Dickson Igwe, resident socio-economic and political columnist
The world has entered an era of volatility, unpredictability, and conflict.
Upward pressure on prices driven by massive stimulus policies of past years, especially Quantitative Easing, kept the pistons of the global economic engine working effectively up and until very recently.
Economic growth post 2008, in the midst of a deflationary environment was driven by easy money engineered by the Federal Reserve. Deflation reflected consumer fear and caution that followed the Great Financial recession of 2008. That period of economic growth has today hit the buffers. Most economists predict a worldwide recession.
The post 2008 stimulus of hundreds of billions of dollars engineered by the Federal Reserve and Barack Obama’s Treasury Officials was an effort to avert a financial collapse that could have led to a severe recession, even an economic depression: depression is many years of economic contraction and social hardship.
Pumping hundreds of billions of dollars into the world banking system post 2008 and then during the 2020 pandemic led to the present increased inflation.
Current inflation is viewed as a natural consequence of the huge increase in the supply of money – especially US Dollars- to fight economic contraction. The equilibrium of cash and the products cash buys has disjointed with too much cash chasing too few goods: disequilibrium and misbalance. This is at core why inflation is rising.
When too much money chases fewer goods, the result is price increases where the market determines the availability of a product or service in terms of the ability of consumers to buy the product. This is one of the realities of trade. There is an invisible place where the supplier and buyer decide the price of the product. This is where demand meets supply and vice versa.
It is near impossible for any other force – such as government- to influence this dance between demand and supply. Forcing price caps simply drives the real price underground or worse still, removes businesses from the market. Then in a capitalist economy, it is impossible for the state to force businesses to increase production to temper price rises. Free trade means least government and regulation.
The present inflationary spiral driven by global factors, first stimulus, and now a war in Europe that has created a Supply Shock and has driven up the prices of grain, fertilizer and energy worldwide, will end only when the Federal Reserve and allied central banks have inflicted enough pain on markets to force prices to decrease. That is historically the way to tame inflation and overheating: hardship and austerity.
Higher interest rates throw water on the inflationary fire and takes cash out the market and monetary system forcing demand to contract and suppliers to reduce prices or leave products left unsold.
When the money supply decreases to such an extent that there is less cash than the goods cash buys, then prices come down. This is the blunt force trauma of rising interest rates: contraction of the money supply.
The associated evils of creating a recession to tame inflation will not deter central bankers from increasing interest rates that in a capitalist society is the only way to reduce inflation. Regulating the money supply and ensuring equilibrium is the way to tame inflation and prevent economies overheating.
That is why the best way to fight inflation absent of socialist style state intervention is frugality. The Virgin Islands is an import economy. The country has zero control over prices set overseas.
This is a belt tightening time for the Virgin Islands. Living within means, and adopting caution in spending habits will help consumers live through the hard times that have arrived. Budget wisely, if you cannot afford something then leave it on the shelf. Watch and wait for better days. Inflation does not last forever, and neither will austerity.
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Dickson Igwe is an education official in the Virgin Islands. He is also a national sea safety instructor. He writes a national column across media and has authored a story book on the Caribbean: 'The Adventures of a West Indian Villager'. Dickson is focused on economics articles, and he believes economics holds the answer to the full economic and social development of the Caribbean. He is of both West African and Caribbean heritage. Dickson is married with one son.
