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”?