July 25, 2014
Prague, Czech Republic
Less than four weeks after starting his new job, Panama’s President Juan Carlos Varela already has a serious challenge to deal with: empty grocery shelves.
This is largely a self-inflicted wound that was bound to happen.
Fresh on the heels of his victory in May, the then President-elect announced that one of his first orders would be to regulate prices for staple food products.
He followed through on his promise, establishing price controls on certain brands of roughly two dozen items like chicken, rice, eggs, and bread.
And within a matter of weeks, many grocery store shelves are already empty, at least for the regulated items.
It’s not quite Venezuela or Cuba where it can be downright impossible to buy a roll of toilet paper. But it’s more proof that price controls almost always backfire.
The larger issue here is why the Panamanian government is controlling prices to begin with. The answer is simple: inflation.
According to the Panamanian government, the price of basic foods rose 4.1% from April 2013 to April 2014.
Over the last five years, in fact, food prices have risen more than 24%.
And when average wages are little more than a few hundred dollars a month, a 24% increase in food prices really hurts.
Now, inflation isn’t a particularly unusual phenomenon in Central America, or in developing countries in general.
But what sets Panama apart is that the country is dollarized.
In its entire 111-year history as a sovereign nation, in fact, Panama has never issued its own currency.
Locals and foreigners alike pay US dollars for goods and services across Panama just as you would in Houston, Jacksonville, or Las Vegas.
This means that the country is subject to all the whims and consequences of US monetary policy; when the Fed conjures money out of thin air, the negative effects are quickly exported to Panama.
Yet while it suffers all of the downside of quantitative easing, Panama enjoys very little of the upside.
Of the jobs that the Fed claims they have created by printing $3.7 trillion over the last few years, zero of those have ended up in Panama.
Not to mention, the Panamanian government doesn’t have an endless supply of foreigners lining up to buy its debt.
So to get a true sense of US dollar inflation… and where it’s headed in the Land of the Free… one only need look at dollarized countries like Panama.