Cost Of Living – They like to blame it on Costa Rica.

I have heard so many complaints about the inflation in Costa Rica with many expats blaming the Costa Rican government and/or the Banco Central de Costa Rica for the rising cost of living.

These grand theories are patently untrue and come from the minds of those who do not understand economics at its simplest levels.

Costa Rica is affected by the U.S. in many ways. The truth is that the policies of the Banco Central de Costa Rica are intended to keep inflation low and build a $600 billion reserve in foreign currencies but have also affected us in a positive way.

If these policies are successful the dollar should not fall much below the 500 level. The problem is that the Costa Rican economy is so small in relation to the economy of the U.S. that I do not think they will have the desired effect in the long term.

I moved to Costa Rica in December 2007 with the expectation that my dollars would be worth something near 500 colones. At the time the exchange rate was 492 to the dollar.

Over the next two years the value of the dollar experienced an extremely fast rise until it reached 596.992 colons on October 3, 2009.

For me this was an unexpected bonus that allowed me to accomplish far more than I had expected. For the majority of expats it seems that the expectation was that the dollar would continue to rise and enrich them.

It is possible that it could have had the economy of the U.S. been corrected and the recession put to an end.

The problem is, and what the average person does not realize, is the weight that the U.S. economy carries on the economies of the rest of the planet or that the economic crisis in the U.S. has been building for four decades through bad decisions made by our elected representatives and the U.S. Federal Reserve.

Coming out of WWII the United States was the only industrialized economy that was survived intact. The U.S. capacity to produce exceeded that of all the other nations combined and as a result as the U.S. economy went so went all other economies. That fact holds true today although the U.S. is now no more than just another nation economically.

The political leaders that we elect have very little knowledge of how economics works and no apparent knowledge of the economic history of a free market economy as practiced in the U.S.

1. The first mistake made by our elected representatives was to remove the dollar from the gold standard in 1972 in effect making the dollar a fiat currency subject to the whims of inflation and political decisions. The correct tack would have been to allow the price of gold to fluctuate with the rate of inflation.
2. The second error was in not knowing economic history and the fact that the middle class, with money to spend, drives the American economy. In 1982 a policy of supply side economics was begun by adjusting the federal income tax rate in favor of the wealthy in the belief that if there was a sufficient supplies of product on the market it would be sold. Supply side economics holds that if the wealthy have more money to invest they will provide the funding needed to create new business ventures. This is a theory that has no validation in the history of the free market economy of America.
3. The third error was in repeating, beginning in 1981, the policy of laissez faire that was practiced from 1921 to 1932 and was one of a multitude of causes of the Great Depression. This policy led directly to the Savings & Loan failures of the late 1980’s and early 1990’s by allowing the industry to invest inappropriately in commercial properties.
4. Although the policies of the Clinton administration started to turn the economy around but fourth error was made in 1999 with the rescission of the Glass-Steagall act of 1933, which separated the banking and investment industries. Prior to Glass-Steagall banks were allowed to act as brokerage houses leading to the failure of many banks during the period from 1929 to 1932. With the passing of the Glass-Steagall Act the banking and investment industries were separated by law.
5. The fifth error was a return of laissez faire and supply side economics beginning in 2001.
6. The sixth error was in getting involved in military action while cutting taxes at the same time, not once but twice, in 2001 and 2003. This had never been done historically because the cost of war is inherently expensive.
7. Another error was made by the Federal Reserve in the allocation of Quantitative Easing One (QE1) in printing $2.7 trillion in new money and again Quantitative Easing 2 (QE2) in printing an additional $600 billion. The effect of printing this money with no value to back it was to devalue the dollar by 20%.

An interesting explanation of QE1&2 is at Bernanke’s bold QE2 finally explained — with burgers and fries.

Because of the foregoing economic decisions, the U.S. economy is now in the tank and the only resolution is in raising taxes as well as severe budget cutting.

In the U.S., many of our representatives are blaming “entitlements” such as Social Security and Medicare/Medicaid for the economic crisis.

In the first place, it is MY money that pays my Social Security check each month. In the second place the Social Security Act limited investments available to the trust to instruments that bear “the full faith and credit” of the U.S. government.

The only investments that are available that fit that criteria are instruments issued by the U.S. Treasury Department. The Social Security and Medicare trust funds, along with a few other government entities own fully 50% of the government debt.

If not for these investments nearly the entire U.S. debt would be in the hands of other nations and investors outside the U.S.

If MY payments into Social Security had been invested in an intelligent manner rather than in instruments that pay the lowest possible return (U.S. Treasuries) Social Security would not be an issue.

Links Relating To Costa Rica:

• Forcing U.S. policy.
• Costa Rica’s Central Bank to Stabilize the Dollar June 17, 2010
• Dollar rises after Central’s Bank decision to raise its reserves
• The Crawling Peg

Links Relating To The U.S. Economy:

• U.S. Federal Individual Income Tax Rates History, 1913-2011
• Debt to GDP – Time Series Chart of US Government Spending as % of GDP
• Time Series Chart of US Government Spending by year cumulative debt to GDP

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Written by Les Waggoner who is a native of Denver, Colorado who moved to Ciudad Colon, Costa Rica in 2007. Les is retired, married twice with 7 children, 11 grandchildren and 12 great grandchildren. Les is a past member of two high IQ societies, American Mensa & Intertel and his major interests include education, history, political philosophy, economics, social issues, rural life and sustainable living.

For those who are unaware, intelligence as related to IQ is nothing more than the ability to resolve problems. Resolving problems is a matter of gathering facts and the more facts you have the more certain you are of resolving a problem. If you have all of the facts in hand you are certain to resolve the problem.

When John Kennedy proposed changing the marginal tax rates in 1963 I thought the U.S. economy would tank. The fact that the economy kept pumping along after the tax codes were changed showed how little I knew about economics and I determined to learn.

I do not have an education in economics but I do have the ability to read and understand the basic issues involved in economics. Some of what I have written here is based on well known facts such as the policies of our representative government.

I have supplied links to the historical information on debt, the GDP and taxes as well as the policies of Costa Rica for your use and welcome comments and questions.

If you would like to learn more about buying real estate in this area, please contact our Recommended Realtor Martin Gill using the simple form below:

Andrew Makarik

to@welovecostarica.com

Andrew Makarik is the main editor of WeLoveCostaRica, a fan of this sunny country. He is also a loving husband and a has a lovely daughter. By being a devoted family man and the biggest Costa Rica fan, he wants to make more people feel at home there. WeLoveCostaRica unites people and helps them find new home or a new travel destination. This website is a friendly community where everyone can find not only information, but also new friends and travel pals. Andrew is also passionate about IT and programming, so he himself maintains a friendly atmosphere in this cozy environment of WeLoveCostaRica.com.