Inflation hardships

History has taught us the disastrous effects of uncontrolled inflation in numerous developing countries all over the world, such as Sri Lanka, Venezuela, Zimbabwe, Greece

September 7, 2022

The world’s economy continues to drift here and there not knowing where and how it will eventually settle. The ebb and flow of the economic hardships wrought by the Covid pandemic and exacerbated by the unfortunate eruption of hostilities in Europe continue to bedevil governments and their central bankers on how to best shelter the people from its dastardly consequences. Economists have widely projected the contraction of the global economy by half from 6.1 percent in 2021 to about 3.6 percent in 2022 and inflation projections of 5.7 percent in advanced economies and 8.7 percent in emerging and developing countries in 2022 advancing by 1.8 percent and 2.8 percent higher, respectively, from January projections. (Source: IMF)

A few weeks ago, no less than Federal Reserve chairperson Jeremy Powell, the central banker of the world’s largest economy, declared in no uncertain terms that the crisis of dangerously uncontrolled rising prices, or inflation, is far from over. Powell unambiguously pronounced that the Federal Reserve will continue with its march toward higher interest rates until inflation is reined in. Unfettered inflation as we learned in Economics 101, unless nipped in the bud, can perilously lead to great human suffering and political instability.

And what doomsday scenario could possibly ensue? In the absence of interest rates that could match elevated inflation spirals, inevitably there will be massive currency speculation, a tsunami of investment outflows, depletion of foreign currency reserves forcing a consequent devaluation leading to debt restructuring, failed businesses and widespread unemployment. Rioting will be commonplace, eventually morphing into government upheavals and even totalitarianism.

History has taught us the disastrous effects of uncontrolled inflation in numerous developing countries all over the world, such as Sri Lanka, Venezuela, Zimbabwe, Greece, and even a developed nation such as Germany (after World War I). It is a malady that surely will spare no country unless appropriately and unfortunately, more often than not, painfully addressed.

Again, our textbooks have taught us that the usual go-to antidote that is typically employed by central bankers is a massive bump up in interest rates to deflate the purchasing power of excess liquidity chasing limited supply of goods. Such a remedy however, akin to chemotherapy, unless administered in prudent moderation, can have its deleterious side effects and can mortally inflict damage to what otherwise are perfectly healthy organs. Thriving businesses could go bankrupt due to a drop in demand, increased unemployment, deflated fiscal revenues and, in a vicious cycle, further stunt prospects for economic recovery as the high cost of borrowing will likely dissuade any new enterprises and inhibit government pump priming.

Our country has had its own share of excruciating medication in the not-so-distant past. Due to the abject failure of governance marked by corruption, depleted government coffers, domestic political turbulence and plunging investor and creditors’ confidence, our central bank had to resort to sky-high interest rates peaking in the early ’80s at about 50 percent. Foreign exchange control was imposed as all dollar export receipts by the banking system were mandated to be pooled and surrendered to the central bank, and meager dollar allocations had to be parceled out to FX-starved importer clients prompting a robust parallel Binondo FX market. It was a harrowing experience that hopefully we will not experience again as we wait with bated breath how our economic managers will navigate the turbulent waters that we now face as inflation gallops on.

Until next week… OBF!

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