It is known that inflation occurs when there is a crisis (imbalance) in the balance between demand and supply in the market, which causes the prices of goods and services to rise. The main reason for rising prices is none other than the expansion of money circulating in the market, according to followers of Milton Friedman. Fiscal and monetary measures to support the economy in the period of the pandemic came to be added to the quantitative easing to combat the effects of the great financial crisis of 2008.
Since goods and services remain relatively stable, excess money in the past leads mathematically to price appreciation. The followers of the monetarist theory have always been a red flag for most of the political world, but also of society, who have always aimed at the most flexible solution of state intervention with broad fiscal measures to stimulate employment and economic activity.
As dark memories of hyperinflation faded, governments believed they could increase the monetary base without consequences for the value of money.
This belief forced many central banks, despite objections, to directly or indirectly adopt the support of labor and the avoidance of recession as part of their statutory charter alongside their traditional role focused on the protection of the National currency.
It is not difficult to imagine that of the two approaches, that of the monetarists was the least popular both with the dominant tendencies of social democracy, but also with the more populist representatives of neoliberalism.
Monetarists propose a bitter solution for the economy in the form of higher interest rates and the withdrawal of excess liquidity in order to break up those businesses that owe their prosperity mainly to fiscal expansion, without any real productive innovation.
The rise in prices may be painful today, but it may be dragged out further as citizens themselves begin to demand higher wages. In this vicious circle of self-feeding expectations and economic shocks, controlling the value of money seems the most reliable method to contain inflation which has always been the most insidious tax on citizens’ wealth. The inevitable impact this will have on economic indicators and employment levels will require bravery from both political forces and citizens themselves.
