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
BROADER BAILOUT PLAN Hartford Courant

Labels: bank nationalization, banks, financial bailout, financial crisis, inflation

Comment: US govt continues to throw money into meltdown fix

There are those who say its like trying to smother a fire with bales of kindling, but the administration again shoveled money into the financial furnace.

The latest plan by Treasury Secretary Hank Paulson is to directly inject money into faltering banks by buying shares with money from the $850 billion bailout package. The purpose is clear. They want to make money quickly available for credit purposes.

But what about the bad mortgages? Again, the government is trying to solve one debt problem by introducing more debt.

And anytime large amounts of money are injected rapidly into the system, we can expect inflation.

Max Keiser, the controversial American financial activist who appears mainly in overseas media, believes that the next debt meltdown will come in the credit card industry. Inflation will cause many people who survive day-to-day to prioritize their expenses.

Water, food, housing, heating bills will be high on the priority list. Credit card bills will be relatively low on that list. After all, defaulting or becoming irregular on credit card debt at the most means losing the credit card and some harassment by collection agencies. You can survive all that of course.

If credit card debt gets hurt, institutions in the credit card business, like Bank of America, will be hurt as well. Basically inflation will just spread the damage putting more businesses in the bailout mode.

Consumers will tighten up spending at least until they see inflation settling, so the overall economy will slow.

Interestingly, the government no longer provides stats for M3, the overall money supply, probably because it fears the numbers would curb support for its easy money policy.

One website, shadowstats.com, has estimated these and other statistics that have been impacted by changes in government economic information collection and reporting. Their chart shows the estimated sharp rise in money supply arising from the flood of corporate welfare being spent by the government since official M3 statistics ended.

Money Supply

Charts of M1,M2 & M3 Levels

Labels: banks, capital injection, credit card debt, credit crunch, inflation

Good policies help Philippines weather crisis

Despite its strong reliance on imported fuel and food, the Philippines has managed to weather the current inflation crisis well so far due to the astute policies of President Gloria Macapagal-Arroyo.

While the worse may be yet to come, the Philippines so far has managed to avoid the market meltdown that hit Vietnam and has kept rice prices below that its neighbors through heavy subsidies.

One of the most important measures taken by the Macapagal government was to reduce budget deficits with the expanded value added tax (EVAT) on gasoline and other oil products, and by cracking down on tax evaders. While painful, the EVAT was a very logical way to increase revenues in a nation that was getting too dependent on foreign oil. The resulting reduction in red ink has increased overall confidence in the economy.

The government has used money from EVAT on increased vigilance on tax evaders to pay subsidies to poor people suffering from the soaring global inflation.

Macapagal had instituted a number of programs aimed at increasing remittances and investments from abroad. One of these was the "ambassador" program in which expatriate Filipinos and foreign nationals were invited to travel to the Philippines as guests of the government. In the country, they were treated to guided tours by government officials who extolled the country's many available opportunities culminating in a private audience with the president herself.

Money continues to pour into the country aimed primarily at real estate and franchise business investments. Remittances from Filipinos working abroad and outsourcing investments have also filled the country's coffers registering record foreign reserve accounts in recent months.

The administration's investments in intellectual capital has also probably helped in handling the current crisis. Increased research and development generally leads to greater resourcefulness and a better understanding in how to solve local problems.

One area where the government has had difficulty is in increasing agricultural productivity. The administration responded recently by increasing agricultural expenditures resulting in an increase of rice production by 200,000 metric tons over the government's previous targets.

Labels: economy, evat, food and fuel prices, inflation, philippines