September 30, 2011

Dear Brazil, Thanks for going on strike this week so I could write about inflation. -Sarah

Bank workers in Brazil went on strike on Tuesday demanding 12.8% pay increases because of an inflation rate of 7.33%. In August, Brazil lowered its equivalent of a Federal Funds Rate (Selic interest rate) from 12.5 to 12%. They were hoping that the struggling economic climate would bring the prices of imports and commodities down enough to lower their inflation rate to 6.5%. Over the past month postal workers and metal workers have demanded higher wages due to inflation. Now the bank workers are asking for wages that are much higher than the inflation rate. This could possibly worsen the problem and increase inflation even further.

What would Austrian Economics say about this? The inflation rate is creating unfairness in the economy. People who receive the inflation money first will benefit by being able to afford the higher prices. Their income will increase, while most pre-inflation prices still exist. However, the rest of economy, whose incomes remain constant, will have to make sacrifices and buy less because of the new, higher prices. This has sparked the wave of strikes by metal workers, postal workers, and now bank workers.

The Austrian solution would be for the government to tax more instead of inflation, “There can be no secret way to the solution of the financial problems of a government; if it needs money, it has to obtain the money by taxing its citizens” (57). Taxes do not create a rise in prices. When taxes increase, consumers have less income to spend, which the government spends instead. There is no increase in prices, but the government can still get its money and achieve its goals.

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