Posted by: luisabaldwin | March 4, 2010

IS INFLATION COMING TO PANAMA?

NOTE:  CHECK BACK FROM TIME TO TIME FOR UPDATES TOWARDS THE BOTTOM OF THE POST

Photography of the Flowers of Panama

by

Luisa Baldwin

There to give you a slice of happiness as you plow through this posting!

Yeah, yeah – I know it’s all been fun and games on the site so far.  It’s been about being positive and light hearted on this travel blog.  After all, many of you are coming to Panama for a vacation.  I wish I could keep it that way but we live in terribly uncertain times and, when it is important, I have to get a little more serious.  So please bear with me.  A lot of my readership has pragmatic considerations.  In addition to those who access my site for vacation ideas there are those considering a move to Panama as well as people who live in Panama as x-pats.  This post is about what could happen in Panama should the almost certain inflation descend upon the United States and the rest of the world, for that matter.

I have held an interest in macroeconomics since I was in my twenties.  I know it’s darn boring to just about everyone of you but to me the study of economics never was monotonous because of what happens when the going gets tough.  After all, we have busy lives to live.  Thanks to my wise cousin Gary, who introduced me to this world, I knew way back when that the sad state of affairs our economy has sunk into would one day descend upon us.  As far back as the late seventies, Gary always reminded me that Americans were, one day, going to have to get used to living with less.  I never forgot his wise council.

Our decision to move to Panama was, in large measure, an economic one.  It had to do with the cost of living and was the result of a lot of careful research into the miracle that is the economy of Panama and the sound, conservative banking system of Panama.  I was thrilled to learn, for example, that the Constitution of Panama prohibits the establishment of a central bank.  For you see, central banks and their monetary policy are responsible for all economic cycles, i.e. recession, depression, deflation, inflation, stagflation, etc.  And as it relates to inflation, Claus Vogt of Money and Markets had some pearls of wisdom to throw into the equation.  “Inflationary periods are highly unjust. They undermine the ethics of hard work and thrift. They destroy solidarity, lead to widespread hardship and often to social unrest.”  Inflation is particularly cruel to the retired, who live on relatively static incomes.

I was also excited to learn that, over time, economic cycles,  in Panama, generally speaking, have had a lesser effect on it’s economy than in the U.S. Hence, the good people of Panama, I am told, suffer less when times are not so good.  Banking reserves in Panama are $0.68 on the dollar whereas our U.S. banks are running at about $0.03 cents.  That means that U.S. banks hold $0.03 for every dollar deposited.  You can imagine what happens during stressful events.  That’s like what happens to you when you have depleted your rainy day savings account and then you get laid off from your job.  I liked the fact that Panama’s conservative banking system never got involved with sub-prime debt or credit default swap derivative instruments, particularly bundled credit default swaps which are leveraged to the hilt.

All in all, I was feeling pretty confident about Panama’s prospects but a question always lurked in the back of my mind.  What if inflation reared its ugly head and broke out of Pandora’s Box in the U.S.? How would that affect us so far off the beat and track?  I decided to go to the source for that answer.  I sought out one of the original architects of the miracle that is Panama’s economy, David Saied.  Luckily for all of us, he was willing to give me a slice of his valuable time.

David Saied was the former Securities and Exchange commissioner for the Republic of Panama and has a masters degree in economic policy from Suffolk University, Boston, Massachusetts. He was head of National Public Policy for the Government of Panama and also directed the National Competitiveness Program. He is considered to be one of the economic architects of Panama’s miracle economy.  Currently Mr. Saied is studying for his second Masters Degree in economics and has written financial articles for the prestigious Ludwig von Mises Institute. In response to my question regarding future possible inflation in Panama Mr. Saied stated,

“An inflationary period in the US will likely push prices in Panama even higher due to higher levels of growth in Panama and a closed food sector (oligopolies).”

