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Inflation Destroys Rotten Governments

Historically, inflation has often served as an acid test for democratic and authoritarian governments alike, because it represents a breach of the social compact between a country’s political leadership and its people. With inflation ticking back up in Russia, the risks for the regime have not been lost on President Vladimir Putin.

BERLIN – The recent worldwide surge of inflation is forcing political change, reminding us how efficiently this old economic problem can topple governments. In democracies, election outcomes often hinge on price developments. But the effect on autocracies is no less pronounced, because inflation erodes the implicit social compact on which they base their authority.

In Argentina, the election of a radical self-styled anarcho-capitalist, Javier Milei, as president can be understood as the immediate consequence of the incumbent Peronist regime’s inability to deal with inflation, which has hit an annualized rate of 143%. Milei’s most important campaign promise was to restore price stability by abolishing the central bank and replacing the Argentine peso with the US dollar.

Ending monetary autonomy is obviously a bold and risky experiment that will severely limit government action. But that is exactly the point. Since the previous government tried to do too much, and manifestly failed, voters now feel as though anything would be better than more mismanagement.