Wednesday, September 19, 2007

Inflation is a monetary phenomenon

This article in the Telegraph says that Saudi is considering to break it's peg with the dollar, as the dollar continues to fall, aided downward by the Fed's surprisingly large 50 point rate cut yesterday. Similarly, inflation is running sky high in Dubai, which chose (for now) to maintain the peg.

I don't know how long the oil producing countries in the Gulf have pegged their currency to the dollar, but I remember this being the case when I was very young, so maybe over 20 years? In any case, right now there is no doubt that the Dubai economy (red hot) and the US economy (cooling) are operating out of sync, and while a rate cut may be the right thing to do for the US, it's almost certainly not the right thing to do for Dubai. But since Dubai has essentially outsourced it's monetary policy to the US Fed, they trimmed their rates by 50 points yesterday too.

The claim is that inflation in Dubai is 9%, which seems perfectly beleivable. Other areas seem to be even worse.

I'm not sure what options the region has aside from letting their currencies appreciate against the dollar.


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