Exporting Inflation

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    I have heard, at one time or another, that the United States is “exporting inflation” to other nations of the world. Would someone be willing to provide a brief explanation of what this means, and how the US is doing it?


    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.


    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.”

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