Bernanke v the World: why the world has not delinked from the US

The Business Spectator has a slightly chilling article on the conflicting interests between the US and the rest of the world when it comes to inflation and a stable global economy.

Essentially it comes down to:

1. the US has to lower interest rates to increase availability of credit to keep house prices stable or increasing to stop the contagion in the structured financial markets spreading and therefore to avoid recession;
2. US monetary expansion (caused by lower US interest rates) drives up commodity prices (here is an explanation from a Harvard professor of macroeconomics), as most commodities are traded in US dollars, that isn't offset by the falling US dollar;
3. rising commodity prices drive up general inflation worldwide (as the world must consume commodities);
4. the rest of the world suffers with increasing inflation without the benefits received through monetary expansion at home (or if there is monetary expansion at home, they will be hit with there own home-grown inflation and inflation caused by global commodity price increases).

This is not felt so bad in first world countries, where spending on commodities does not consume such a great proportion of income. It is the poorer countries that suffer.

The author concludes that therefore the US should not lower interest rates so that the rest of the world does not keep suffering general inflation and the global economy suffers.

However, I do not believe that this is the end of the story. While general inflation and global instability may result from lower US interest rates, if the US does not solve its housing problem (the 'jingle mail' as it is known) the current liquidity crisis infecting global financial markets will only get worse (and it already seems to be), this will hurt everyone and possibly push the world into recession. At least if the US can solve its housing problem it will stop the current credit crisis in its tracks and hopefully allow stability to return.