[jmherbener]

If a Fed generated monetary inflation and credit expansion had its effects only domestically, it would lower the dollar’s purchasing power in the U.S. and extend credit to less profitable investment projects in the U.S. Because dollar-denominated credit markets are worldwide, arbitrage opportunities would then arise. Investors could profit by extending credit to investment projects overseas that are still earning the higher pre-inflation rate of return. Because Fed monetary inflation has made the purchasing power of the dollar higher overseas, people can gain by spending dollars there and foreigners will hold the additional dollars until it purchasing power is the same in the U.S. as in foreign countries.