The economic concept of currency exchange rates and it's economic cousin, importing inflation/deflation, have been difficult to grasp. Here is a link to a
Caroline Baum article on Bloomberg that goes a long way to clearing the fog. Here are a couple of salient points that helped a lot.
"First, let’s define inflation so we’re all on the same
page. Inflation is, depending on one’s orientation, too much
money chasing too few goods and services or, in the extreme case
favored by Austrian economists, an increase in the money supply.
In other words, money is key.
The Fed can print dollars, and those dollars may very well
find their way into global commodities prices, emerging debt and
equity markets or country-specific goods. That’s not inflation.
No matter how many dollars the Fed prints, it cannot affect
another country’s inflation unless that country is complicit in
increasing its own money supply to prevent its currency from
appreciating.
China is making a choice to import inflation. (Actually, in
pegging the yuan to the dollar, the PBOC is choosing to cede
control over its domestic monetary policy to the Federal
Reserve. Inflation is the result.)"
"Sovereign nations need sovereign monetary policies. The European Central Bank is learning just how hard it is to fashion
a one-size-fits-all short-term interest rate for
17 very
different countries.
No single central bank can play that role for the world
(gold standard bearers, hold your fire), just as no central bank
can export inflation without a willing importer on the other
side."
