Inflation and CBs 2: Panama has no Central Bank

One of the hallmarks of HK's free market economy is that its monetary authority (or central bank or federal reserve) does not print the national currency. The HK dollar is printed not by its monetary authority, but by private banks -- HSBC, Citibank i think, and one more bank. The monetary authority just function as it is -- to set monetary policy (levels of interest rate, money supply, exchange rate and international reserves, etc.).

But there's one economy that looks more free marketer than HK in monetary policy -- Panama. It has no central bank or monetary authority. No national currency, they're using the US$. And in some big infrastructure projects, like expanding the capacity of Panama Canal, the government will raise not a single tax rate, but rather use revenues from the canal to do the job.

To see more about this, see Andrew Work's article, "Panama -- the HK of Latin America?"
http://www.lionrockinstitute.org/

In earlier short articles, I have argued that central banks are shrinkable if not abolishable, if their main concern is "inflation targetting". High inflation rate, and high prices of commodities and services in an economy, is mainly a result of trade protectionism and less mobility of commodities around the world. When the price of some goods are high in country A when such goods are wide available elsewhere, that country's protectionism is the culprit. Conversely, when the price of other goods in that same country A are dirt cheap when these goods are expensive elsewhere, again that country's or other countries' protectionism is the culprit.

The level of money supply in the economy is not much a factor, though loose money supply can push prices up (ie, too much money chasing too few goods and services). But it's those central-planning thinking central bank bureaucrats that manipulate money supply and interest rate levels. And their manipulation can distort the price signal in an economy if market players are better left on their own to respond to changes in consumer demand and producer supply.

When central bank officials or bureaucrats say thay want to "cool off" an "over-heating" economy, they mean they want to control "over-spending" and high borrowings by the people because this can lead to high inflation. So what they usually do, is they raise interest rates -- to encourage savings and discourage high spending and borrowings. Then they say that they have controlled high inflation.

I am not in favor of this kind of intervention. When people have lots of money to spend, let them do so; someone's consumption is somebody else's production and services.

* See also: Inflation and CBs 1: Central Banks Can Be Anti-Globalists, June 29, 2006