As it relates to higher levels of growth in Panama, Mr. Saied stated that Panama’s GDP grew at the astounding rate of +10.7% in 2008.  In  2009 it was still in the black, coming in at +2.4%.  We are very fortunate to have a 2010 forecast from Mr. Saied.  He projects GDP to still be in the positive and growing at the rate of +2%.  Given the macroeconomic challenges around the world last year, Panama was one of only a handful of countries producing positive GDP. This says a lot about this country and Panama should be resoundingly proud of its economic achievements.   There’s been no recession here. The country is still moving forward, although slow down is evident.  That’s to be expected.

Since inflation can be defined as too many dollars chasing after too few goods, Panama’s prosperity has, in and of itself, already produced a relatively small natural inflation of sorts.  Mr. Saied’s statement relating to a closed food sector was, however, something I wasn’t prepared for.  I even have to admit my ignorance at the term oligopoly and I had to look it up.  An oligopoly is a market condition in which sellers are so few that the actions of any one of them will materially affect price and have a measurable impact on competitors.  OK, that made sense.  I can envision that here in Panama.  This country is small, only 3 million people.  If we were to take produce as an example we would only have to look towards one small geographic area called Cerro Punta because that general area is the bread basket for the entire country.  It’s a small area comprised of a number of farms. So there isn’t a plethora of produce vendors competing with each other and hence keeping the prices of produce down.

As I raked my brain to find a solution for Panama, I developed a big hope and I asked Mr. Saied about it.  If inflation was seeping over from the U.S., would Panama consider de-pegging from the U.S. dollar? Mr. Saied informed me that this was definitely not the case, “The Balboa (the Panamanian currency) will never become a reality.  Our constitution prohibits the issue of fiat currency.” So that hope for Panama went by the wayside. Mr. Saied does offer generous recommendations as to what we all should do to protect ourselves.  It applies to both those in the U.S. as well as people here in Panama.  He states that Mr. Bernake, (head of the Federal Reserve) has dangerously inflated the money supply, which can only lead to high inflation.  Martin Weiss of Money and Markets offers a chart which clarifies Mr. Saied’s point:

Explosion of the money supply

Mr. Saied further explained, “Mr. Bernake has also planted the seeds of the next downturn, which should happen in less than three years.” So Mr Saied is certain inflation is coming to the U.S.  and hence, to Panama. His recommendations are as follows:

  • Hedge against inflation – buy gold.
  • Gold has not even reached its 1980 level of close to $2000. It will continue to grow. Wait for a dip.
  • Buy oil on a dip. Inflation will push commodities higher.

I recently was honored to meet Dr. Arthur B. Laffer at the San Diego airport while waiting for a plane.  He was having a very nice conversation with his wife by cell and, although I had not looked over at him and tried not to listen to his conversation, I did recognize his distinctive voice.  After he hung up his phone I said, “I’m sorry for listening to your voice, but you’re sitting right next to me.  That voice can only belong to Art Laffer.”  With that he piped up and in his usual friendly and cheerful way said, “That’s me.”   The following very long paragraph consists of Dr. Laffer’s bio, just to convince you of his sound advise.  For you see, it was Dr. Laffer who helped President Reagan usher in the decades of prosperity that followed his presidency.

Dr. Arthur B. Laffer is the founder and chairman of Laffer Associates, an economic research and consulting firm. He was formerly the distinguished university professor at Pepperdine University and a member of the Pepperdine Board of Directors. From 1976 to 1984 Laffer was the Charles B. Thornton Professor of Business Economics at the University of Southern California. He was an Associate Professor of Business Economics at the University of Chicago from 1970 to 1976 and a member of the Chicago faculty from 1967 through 1976. During the years 1972 to 1977, Laffer was a consultant to Secretary of the Treasury William Simon, Secretary of Defense Donald Rumsfeld and Secretary of the Treasury George Shultz. From October 1970 to July 1972 he served as chief economist at the Office of Management and Budget. Laffer is a founding member of the Congressional Policy Advisory Board, was a member of President Reagan’s Economic Policy Advisory Board. He has received several awards for his economic work including two Graham and Dodd Awards from the Financial Analyst; the Distinguished Service Award by the National Association of Investment Clubs; the Adam Smith Award for his insights and contributions to the Wealth of Nations; and the Daniel Webster Award for public speaking by the International Platform Association. Laffer earned a Bachelor of Arts in economics from Yale University and a Master of Business Administration and a Ph.D. in economics from Stanford University. He recently co-authored the best seller, “The End of Prosperity”. He makes frequent appearances on news and finance TV shows.  In economic circles, Dr. Laffer is famous for developing the Laffer Curve.  In short, the Laffer Curve shows the relationship between tax rates and tax revenues and illustrates that changes in tax rates affects tax revenues, i.e. lower tax rates produce increased revenues.

