by Hossein Askari and Noureddine Krichene
The world economy is suffering from high inflation, stemming from overly expansionary monetary policy in the United States, as indicated by negative real interest rates and the rapidly depreciating dollar. Low interest rates discourage savings, reduce bond yields and cause investors to seek higher yields in speculative commodities and foreign currency markets. Consequently, energy and food prices have exploded to levels threatening social and economic upheavals.
Oil prices, by climbing from US$20 a barrel in 2001 to $135 barrel in May this year, illustrate the extent of the dollar's depreciation and interest rates distortions. Whereas a $100 bill would have bought five barrels of oil in 2001, now it buys only 0.74 barrel, losing approximately 85% of its real value.
Inflation imposes a heavy tax burden on dollar holders, cuts
disproportionately the real incomes of workers and pensioners, redistributes wealth in favor of debtors at the expense of creditors, and stifles economic growth.
Given that the US dollar accounted for 41% of total international reserves at the end of 2007, (against 17% for euros), its fast depreciation makes it a risky asset for holders and could lead to a run from the dollar toward ...   more »