Friday, August 31, 2007

A rather silly letter 

Someone tries to analyze the national economy in the local paper.
Prices are rising because the value of the dollar is falling.
You have me up to the "because". Each side of "because" is true, but it's the causal link that I'd like you to explain.

Yes, the dollar has fallen, but if that made prices rise, why didn't the dollar fall a whole lot when we had the dollar rising in the 1990s?

He goes on:
Why is the value of the dollar falling? The Federal Reserve is printing money to pay for the Iraq war so the money in circulation loses value. The housing loan industry was bailed out by the Federal Reserve, who printed several billion dollars to bail them out so the stock market would stop falling.
That graph to your right is monetary base, which is the only thing the Fed could use to pay for either Iraq or for the loan bailouts (I've explained here that they aren't yet really bailouts, though this is discouraging news from the Bush Administration.) The Iraq war has been financed by other central banks, perhaps -- see Nouriel Roubini for one such explanation -- but not by our own.

We teach classes that help you with this, sir. Our door is open.