As the Fed continues to inflate inject liquidity into the market, I’d watch for the dollar to fall even further against Sterling. Despite the ongoing “credit crunch,” formerly known euphemistically as an “economic downturn,” formerly known as a “recession,” sometimes “depression,” and in its most pronounced manifestation, “Flucht in die Sachwerte” – the U.S. central bank seems content to repeat the errors of the past, the Bank of England, on the other hand, remains reluctant to offer any bailouts to the market:

“Interest rates aren’t a policy instrument to protect unwise lenders from the consequences of their unwise decisions,” [Bank of England Governor Mervyn] King said at the release of the bank’s quarterly inflation report last week, before the credit crisis erupted.

Indeed, interest rates aren’t a game or a policy instrument. Start falsifying economic calculation, and it’s only a matter of time before its effects catch up with you. By far, one of the wiser statements issued by a Central Banker that I’ve ever come across.

Let’s say I want to put a work-shed in my backyard, with a wood-burning stove so that I can use it during the winter months. I plan on burning refuse – mostly wood pallettes discarded by the stamping plant down the street. As my neighbor, this upsets you because you’ll have to look at the smoke billowing from my stove-pipe all winter long, and occasionally the smoke drifts low into your yard.

When you ask me to stop, I politely remind you that it’s not dissimilar to your smoker during hunting season, or to the incessant noise of your children playing basketball at 10pm on a weeknight. As there is no statute that forbids me from using a wood-burner in the winter, it seems we’re at an impasse. Until you offer to purchase and install a natural-gas heater in my shop, and thereafter, I stop burning old, oily wood.

Or maybe you don’t want me using or building nuclear reactors, so you give me a sh’load of oil, instead.

A shipment of oil headed Thursday to North Korea in exchange for the expected shutdown soon of the communist nation’s only working nuclear reactor, which would be the first step by Pyongyang to stop making atomic bombs in nearly five years.

In Coase’s The Problem of Social Cost, the problem was cattle-ranching or bee-keeping or some other mundane thing of little interest to most people. The caveat to his theorem, however, is the absence of transaction costs – which unfortunately exist in the real world. Sometimes, they’re ginormous. Now, I don’t trust Pyongyang as far as I could throw him, and I imagine that the South Koreans don’t, either. But, it’s a start, and if you don’t want your neighbor using nuclear power, give him the next best alternative.

Eh, maybe this is a bad analogy, but Coase is the first thing I thought of when I saw the headline…