitive devaluation.
The United States can print all it wants, and, at least until now, export the worst of the inflationary effects overseas to those poor suckers in Asia who keep buying Treasuries. Panama cannot export its inflation to the same extent, so rising prices have made a permanent home down here in the tropics over the last few years.
Panama is essentially absorbing all of the downside of being dollarized, but receiving little upside. Minting its own coins constitutes the country’s opening salvo in the currency wars– a mutiny
of sorts on the dollar side. Panama is unwilling to take a backseat to Mr. Bernanke any longer and is taking steps to reduce reliance on US dollar hegemony.
If a country as small and US-aligned as Panama is taking these steps, it’s an interesting indication of what will happen in larger, quasi-dollarized places like Hong Kong and Saudi Arabia. Perhaps a
“Dollar Spring”?
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Replies
I think the price of gasoline is expensive in any currency right now and here's possible a good reason why.
http://www.businessweek.com/articles/2012-03-07/have-oil-speculator...
"Since October, money managers have bought the equivalent of 372 million barrels of oil through a variety of futures contracts, essentially doubling their oil exposure."
"money managers now hold a record net long exposure to oil through 638,774 futures contracts, which at 1,000 barrels per contract equates to about 638.8 million barrels of oil. "
"in July 2007, a year before the price of oil peaked at $144 a barrel, money managers held a net long position of 160,000 WTI futures contracts on the NYMEX, says Evans. Today, that number is 272,000 contracts."
Speculation can lead to big profits or big losses. However when you control the economy and the media you can almost guarantee the future. This is a gamble that a war with Iran is coming.
If the same people who are wagering did not also control the governments that can create the war I would consider it speculation. However if you listen to the drumbeat for war by the politicos and media you understand the wager has a better than 50/50 chance of success.
Once again war profiters will expend the blood of our children to earn big profits, sounds like history repeating, over and over.
Sadly correct.
I am going to post this from Warren Buffet, it is good start point for a counter point. Gold may not be all that it is cracked up to be.
In his annual letter to Berkshire Hathaway shareholders, published Feb. 25, Buffett states:
“Today the world’s gold stock is about 170,000 metric tons. If all of this gold were melded together, it would form a cube of about 68 feet per side. (Picture it fitting comfortably within a baseball infield.) At $1,750 per ounce — gold’s price as I write this — its value would be about $9.6 trillion. Call this cube pile A.
“Let’s now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world’s most profitable company, one earning more than $40 billion annually). After these purchases, we would have about $1 trillion left over for walking-around money
(no sense feeling strapped after this buying binge). Can you imagine an investor with $9.6 trillion selecting pile A over pile B?”
Anyone for pile A? No, I didn’t think so.
Good point Lee,
But i also choose pile B (i would even give the 16 Exxon Mobils to charity) even if pile A was twice as large and filled with USD bills.
All in all, Buffet's speech is really a billionair's one. Most of the people don't have access to neither of those piles.
Anyway, i think that "Concerned" was more concerned (sorry) about raising prices and the future of the USD.
Prices are raising everywhere, and the USD is still the only global currency along with the sick euro, well both are sick, but some are sicker than other.
All i wanted to point out is that "INFLATION" is one of the less understood phenomenum among the public. I should have add that Panama not having a small "money printer central Bank" is one the best thing it has.
Though i miss the times where Manolo was selling its beers for 1 buck, i don't think it is cheaper in Colon's Costa Rica or Peso's Mexico. That is because Raising prices are not always because of monetary inflation.
Cheers
I also remember nineteen cent gasoline and most important the five cent Snickers bar. Inflation is world wide and is planned into the economy. The greatest fear to economists and bankers is what actually happened in the 1930's and in the last decade, deflation.
When a house for example is worth less than the liability, mortgage, people are upside down and they walk away. The purpose of planned inflation above the interest rates paid by banks is to encourage people to buy now, not later, borrow and pay. The economy creates wage slavery, much less difficult for people to swallow than other options.
And, the most worrisome part is that our "leaders" will eventually view inflation as a solution to the national debt -- and that will be armageddon for anyone living on a fixed income. (Mr. Bernanke has already got that ball rolling.)
Now, if you really want to give yourself a headache, tie this discussion thread to the one on 8938 reporting, and think it through. There is a big "oh sheeeeeeit" in it.
jejejejeje
Not so sure about that.
I could write pages on the subjects.
But suffice to say that the printing process is way overblown by some to explain inflation. The main money creator are or should i say were - and that is the whole point - the banks. Out of each 1.000$ deposit on a current account, banks used to issue "irreal" money of 15.000 to 30.000$. this money was not printed but circulated as such. With the crisis, banks stopped lending, cleaned their balance sheet etc. so they money creation collapsed. And dozens of trillrions dissapeared, much more trillions than Bernanke could ever print. Money printing by the fed was the only response they could give to this stop.
The inflation we have today is more due to the big fall of confidence in the States of the world.
Real inflation will strike if world economy recovers and banks go back to they "money creation process".
As for Panama, they are issuing coins more is because of the USA starting issuing 1$ coins, which are costly to import as you said. Not such a big deal.
I am not saying that the USD is a great currency, just that all flat currencies around the world are garbage just the same.
;)
Good text though, thanks