Barely posted on Calculated Risk message board:

From the Bernanke-Paul video – I can’t think for a moment that Bernanke believes what he said when he stated that if a US consumer spend his money in the USA the crash of the dollar doesn’t cause inflation. That is pure bullshit in a global economy and he knows it better than anyone in the room. If the eurozone is willing to buy wheat, say, from farmers for prevailing global rates (more money in USD) that means the farmer is faced with selling for less to American consumers if he so chooses. That farmer will need to decide if more money is better than less. More likely, the US consumer will be paying global prices. This is globalization working in the reverse of the way we have enjoyed it in the recent past. Inflation, or should I say, Stagflation.

It sounds very logical. But I don’t buy it. I think the inflation is produced by the changes in the ratio of the total amount of money to total amount of goods. To have a spike in inflation we need:

  • Some dramatic increase of money supply. At the consumer level that will be a fast increase of prevailing wages and/or increase in capital value, i.e. dramatic rise in real estate prices or stock prices. Do you expect that to happen? I don’t
  • Some dramatic decrease in supply of goods. For example a tariff on import goods that will put them out of market. Some significant decrease of world supply of goods, for example because of a major milti-national war or the increase of fuel costs to the levels that will make cross-ocean transportation impossible (I would say $300/bl oil will do the job)

Unless that happens the increase of the price of some necessary import goods will only make other goods cheaper, because there is no new money, old money will have to be reallocated from one set of goods to another