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I have been worried sick over the falling dollar and its effect on my retirement savings, so I have been following the economic news closely. The collapse of the dollar is expected to bring on a surge of inflation, as imported foreign goods, including oil, become much more expensive in dollar terms.
The last bad inflation this country suffered was from the late 1960s until the arly 1980s, when purposely created sky high interest rates and a recession "wrung" inflation out of the system, as Paul Volker used to put it.
This time, inflation will be much, much harder on working families. That's because during the 1970s, American unions were strong, American labor faced little competition from Mexican, Chinese, and other low wage work forces, and American corporations were relatively immobile.
This meant that every time producer prices went up, labor forced employers to raise wages. Inflation in the 1970s was often referred to as the "wage-price spiral", because higher wages required producers to raise product prices, which in turn caused unions to demand wages, and so on. As a college student in the 1970s studying economics, I remember that professors almost never dwelt on the cost to worker-consumers of inflation, because they were quite low. The burden of inflation fell mainly on people with savings, the value of which declined, and people on other kinds of fixed incomes, and financial institutions. It also caused "transaction costs" -- namely the work of constantly repricing things, eg when the supermarket had to have extra clerks constantly relabeling prices. But workers, represented by unions and part of an irreplaceable labor force, were generally not hurt. In fact, homeowners were helped because over time, when the purchase prices of their homes, locked into fixed rate mortgages, declined in real terms, while the value of their homes increased.
This time it is going to be so much worse for working families. Real incomes of working and middle class people have been declining for 25 years -- approximately since the end of inflation. Unions are very weak, having essentially been forced to negotiate give-backs for the last several decades. And the labor force in general cannot demand higher wages, because corporations easily move operations to low wage labor markets like Mexico and China. The entire manufacturing base has been gutted, and we have become a nation of Walmart clerks, burger flippers, health care aids -- with a "cream" of corporate executives, lawyers, doctors and media makers floating on top of the income pyramid.
When inflation comes, probably sometime toward the middle of 2005, middle and working class families will simply have to swallow the price increases without any offsetting wage increases -- leading to a decline in real wages. Unlike the 1970s, dramatic increases in interests rates will be passed along to consumers through variable rate mortgages and credit cards.
The inflation of the 2000s is going to be an economic bloodbath -- the final economic blow to the middle class, and we will find ourselves in something like the situation of Argentina's "former" middle classes.
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