We had a long conversation about the economic havoc the American people are suffering and I was encouraged to hear him say he could solve the whole mess in a weekend, given the right Congress and Executive branch.  Dr. Laffer has recently co-authored the best seller, “The End of Prosperity” and for you economic junkies, (yes, I know – that would be my cousin and me!) contained in his book are those solutions.  But back to Panama.  I decided to ask my big question.  “Dr. Laffer, given an almost certain severe inflation coming to the U.S., what do you think will happen in the Republic of Panama, where I live?”  He responded by saying,

“Yes, there will be inflation in Panama because Panama is on the U.S. dollar.”

So there you have it.  These are the best experts I think I can find for you.  In conclusion, most of us came to Panama to get away from this sort of nonsense. We just want to live our lives in happiness, harmony, and security.  But when the problem follows us here well, what can I say, it can only be described as a game changer, especially in light of the fact that many Americans living in Panama are on fixed retirement incomes.

This is only the beginning of my journey into this study.  But I felt a duty to inform you sooner rather than later of the inflation possibility in light of the fact that the IMF (International Monetary Fund) economists have just published a recommendation that the world central banks double their official inflation target from 2 percent to 4 percent. Go figure, and I thought the job of central banks was to keep inflation at bay!   And so, it begins!

UPDATE:   3/12/2010. Gas in Panama raised $0.11 a gallon to $3.11.  Watch how this affects the price of everything!

UPDATE:  3/13/2010.  Mr. Saied reports, “Oil will reach $100 soon“.  Watch how this affects the price of everything!

UPDATE: 3/15/2010.  Obama administration announces a 3-year moratorium on off-shore drilling.   Remember when gas reached $4+ a gallon in the U.S.?  What brought it back down was the announcement that both Congress and the Administration were lifting the bans on off-shore drilling.  To my way of looking at things, this virtually guarantees Mr. Saied’s forecast of $100.00 a barrel oil.

UPDATE: 3/17/2010.  Federal Reserve announces they will stop buying mortgages in April.  This is an inflationary signal.

UPDATE: 3/31/2010.  Oops!  Reversal in course.  Obama announces off-shore drilling will now be allowed.

UPDATE: 4/1/2010.    It seems President Obama’s announcement of off-shore drilling yesterday made no difference.  Martin Weiss of Money and Markets put the oil picture in this light, “oil hit $84.62 early today — a new 18-month high. It has now more than DOUBLED in price since its December 2008 low — and has surged a whopping 20% in the last two months alone!  This chart, courtesy of Money and Markets helps us to better visualize.

Money and Markets

Update: 4/2/2010.  Associated Press reports, “Crude pushed to an 18-month high Thursday. It passed $85 a barrel at one point”

Update: 4/5/2010.  Fox news is reporting oil is at $86 a barrel and if it goes to $100, it could push the economy back into recession.

Update 4/7/2010:  CNBC’s Rick Santanelli predicts $150.00 oil and $4.00 gas by summer.  According to Santelli, it’s not inflation but a move by investors out of a potentially over-valued equities market that will cause a rise in commodities.

Update 4/6/2010:And so it begins in the US!  Rising demand and reduced supply drove supermarket prices for 16 basic foods up 6.2% in the first quarter, led by gains in staples such as cheese, vegetable oil and eggs, the American Farm Bureau Federation said.

