I have observed that many believe that the U,S, will shortly begin the historic “intervention” , often seen in the past, to prop up the dollar. The “reason” you hear given for this is that they will “have to start fighting inflation”, and the rising prices which the high cost of oil are creating in our overall economy.
My view is that this opinion is based upon a mistaken definition of inflation, as simply being “higher prices without a corresponding increase in productivity to cancel them out.” This is wrong. The only usefull definition of inflation is, “too much money chasing too few goods and services”. Using this definition, then, we can see that increasing oil prices–resulting from a falling dollar–do not represent inflation, but rather extortion, and therefore a strongly DEflationary force acting on the economy, soaking up every dollar that would otherwise be available, of discretionary income, and which could thereby be used to force up prices by creating “true” inflation. While some would argue that “Rising prices beget rising prices”, if the source of the rising prices is not “true” inflation, then these price rises can only be applied to other necessities and, likewise, would have to properly be described as extortion.The willingness of the people to pay these prices grows not out of their excessive demand and ability to gladly afford them, but rather the fact that they must have the oil (food, heat, etc.) to conduct the necessary daily business of their lives and to maintain life.
What, in my view, does this mean for the chances that the U.S. government will continue its policy of a falling dollar, while hypocritically vowing that it has a"strong dollar policy"? It will continue as in the past, with only “jawboning” to control the fall it desires, while preventing an immediate collapse. The benefits it derives from this are as follows: (1) With the dollar eventually low enough, we can export our way out of all of our problems, including the necessity to run the money presses 24/7 to keep the poiticians promises and our “commitments” in Iraq; (2) likewise, we will conserve what little foreign exchange we have by strangling imports, and U. S. tourism overseas; (3) we can export the resulting deflation to our trading partners, including China, so that we may continue to obtain reasonable consumer goods; (4) the benefits of oil being severly rationed, by price, will accrue to the environment and the infrastructure, helping reduce costly demands for constraints on CO2 emissions. This scenario makes everyone happy, especially U.S. politicians , but doesn’t do much for those of us who have worked all of our lives, with nearly all of our assets in dollars.
Am I missing anything?