Inflation is not easy to correct. Most government solutions fail.

How do countries control inflation? The answer is: very badly. The misunderstanding of money that leads governments and central banks to devalue currencies too often means they are ill-equipped to put the inflation genie back in the bottle. History is littered with attempts to end monetary disasters that failed and often made matters worse.

Indeed, policymakers are usually unable or unwilling to recognize the real reasons why their currency has lost value. Instead, they blame the markets: people are spending too much money! Companies are snapping up! The economy is overheating! Do something!

Often that something pressures companies to lower prices or encourages people to spend less money. These strategies never work.

Many countries attempt to prop up their plummeting currencies by artificially increasing demand through so-called “capital controls”. Argentina has periodically banned companies from doing business in dollars in an effort to shore up its beleaguered peso. The use of credit cards has also been restricted. In 2021, after a brief dip, Argentine inflation (which had reached rates of 50%) soared again. The value of the Argentine peso had fallen from 15 to the dollar in 2017 to 107 to the dollar.

Price controls are another favorite method, often accompanied by threats and shame from authoritarian regimes. Turkey’s strongman President Recep Tayyip Erdoğan reacted to rising food prices resulting from the fall of the Turkish lira by blaming foreign ‘food terrorists’ who he said were working with international speculators . He called on citizens to report food vendors who were “bullying” consumers and ordered price inspections of grocery stores and warehouses. The efforts had virtually no effect on Turkey’s runaway inflation.

With the highest inflation rate in the world, Venezuela at one time imposed strict price controls on
a wide range of products, including corn flour, auto parts and children’s toys. The government has sent a small army of price inspectors armed with central bank data to hunt down suspected price scammers. After further devastating the country’s economy, controls were finally relaxed. Meanwhile, the government continues to print money to help fund his skyrocketing salaries, which have increased at least 60 times in just one year.

Price controls were also a favorite method of the 37th President of the United States. Faced with mild inflation in 1971, Richard Nixon responded with a 90-day wage and price freeze—the only peacetime wage and price controls in U.S. history. Nixon was convinced that the controls, combined with monetary expansion by the Fed, would boost employment with minimal inflation. The president was re-elected, but his initiatives failed to control the rise in prices.

Another inflation-fighting strategy is “austerity,” a combination of harsh tax increases, sky-high interest rates, government spending cuts, and yes, greater devaluation of the currency. These so-called cures are based on an erroneous critique of the Great Depression. Back then (and, too often, now), Keynesians viewed inflation as primarily a non-monetary phenomenon. The purpose of austerity measures is to curb inflationary price rises by creating a “recession to break the back of inflation”.

Austerity is the favorite inflation “cure” of the International Monetary Fund, the global organization of 190 countries whose mission, in part, is to foster global financial stability. Countries plagued by high inflation often turn to IMF experts. They should not. States around the world have seen their crises deepen and their economies devastated after following the agency’s advice.

The classic example of IMF malfeasance was its intervention in the Asian currency crisis in the late 1990s. The rise of the dollar during this period put pressure on the values ​​of dollar-linked currencies in Asia. Traders ditched the Thai baht and other currencies in the region and bought dollars instead.

The IMF, however, insisted that the problem lay in the Thai government’s deficit. The agency recommended an austerity program of tax hikes and spending restraint to turn the government’s tiny deficit into a surplus. The strategy, however, was a disaster. The value of the baht has fallen further.

In the late 1980s and early 1990s, the Soviet Union and later Russia made a similar mistake by consulting the IMF. As Moscow began to conduct more international trade in US dollars amid President Mikhail Gorbachev’s warming relationship with the West, inflation soared as demand for the ruble slumped. At the same time, the Communist bureaucratic government began to finance its huge deficits by printing new banknotes. The combined result was roaring hyperinflation.

IMF advisers recommended slowing hyperinflation by reducing the supply of rubles. The problem, however, was not the supply per se, but that no one trusted the ruble. By declaring much of its currency worthless, Moscow has exacerbated this problem exponentially.

To stem the devastation, a series of IMF-recommended austerity measures were imposed, which included a series of new taxes in addition to spending cuts. The goal was to create a budget surplus, but the tax hikes only accelerated the downward pressure on the rouble. The disaster created by the IMF led to the election of strongman Vladimir Putin.

Inflation-fighting regulations and taxes fail because they do not properly address the cause of the fall in the value of money. Failure to address this core problem produces “solutions” that somehow further undermine confidence in a government and its currency, making matters worse.

This was adapted from the book Inflation: what it is, why it’s bad and how to fix it by Steve Forbes, Nathan Lewis and Elizabeth Ames, courtesy of Encounter Books.

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