Update 4/8/2010: Only one week after the Federal Reserve withdrew from their mortgage buying program, 30-year fixed mortgage raised to 5.31%, up from 5.04%, one week after the Fed ended its program to buy mortgages.  If they go too much higher, recovery will stall.

Update 4/12/2010: Gas at the Panama pump is now $3.20.

Update 4/22/2010:  If the VAT tax passes in the US, a guaranteed inflationary cycle will begin in the US as the VAT tax will kill innovation, jobs and economic growth.  The VAT taxes the value that is added at each stage of the production cycle to so it’s invisible to the consumer.  It’s a very cruel tax, especially to those on fixed incomes, and will raise the cost of just about everything.  Manufacturers just pass those costs on to the consumer.  If that already too expensive car costs 20% more you’re going to think about it twice, especially in these uncertain times.  In an article entitled  Will They Take ‘No’ As Answer to VAT?, Investor’s Business Daily states, “Our economy would be more like those of the stagnant, debt-ridden European Union, where the VAT averages close to 20%.”  To my way of thinking, the VAT tax guarantees a double-dip depression.

Update 4/22/2010: AP reports, “Food prices jumped by 2.4 percent in March, the most since January 1984. Vegetable prices soared by more than 49 percent, the most in 15 years. Gasoline prices rose 2.1 percent, the department said, the fifth rise in six months.”  But the Labor Department tell us, Labor Department said the Producer Price Index rose by 0.7 percent in March.  As Jim Sinclair states, “Rising lumber prices at the home improvement stores, rising hardware costs, rising PVC costs, rising sheetrock costs, rising gasoline prices, rising meat prices, rising sugar prices, rising baby food prices, rising fruit prices, rising diaper prices, rising fees on local services,… Nope – this has zero effect on the average consumer.  Inflation has gotten a grip on the U.S.  The reason the Department of  Labor can tell us that the index rose by only 0.7% is they leave out food and energy costs!  Here we go folks.  Hold onto your wallets!

Where will it go?  Nobody, of course, knows and the forecasts are all over the map – up to 40% and beyond to hyperinflation for the U.S.  We’re in uncharted waters here.  Never before have we seen so many sovereign debt default risks pose a major threat to the global economic recovery. It is now looking like Panama will not go unscathed as it has for the last two years.  Maybe it will be a little less intense here for there is no central bank to print fiat currency out of thin air and spread it around all over the place.  I don’t really know.  But what is apparent is it’s time to batten down the hatches;  live within our means, stop spending, and pay off debt.  For those of you who maintain portfolios, it’s time to reposition them with a hefty hedge against inflation. And never forget what your grandparents told you,”Never get into debt.   Cash is king!”  It may be worth a lot less but it will buy you a loaf of bread whereas that credit card may not.

Photography by:
Luisa Baldwin
© All rights reserved

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Responses

  1. Obama announced offshore oil drilling yesterday, largely onto the Mid-Atlantic region.

    Just wanted to update your updates:-).

    Great blog !

    Jo Ana

    • Hello Jo Ana,

      If you’ll allow me, let me shed some light on this announcement. Do you remember when oil shot through the roof and Congress allowed the off-shore ban on drilling to expire? Then President Bush announced drilling would resume? Santa Barbara was just one such example. California could have drilled (and, by the way, solved their liquidity problems) but didn’t. The opportunity was squelched in court by the environmentalists. This wasn’t that long ago and speculators (40% of inflation in oil) remember this. That’s why we probably won’t experience price deflation this time around. In short, the announcement probably won’t have the same impact as it did last time. For everybody’s sake, I hope I am wrong.

  2. What i do not realize is in truth how you are no longer actually much
    more well-liked than you might be right now. You’re very intelligent.
    You understand thus considerably relating to this matter, made me in
    my view believe it from numerous various angles.
    Its like men and women are not interested unless it is something
    to accomplish with Girl gaga! Your personal stuffs
    excellent. All the time handle it up!

    • Thank you for your kind words. We have had inflation in Panama.


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