Will we commit to a monetary policy that is sufficiently restrictive to reduce inflation to 2-3% over time, or are we not confident that we can achieve such a position in the region? Prepare for the latter.
Inflation is clearly out of control and several situations can be foreseen. Either much higher interest rates would be needed to reduce inflation - which would likely crash the economy - or we would tolerate higher inflation for a longer period of time, perhaps yes, years. With all its consequences.
Fact is that there is a need, or at least a temptation, to inflate debt and a chance to trigger a recession. We are dealing with a young cabinet formation, there is geographic and demographic pressure, a multipolar world is raging, bringing political instability and a higher inflation scenario will probably prevail.
Let's explore some of the mechanics at play. Deficits are spiraling out of control, which could lead to more government bonds, nominal debt rising, leading to compounding effects that are difficult to reverse. This trend is likely to accelerate further due to a combination of rising debt levels and the refinancing of existing low-interest debt in the portfolio as it matures by risking more expensive debt in the future.
The question is, will we have to cut spending on health, infrastructure, education and social protection, which is often the case for low-income countries when they enter the debt crisis. Are we going to impose higher taxes on companies again, so that local and foreign capital dries up further because it is ruining its business climate. Higher corporate taxes will result in freezing salaries and increasing local price levels. Are we going to take measures to further increase minimal salaries, for which there is no clear explanation about how this can be financed in the current situation we find ourselves in. The reality is that this very difficult situation could result in a prolonged recession, years of high inflation and the country will have fewer resources at its disposal that should go to essential sectors, which, according to the World Bank, could have a disproportionate impact on the poorest groups within the population.
It is important to emphasize the compounding effect of debt growth curves and the associated costs of debt servicing. The human mind is somehow programmed to think in linear terms. Too often we are surprised by the cumulative effects of compound curves, and how difficult they are to reverse.
If there were a loss of confidence in the economy and interest rates continued to rise, the compound effect could suddenly and unexpectedly accelerate even further.
Who is going to explain to the people how the real story works, and how we should simply prepare for difficult periods ahead and we have to accept many issues on the agenda will not be resolved in the next years to come as they are too complex to handle and will take more time to be resolved. So let's step over our shadows, communicate the real story, stop political and social polarizing, seek to understand different opinions, build bridges, find compromises an join forces on solving the current challenges.