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July 26, 2022
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unpleasant task

Gustavo Volmar

The fight against a inflation that comes from outside is an unpleasant task, like undressing one saint to dress another. Any measure that is taken generates harmful side effects, so its application becomes an exercise in choosing the lesser evil. For the authorities it represents a challenge of great magnitude, with serious political consequences. And what is decided to do will impact the economy beyond the prices of goods and services.

Apart from the exceptional case in which a government has unlimited fiscal resources, and a huge foreign exchange reserve, the granting of subsidies, whether these are focused in the form of deliveries of products or money, or general via assignments to suppliers to absorb their cost increases and prevent price increases, is made at the expense of other types of expenses. As the funds that are used to subsidize have to come from somewhere, the Government has to reduce the sums that it dedicates for other purposes, usually on the investment side, provoking adverse reactions in the population.

If under these conditions the Government tries to obtain the funds by imposing more taxes, economic activity declines, unemployment rises and discontent increases. And if you try to obtain them by raising public debt, you will increase your obligations and interest rates, if you place them locally, or lower your credit rating if you resort to external financing without having more income.

If, on the other hand, you decide to establish price controls, yielding to pressure from social movements, you will achieve an apparent and ephemeral improvement, while product stocks last. After that brief period, supply will decline giving rise to scarcity, parallel black or gray markets will emerge, and inequality will grow, with only the wealthiest being able to access those markets.

But even if the task is unpleasant, it must be done minimizing the damage.

Doctor of Economics from Columbia University specialized in companies, markets, forecasts and risk.

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