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How Inflation Will Change Things

By: Steve Johnson

5/23/2008 - 49 Comments

As of today, the dollar is still the Reserve Currency of the world, which is the primary currency used to buy/sell oil.

This fact forces all nations to have dollars, which is why two-thirds of the dollars are in circulation outside the US. The falling value of the dollar is creating a global currency crisis as everything moves with the value of oil, which is dropping primarily because the dollar is losing its purchasing power against other currencies.

This is creating major inflation, as notes by my article Inflation is Everywhere.

We are now at the brink of the biggest financial crisis the world has faced since the Great Depression. Inflation will change the entire economy.  Here are a few of the changes coming our way.

How Governments Change

A governments’ reaction to inflation has historically repeating throughout history again and again.  Nixon did the same as early as 1971.  The government will try many things, including increasing regulations, along with bank and business bailouts, price controls, wage freezes, taxing the rich, blaming business CEO’s and capitalism, etc., until finally when nothing seems to work they will drastically increase interest rates as Paul Volker did in 1976-1981. 

Governments hate to raise interest rates, because it slows down the economy and reduces the GDP, causing congress to cut back on spending. Cutting back on spending is not good for elected officials, because it decreases their chance of getting re-elected – even if it’s the right thing to do.

How People Change

People switch to survival mode, by hoarding food and supplies, cutting back on consumer goods, pulling money out of the banks and purchasing stronger foreign currencies to preserve their wealth.  Most of these things are what the government is trying to stop people from doing, but they do it anyway as they try to preserve their wealth.

How Businesses Change

Businesses change by abandoning low margin products as wages increase faster than they can profit from the products.  This reduces the number of products on the shelves, which reduces the number of products consumers have to choose from.   Businesses also reduce investments in new product developments because it becomes more profitable to just put their money in the bank (or foreign currency) and gain interest than producing more products.  Both of these reduce the need for labor and increase unemployment.

Construction is especially hit hard, as bankrupt businesses leave many open commercial properties, which pushes down rents and reduces the need to build.  At the same time high interest rates and high material prices drive up the cost of building.  We have already seem the housing construction slow down, and commercial construction is sure to follow.

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