Oil prices are up...  Food costs are up...  Airlines are going bankrupt, but Congress sits on their hands.

While the effects of the housing market implosion continue to ripple throughout the economy, the Federal Reserve resorts to its favorite bailout strategy of cutting the fed funds target rate. The slightest sign of weakness in the US economy prompts the Fed to blindly jump to action even as more prudent heads prevail in Europe. Both the bailout of the technology bubble and the ongoing rescue of the housing implosion injected massive amounts of liquidity into the economy leading to market distorting behavior. The original liquidity infusion following the bursting of the tech bubble started the dollar on the slippery slope of devaluation against the world’s major currencies. Weakness in the dollar combined with the global commodities boom resulting from the industrial emergence of China and India have affected a dramatic rise in core inflation that further threatens our fragile economic stability.

The structural imbalances of large trade deficits and significantly lower domestic interest rates debase the value of the dollar. As the dollar weakens, our globally integrated economy suffers as goods and services procured from overseas operations become more expensive to dollar based consumers. The raw materials, manufactured goods, and energy resources that are obtained from our trading partners around the world are ingrained in the American economy with suitable alternatives not immediately available. Large capital investments and extensive human resource development would be required to provide substitutes for the products and services that we import. Such endeavors would require years of investment, deferring any anti-inflationary effects and mitigating the benefits of a reallocation of resources.

The rapid growth in emerging market economies combined with a lack of foresight and planning by the largest energy consumer, the United States, has seriously constrained the system and destabilized global prices. While politicians try to deflect the blame by “investigating” price manipulation, speculator impact, and “excessive” corporate profits, they are neglecting any real solutions and postponing serious responses to the problem. Environmentalists and politicians prefer to focus on “alternative energy” while ignoring the fact that, despite significant investment, wind power contributes only 1% and solar 0.01% to electricity production. This suggests that there are no realistic short term alternatives to carbon based and nuclear energy. The growing demand for scarce resources, which will only accelerate with China and India’s ongoing industrial revolutions, is a threat to global economic stability and subjects economies to drastic price shocks in commodities and energy. The price of coal is up over 6% since the beginning of June and instability around the globe threatens oil supplies from the Middle East and Africa. Additionally, the U.S. uses 10-20 times more oil per capita than developing countries such as China and India portending significant future demand as these nations further develop and desire energy intensive “luxury” goods. Absent domestic responses to these issues, the stability of the United States’ economy will continue to erode with greater risk of price spikes, rolling blackouts, rationing, and hoarding of basic commodities and resources.

http://www.beyondthemargin.net/2008/06/inflation-rears-its-ugly-head.html