Yes, recently, the dollar has gotten relatively stronger against other currencies. But, due to a combination of events (past, present, and future) this won't last. As a matter of fact, at some point in the future the dollar may need life-support to survive.

Life support? Those are fairly harsh words you might say. Well consider this, the standard definition of inflation is too many dollars chasing too few goods. This week it was reported that unemployment hit a 25 year high at 8.1 percent. If you include all the discouraged workers who have given up looking for work, like the government use to include in the rate, the number balloons to between 14 and 20 percent! We have not seen these numbers since the 1930s. It makes sense that this many unemployed workers will generally reduce national production of goods. Combine this reduction due to unemployment with the trillions of new dollars the Fed and Treasury have injected into the economy in the last year and you have a recipe for a strong decline in the value of the dollar and much higher prices.

So, where has all that new money the government and central bank has injected into the economy gone? The answer is into savings accounts and bank balance sheets. Government figures show that the household savings rate jumped to 5 percent in January from 0 percent last spring – the highest rate since 1995. Back in December, the cash reserves of banks in the U.S. increased to $774.4 billion from $604.7 billion in November and an incredible $2.39 billion in December 2007. Thus, the new money along with trillions pulled out of the stock market sits on the sidelines and not in circulation where it would be making for higher prices. At some point, when banks resume lending and consumers spend their savings on fewer goods, the deluge of cash into circulation will significantly debase the value of the dollar and cause an inflationary depression the likes of which we have never seen.

History tells us this scenario is not far-fetched. Strapped for funds because of huge debts incurred by spending for World War I, the Weimar Republic experienced a deflationary collapse in the early 1920s. As the German government printed new money to stimulate the economy, the mark actually appreciated against other foreign currencies for a while. However, as additional debt mounted and the economy refused to improve, the German people lost faith in their currency and began spending billions of hoarded marks in the marketplace making for one of the most severe episodes of hyperinflation in modern economic history. Sound familiar? Replace spending for World War I with spending for a general warfare state and we have fulfilled three-quarters of the above scenario. The only part left is the deluge of huge amounts of dollars back into circulation making for some level of hyperinflation.

Of course, Fed chairman Bernanke claims the Fed will be ready when recovery hits to sterilize the money supply and bring it down to an appropriate level. But, how does he know what that level should be? Will it be commensurate with the smaller economy we will have then? The above scenario only takes into account domestic economic factors. What about the foreign countries and nationals who hold dollar reserves? Can it not be assumed they will act in their own self-interest? Countries will spend dollars to stabilize their currencies and individuals will dump dollars to preserve their savings and spending power. Lastly, the Fed induced Treasury bond bubble will burst expanding the Fed's balance sheet and unleashing more dollars into the economy. With all of these events working together, Bernanke will have a complex, high risk, long and drawn out job bringing the money supply into line with market needs. At the end of the day, Fed policy caused our patient (the economy) to get sick; the Fed's cure (spending) is killing it. It won't be long before our patient needs life support.

Kenn Jacobine teaches internationally and maintains a summer residence in Haywood County, North Carolina. Visit his website online at: The View from Abroad