Panama’s Achilles Heel

We have a really intelligent group here.

All the comments from yesterday, plus the dozens of private emails I received, underscore one of the big reasons why I do this in the first place– to build a community for like-minded, sharp, successful people who are lions instead of sheep… bold winners who think outside the box and take action instead of find excuses.

The comments were spot-on, even the one about the massage parlor (you know who you are).  Everyone appropriately captured the challenges that will befall Panama over the coming years.

To be clear, no place is perfect. The United States has enormous fiscal, monetary, and social challenges ahead of it, and a long tradition of serially incompetent politicians who make things worse.  Notwithstanding America’s woes, most of Western Europe is in an even leakier boat.  I will be reporting more on this in the coming weeks.

Panama undeniably has its own problems. It has been under US influence since its infancy and continues to be awash with US government sponsored spooks, thugs, and bureaucrats.  Years ago when I first started traveling there, the US Customs and DEA thugs in Miami used to stand on the jet bridge and randomly search passengers for drugs. Today they search people for ‘monetary instruments.’
Resource constraints are also problematic– blackouts are not uncommon and there are surprisingly some parts of the country that have run into water problems; these growing pains, however, are typical of a small country experiencing such a rapid influx of development and foreign residents.

Some people view the corruption as a major detriment; I think every government is corrupt– the Panamanians just haven’t mastered it like US politicians.

Also, as in most developing countries, there is a chasm between the rich and the poor; one of the key indicators that I look for in emerging markets is the growth of a strong middle class.  This is happening in China as we speak, and it is starting to happen in Panama, though certainly to a different standard than we are accustomed to.

I agree with many of you that, if there is an Achilles Heel in Panama’s economic future, it is its currency; Panama has been dollarized ever since JP Morgan engineered revolution and independence from Colombia in 1903. While this provided stability and credibility for the last century, the dollar is now a liability for Panama.

The US government’s runaway fiscal and monetary policies, coupled with centralized influence of the banking sector, are a recipe for future inflation.  This will adversely affect Panama and Panamanians as the country has never once in its history issued its own currency.

Martinelli is not remotely interested in rocking the boat by trying to issue a new currency; most Panamanians have no idea that the dollar is in trouble… hell, most Americans have no idea that the dollar is in trouble. Raising a stink about the dollar in Panama will likely land him political purgatory– it’s simply too much risk for him.

Fortunately, while the dollar will be a future problem for Panama, it does not have to be a problem for you.

It is critical to first move money out of the dollar and into precious metals and other currencies– this will combat the future effects of inflation.  Panama (and the US) will be cheap countries for those of us who are not holding dollars.

I also expect the free market to take over and create its own solution, even if the government does not issue a new currency. This practice is common in many countries across Eastern Europe, Africa, and Latin America with a history of unstable currencies– big ticket items like cars and houses are bought and sold in a foreign currency.

For example, real estate in Croatia and Latvia is frequently priced in euro; I expect the same would happen in Panama.

Consequently, Panamanian property is probably a smart buy right now for anyone who is thinking about expatriating there; prices are depressed and there is even foreclosure inventory to choose from.  In the event of significant dollar instability, the real estate market will likely start pricing in euro, yen, or renminbi to compensate, so property value will be maintained.

I’m off to Europe and will be transiting through New York City tomorrow.  Make sure you look for my Friday missive (from JFK airport…) as I will be discussing what I learned about the banks in Panama.

About the Author

Simon Black is an international investor, entrepreneur, and founder of Sovereign Man. His free daily e-letter Notes from the Field is about using the experiences from his life and travels to help you achieve more freedom, make more money, keep more of it, and protect it all from bankrupt governments.