Tuesday, October 14, 2008

Bank nationalization could worsen inflation

US President George W. Bush's $250 billion plan to nationalize banks will infuse money into the system and could trigger an increase in inflation.

The trend indicates that probably much more money will be needed in the future, so the money supply will continue to grow at a rapid rate as debt climbs. Interest rates will likely be kept low further putting pressure on inflation.

In the end, at least $1 trillion in additional money may be needed to prevent widespread bank failure through nationalization i.e., by shares in failing financial institutions. The law of supply and demand suggests that when money floods into the system, prices rise.

Inflation may actually ease in the short run as oil prices have dropped on fears that the slowing economy will decrease demand for petroleum. However, oil-producing countries have been hit hard and are likely to decrease production to lessen the impact on their own economies. This should stabilize oil prices.

Times Online

Bush Defends Bank Nationalization
Washington Post, United States - 3 hours ago
The government's $250 billion direct investment into banks in essence forces nine of the largest to accept what amounts to a partial nationalization. ...
US Follows Europe in Partial Bank Nationalizations Spiegel Online
Burst of optimism and a record rally Chicago Tribune

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