An article in Martes Financiero today tries to answer the questions many in Panama are asking today. Why are prices going up so much? The cost of food, fuel and every thing a family uses is escalating.
One major reason is inflation of the U.S. dollar which Panama is tied to and the other is the Panamanian governments efforts to keep workers salaries able to cover this decrease in the value of the dollar. Both cases are created by governments manipulation of the money supply either through printing presses or through enacting laws to artificially inflate income. Both of these actions just make the problem worse. As the dollar continues to devalue the cost of goods will appear to be higher. In reality it is only the value of the exchange medium that has changed. In the coming year the Panamanian government will be forced to enact another increase in wages to cover the increase in cost of goods and we will have a spiral that cannot be stopped until there is a breakdown entirely in the fiat currency.
Panama is somewhat unique in that it is tied to another sovereign's currency. Because the Balboa is equal to the U.S. dollar it is subject to the whims of the U.S. governments currency manipulations. In times past this has been a good thing as the U.S. dollars relative strength has kept inflationary forces low. Being tied to the dollar was like being backed by gold and it kept the local politicians from printing their way into a Nigerian nightmare. But things have changed dramatically in the last year as U.S. spending is seen for what it is and many countries are divesting themselves of the dollar in favor of a stronger medium of exchange.
I remember as a boy how $20 from cutting and weeding my neighbors three acres seemed like a lot of money. It took two days, but when that paycheck came it went a very long way. A salary of $20k a year was considered very high and you could buy a VW beetle for about $2500. In other words now it takes ten times as much money to buy the same basic goods we used to buy 40 years ago. Of course our incomes have increased significantly as well, but surprisingly not nearly as fast as the increases in cost. We have technological advances, which seems to give us so much capability, but the cost of basic food, housing and transport has actually gone up in relation to incomes.
It is hard for many of us who grew up in the 1950s and 60s to pay $15 for a movie or $150 for a hotel room without thinking twice. I can remember as a kid traveling around the U.S. with my grandfather who raised me. We would stop at a Holiday Inn in some small town in Texas and they would charge $14 a night. My grandpa would say they wanted a months rent for a nights stay, because he used to pay $2 for a nights stay in a good hotel when he was growing up.
I keep telling myself that when I spend $80 to fill up my car it is really like $8. And when I pay $150 a night for a room it is really only $15 in my world view. But when I consider how I have to work to gain that $80 and $150 I realize I am right where I was growing up except now being a millionaire does not mean you are rich. I was better off just cutting my neighbors yard without the worries.
If you doubt what I am saying just look at this chart of inflation for the last 60 years.
This battle between income and costs of goods has been waged since the beginning of governments ability to inflate through coin clipping or printing. It won't end until the we get to a point where we realize how a few can get control over the many through lending and central banking.
Panama has the ability to create its own currency backed by something of real value such a hard metals. It would make the country a magnet for investment in both its currency and its endeavors. If Panama wants to really break free of U.S. control it must break away from it's ties to its currency. But it must not fall into the trap of creating fiat because no one would have any faith in their ability to be responsible. Only a backing by gold or silver will give it the clout it would need to be successful.
I believe Panama would be wildly successful if it were to issue a gold backed Balboa. There would be no need to tax the populace to gain the ever important ratings from S&P. People and businesses would pour money into the country knowing their investment is backed by something more than a promise to pay. Yes it would take a discipline not seen before here in Panama, or anywhere else on the planet for for that matter, but it is the only way Panama can break away from the inflationary spiral they will be forced to endure on their present course.
There are several factors working in favor of Panama banks attracting such a significant increase in capital. Much of it is probably a pull out of investments and into cash as the economy continues to worsen. Also Panama has still not signed on to information exchange with the OECD and Panama banks are a lot safer for peoples of Latin countries with leftist rulers.
It seems Panama does not have a problem in borrowing capital these days. I only hope that she has the ability to pay it back without saddling its inhabitants with a heavy tax burden. If that can be avoided it will be a first in the history of world governance. As the article points out, Panama external debt currently stands at over $11 billion. With an annual budget approved this month of about $11 billion and a GDP of about $20 billion, Panama has an extremely high debt ratio before additional borrowings. 
Recent Comments