the conventional wisdom from u.s.a. today, quoted by richard russell, is:
"Once foreign investors lose confidence in the dollar, the consequences can be dire. They are, after all, financing a big chunk of the US debt. Foreigners are big buyers of US Treasuries at auction. They own nearly half of all publicly traded US debt and 25% of US corporate debt and mortgage-backed debt. If foreign buyers lose interest in US debt, the Treasury will have to offer higher interest rates to attract buyers. The dollar could fall further, import prices would rise, inflation would surge. Higher rates, in turn would slow the economy."

the reasoning implicit in the predicted series of events runs: lower dollar=> rising import prices and rising rates=> inflation "surges" while the economy slows, i.e. stagflation.

i'd like to focus on the "inflation surges" part. yes, import prices would rise to the extent that the exporters don't absorb the hit, as many of them would try to do to maintain their export industries. but even so, are imports that big a component in the inflation figures? if the dollar drops i suppose oil would rise further and eventually higher energy prices would feed through. but that would take a significant amount of time.

in the meanwhile the higher rates would act immediately to kill housing instantly and altogether, and if the fed defends the buck by raising the discount rate all those floating rate home equity loans would start strangling the finances of even relatively reasonable households [let alone the leveraged-to-the-gills household on the margin]. this seems a recipe for deflation.

to summarize- in a dollar crisis, if the fed defends the buck the interest rate effects are quick, the inflationary effects slow. this produces DEflation.

so, on the other hand, suppose the fed doesn't defend the currency. rates stay low at least on the short end of the curve. if long rates rise too much ben fires up the helicopter for "unusual measures" i.e. buying long-dated bonds to control the WHOLE yield curve instead of just the short end.

that scenario is inflationary, but could take a long while to play out.

am i missing something?