Cheaper Dollars Means More Inflation

This morning, it was announced that our Federal Reserve, along with the Bank of England and the Central Banks of Europe, Japan, Canada, and Switzerland would all lower their dollar interbank lending rate by 1/2 percent. In doing so, it is expected that the world economies will be stimulated.

Once again, you have the monetarist, Federal Reserve Charmian Ben Bernanke, believing that he can kick start the worlds economy through an easy money policy. A policy that he's tried in this country and that has failed miserably to stimulate anything. To me, the only thing that will happen is that the value of our dollar will fall again; making those things we import more expensive for us to buy. In fact and true to form, as soon as this banking arrangement was announced, the dollar sank in value and oil prices jumped above $101.

As I have written before, import price inflation just shrinks the total amount of products and services that a consumer can afford to buy. In other words, less bang for the buck. As a result, discretionary spending declines and the economy starts to contract. Let's never forget, much of what we buy in this country is imported. Even if a product says "Made in America", it was probably assembled using imported parts.

The big problem with this interbank lending policy is that it doesn't really address the underlying debt crisis in Europe. And, unless countries like Italy and Greece get their spending under control, we are still at risk for world wide economic collapse.