Reply To: Exporting Inflation


Look at the so-called trade deficit. As commentator Charles Goyette often points out, when we buy something from China, it took the Chinese real labor and real effort to make the product. The dollar which we exchange is, at least to some extent, the result of the Fed increasing the money supply. The manufacturer in China cannot spend the dollar there so the Chinese government buys the dollar from him and then either holds it in reserve or buys US treasuries with it.

In addition, the world’s oil is currently priced in dollars. This is the result of an agreement between the US and Saudi Arabia. Thus, to buy oil, OPEC customers must first buy dollars from the US. The country which receives the dollars will then either deposit them with a US commercial bank, hold them in reserve, or buy US treasuries with them (or perhaps invests them in the US through a sovereign wealth fund.)

In any case, the dollar’s status as the world’s reserve currency creates artificial demand for dollars around the world. As Dr. Herbener points out, many of these dollars remain overseas dampening price inflation domestically, but often leading to higher prices in other countries as illustrated, for instance, by the rising price of food which was one of the contributing factors to the “Arab Spring.”