If the US economy was isolated from the world then yes I agree with you that the liquidity bubble would lead to general price inflation. Consumers would be more accepting of the price inflation as their earnings would be higher, either from investment and heavy borrowing or from wage growth due to more money being spent into the economy.
True inflation would start to ramp up, resulting in job growth and an all around boom in the economy. But there is that looming debt that has not been resolved. That money has to be paid back inevitably and can't just be borrowed far into the future. That can happen with depression.
Also since we aren't isolated money flowed out of the country for over a decade slowing inflation and suppressing any real growth this last reflation.
I think the world has been fairly complacent with China, Russia and Iran but with China's flooding of textiles further hurting the European industry, Iran's attempts at covert influencing negative sentiment against the US and Russians eastern European influence to control energy into Europe I think political and economy battle lines are being drawn here. China has waged an excellent economic war against the United States that it was completely unprepared to fight. The United States would be forced to conducted economic suicide to issue tariffs to protect its reflation from being absorbed by China's might. American's will be force to pay higher prices and would feel and almost immediate inflation of consumer goods.
The Fed is all about maintaining stability. Correction, they are all about trying to maintain stability. It has not gone their way more recently. I think as it stands now pressure has to be put on China to at least do a crawling peg of the Yuan. They don't have to pull an overnight 40% adjustment out the bag. It would be bad for the US and bad for their still substantial treasury holdings. Interest Rates would ramp up significantly to counter the revaluation and keeps everyone else holding US treasuries as well as keeping the US Dollar propped up. That would effectively be the burst of the housing bubble and we would either go into a stagnation or deflation. People with single fixed rate mortgages would be able to weather the storm but too many people took second mortgages out on the equity of their homes and many speculative loans like ARMs or Interest Onlys. If housing values depreciated only the original loans could be defaulted on. Americans would be forced to owe the banks on those unsecured loans.
Believe me when I say that I’m trying to find the Inflationary side to all of this. The end result in my opinion is that we can’t without either deflating to a level where the world’s pricing power matches ours or stagnating until the rest of the world inflates to meet us. IMO a little bit of deflation with some global inflation should do nicely. But to do that we need strong dollar policy rising interest rates with falling commodity prices and repatriatization of US Dollars. To do that we need to get the Chinese monkey off our back.
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