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Measures to Contain Inflation and the Trade Deficit

Sam Vaknin, Ph.D. - 5/20/2008

Countries around the world - from Vietnam to Kazakhstan - have adopted these measures to reduce their burgeoning inflation and trade deficit:

Hedging (fixing the future prices of foodstuffs, oil, and commodities by purchasing forward contracts in the global markets)

Removal of import duties, excise taxes, VAT, and other taxes and fees on all energy products and foodstuffs

Subsidizing the consumption of the poorest 10% of the population

Introducing price controls and freezing the prices of essential products

Banning the export of foodstuffs (or introducing customs duties and quotas on such exports)

Raising interest rates and reserve requirements in the banking system to prevent new credit formation

Forcing banks to purchase government bonds to reduce liquidity in the market

Administratively capping credit growth and tightening lending to consumers and for real-estate transactions

Freezing, reducing or waiving public sector fees and charges

Releasing commodities, oil, and minerals from strategic reserves

Capping interest rates on deposits (to prevent credit formation using money from new deposits)

Reclaiming agricultural lands and modernizing farms and agriculture (long-term measures)

Declaring a World Trade Organization (WTO) emergency and introducing import quotas and duties on non-essentials and luxury goods

Introducing an inflation target

Allowing for a gradual devaluation of the currency, within a band or range or as a crawling peg. A strong currency has anti-inflationary effects, so any devaluation must be minimal, slow, and subject to market forces.