The Oil Drum

I would guess that we disagree on our respective definitions of inflation/deflation. To me these are monetary phenomena and cannot occur simultaneously, but I interpret you to mean rising or falling prices as inflation or deflation respectively.

I believe West Texas assumptions will be proven correct. Its is possible to an asymetric form of inflation/deflation. As the dollar weakens, prices for imports will rise which caused decreased consumption resulting in higher unemployment and declining asset prices. It seems very likely that dollar will continue to decline for a very long period and and assets such asautos, real estate will decline as the credit cycle for american consumers tightens. Its likely that as the US will continue to weak as foriegnors look away from the US for investment growth and perhaps the Fed drives rates lower in order to drive growth.

I think as long as Oil and other strategic commodities and goods are priced in dollars, countries with large dollar reserves will purchase them with their reserves. An example would be China and Japan trading US dollar reserves for oil & gas. As these dollar holding are released into the market it will weaken the dollar. However, since these dollar won't end up in american consumers hands, americans will face deflationary forces.

Consider the collapse of the Argentina dollar a few years ago. Imports became very expensive for Argentinians, as their currency became nearly worthless. During this period the Argentinians suffer deflationary forces, as unemployment soared, and they could not afford maintain their lifestyles.

If the Oil and other strategic commodites are no longer priced in dollars, it likely means the US is officially bankrupt. It seems likely that more exporters will shift away from the dollar. Some are already accepting payments in other currencies. At some point some might refuse payment in US dollars starting a trend which removes the US dollar as the worlds reserve currency. I think the US would have a very rough time if the dollar is no longer the worlds reserve currency.