Standard economic theories have acknowledged that inflation is "always and everywhere a monetary phenomenon" (Milton Friedman). This is, the effect of Central Bankers printing money. Yet, every time there is a rise in inflation we have to put up with idiotic nonsense that is spewed-out from Central Bankers' press releases, conferences, opinions and otherwise meaningless explanations. It's always the same story. A little bit of inflation is OK, too little is bad and too much is also bad. As we head towards the "bad" section of the sliding scale, the Central Bank of (insert the name of your favourite country here) will (insert your preferred Central Bank response to high inflation here) to safeguard and protect economic activity.
Right!
There is only one tiny problem, how exactly will a Central Bank fight inflation if it is itself the only source of it? Answer: it can't. It's a charade. A trick. Smoke and mirrors. A fallacy. It is the equivalent of finding a way of defying physical laws by being in two places at the same time. No kidding!
Yet, Central Bankers keep doing it.
Year after year.
And people keep believing them.
Year after year.
Now that's pathetic!
Yet, there are places of earth that suffer all the downside of inflation without any upside. Such countries are those that are "dollarized" (officially or un-officially). These are countries that for one reason or another use the USD as currency.
The poster country for such dollarized places is Panama. Panama has not issued its own currency in its 111 years as a sovereign country.
Yet…
Yet…
They have growing inflation. Over the last 5 years food prices have increased by about 25%, or 5% per year. This situation is so bad that the current president enacted price controls… with the trivially forecastable and fully expect result of empty shelves.
This is quite simple. Food retailers buy at Y dollars and sell at Z dollars. The difference (Z-Y) is their profit. But what happens when there is inflation and wholesale prices rise above Z?. They lose money. Consequently and in order to avoid this scenario, they raise prices. Therefore consumer inflation ensues.
And what does the government do? Freeze prices.
Right!
Like this will stop the US Federal Reserve from printing USD!!!
Why is this important? Because all G8 or G10 or G20 or G-whatever countries (i.e. those that matter) print money. All this money will eventually, sooner or later, reach your country and with it, it will bring inflation regardless of what your Central Bank may be doing.
This means that any printing of currencies that are widely used outside their countries of origin will impact you. Even if you do not live in the US or EU, printing in USD and EUR will affect you. Even if you do not live in Japan, printing of JPY will affect you.
We live in a globalized world and as such idiotic economic measures particularly those taken by economic powers, will impact your live. Panama is an elegant and clear proof of this effect. The disease is global and only a global solution will bring permanent health.
Gold or more Panama, the choice is yours.
Note: please see the Glossary if you are unfamiliar with certain words.
