A Dollar Mutiny Has Broken Out in the Global Currency Wars

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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.

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