Tuesday, October 6, 2009



if this is true, welcome back inflation. They've been talking about it
for months (years, really) so this story may not be as imminent as
marketwatch says it is... but its almost inevitable sooner or later.
It may not happen til the US economy has recovered a little more -
China certainly would oppose it anytime before then.

Currently, oil is traded in dollars. Countries that wish to buy oil
must thus have dollars to pay for it.

What this does is create a sort of artificial demand for dollars,
where people want lots of dollars but not to purchase American goods.
Switching away from it means there are more dollars out there than
people want.

This results in inflation.

Ideally, the remedy for this would be higher interest rates, but the
problem is, higher interest rates throttle the economy by making it
hard for people to get credit to buy houses, cars, start businesses,
etc, as well as making it more attractive to put your money into bonds
or the bank instead of spending it.

The other remedy is to reduce government spending - fiscal
conservatism. Unfortunately, both the Obama and the Bush
administrations have been spending like drunken sailors and it would
be extremely difficult to rein in spending quickly enough.

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