but at the same time, the dollars captured by the oil producers are re-invested in US Treasuries, thus lowering the interest rates and making it easier for Americans (and international investors) to borrow - thus leading to increased spending and increasing imports (thus worsening again the deficit), and inflated asset prices, and creating, strangely enough, a appearance of increased wealth.
While I agree with most of this, I would argue that the effect on interest rates is more complicated than that.
Dollars being invested into the U.S. have only effected long term interest rates. Short term rates continue to climb. As a result, variable mortgage rates are climbing putting incredible pressure on the housing market (inventories have increased sharply), and consumer interest rates for such things as cars and credit card debt is rising (though businesses are using promotions to try and stem the effects of this rise).
As a result, at variation times over the past 30 days, there has been an inversion of rates (short term rates being higher than long-term rates). this unsustainable situation almost always predicts a future recession.
The Fed's continued drive to raise rates has less to do with inflation than with a need to continue to attract foreign investment to sustain the deficit. Now, we have reached a stage where higher interest rates are killing the economy yet the Fed dare not stop raising rates or else foreign purchase of the U.S. debt will slow or stop. This suicidal cycle will only stop once the patient (the U.S. economy) finally keels over.
Thus, when the "U.S. economy finally keels over" the chances are high for a very hard and long global recession the mirror of the global expansion led by debt-fueled US consumption.
