The US $, the CR Colon, Panama and the Euro

I won’t say I was stunned, but I admit to being surprised when I read the following story in Yahoo News: Panama leader tells Germany he wants to adopt euro

Anybody who follows the news at all has undoubtedly read about the problems in Greece regarding their participation in the European Economic Union, and you probably have heard dire predictions about the future of the euro due to problems in Greece, along with problems in Spain, Portugal and Italy.

So, it sounds pretty strange that Panama, which currently uses the US dollar (along with some of it’s own currency tied to the dollar) wants to adopt the euro as legal currency along with the US dollar. Why in the world would Panama want anything to do with the euro? Do I know? No, but I am willing to speculate.

Sadly, Panamanian president Martinelli gives no reason, but simply said “In Panama the currency in free circulation is the American dollar and I told the chancellor we are looking for ways for the euro to become another currency of legal circulation and to be accepted in the Panamanian market.”

So what is my take on it? For what it’s worth, Martinelli’s statement is less about the euro than the US dollar. Panama hitched its economic wagon to the US dollar since it came into existence in 1903. The very existence of the country of Panama is a result of the United States wanting to build a canal across the isthmus, which was, until late 1903, a part of Colombia. With the backing of the United States, Panama declared its independence, allowing the US Army Corps of Engineers to begin work on the Panama Canal.

Ben Bernanke, Santa Claus for US Banks

For more than a hundred years, Panama has been using the US dollar. Now, for some reason, they want to include the euro as legal tender, even though the future of the euro is in doubt. If you’re scratching your head, I can’t blame you.

My own take on this is that President Martinelli’s statement is more a reflection of his fear regarding the US dollar than his faith in the euro.

Depending on how much you pay attention to such things, you may or may not have heard the term ‘quantitative easing.’ I suspect you almost certainly aware of the size of the national debt in the United States, or at least the fact that it is worrisome to a LOT of people. ‘Quantitative easing’ is what the Federal Reserve is doing, theoretically, to fight the current recession. To oversimplify the term, it means the Fed is printing a lot of money. When a country prints a lot of money, the VALUE of that currency tends downward.

Panama, tied as it is to the US dollar, is at the mercy of US economic policy. Wherever you are on the political spectrum, it’s likely that you have serious reservations about the direction of the US economy. I could go into a lot of detail but that’s not the point of this post. The point is simply that one of Costa Rica’s two neighbors would SEEM to be nervous about the US dollar, and would like to hedge it’s (gigantic) bet on the US dollar.

I’ve posted the graph above before, but you can see that the dollar has been losing value against the lowly Costa Rica colon for quite a while. To put it another way, the currency of a semi-third world country has gained value against the currency of the world’s largest economy. If you want to think this is because Costa Rica is managing its finances so well, so be it. If you believe it’s more that the US is being mismanaged, then we have something we agree on. We may disagree on what should be done, but I think we can agree there is a problem.

In Costa Rica, we see steady inflation creeping. My Social Security isn’t buying as much as it used to, but it’s out of my hands. One thing I am looking into are certificates of deposit denominated in Costa Rican colones. I can get 9% return on them. I’m not in the States, but perhaps somebody can tell me what rate of return you can get on a six month CD at a local bank. I do know that the interest I get on my savings account in the States (it’s small) is well under 1%. Unless the dollar makes a 9% gain against the colon next year, or the nationally insured banks here explode, a Costa Rican CD will outperform a US CD by a mile.

I’ll let you know how that works out.

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Comments

  1. Thank you so much for posting this graph and your thoughts about the Panamanian currency! One of the reasons we chose CR is for the fact that it's currency was NOT tied to the dollar. Now to become a resident so we can invest in those CD's…

  2. this is very good.I am going to be moving to Costa Rico and build a house after i Rent for a while.Do you know how i can get my money out of U.S

  3. If you can not spell Costa Rica, then NO!