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Intense Inflation Pressure: Fed, Bank of England Have Their Hands Tied

“I don’t think you can interpret what’s happening with energy as a temporary shock.” -- William Poole. He is exactly right.

Economic output, interest rate differentials, etc. are merely short-term influences. The $7 trillion dollar current account deficit drives the exchange rate of the U.S. dollar. icandoitdon is exactly right.

US Dollar: 5 Reasons It Will Not Hit a New Low

The running total of the current account deficit since 1985 (the first time this country became a net debtor country) is $6,604 trillion (short & long-term claims due to foreigners).

The excessive dollar balances aquired by foreigners (excessive in terms of trade) led to the formation and growth of the prudential reserve E-dollar banking system (the discovery that the amount of actual U.S. dollar reserves required to support the E-D banks’ convertibility commitment need be only a fraction of the volume of E-D loans made – and E-D deposits (money) created.

This unregulated system (no legal reserves, only liquidity reserves) has been allowed by the governments and central bankers of the world to create in excess of ??? trillion new international units of account. This deluge of international money has imposed excessive inflationary pressures on world prices.

A weak currency is not a cause; rather it is a symptom of a weak, noncompetitive economy. The real culprit seems to be the cost of our products relative to their quality. Inferior is not a good buy at any price. The problem is that further depreciation of the dollar will not correct our foreign trade deficit.

If it is assumed that the U.S. Government will persist in multibillion dollar unilateral transfers to foreigners and that the trade deficits, even though reduced from present levels, will continue; the future course of the dollar will be down, unless the payments gap is filled by foreign investment.