Having neither the will nor the means to confront our major economic challenges, Washington is instead hanging its hopes on words alone. This week, despite the clearest signs yet that the dollar is in critical condition, President Bush and Treasury Secretary Paulson tried to provide reassurance by once again invoking the name of the mythical "strong dollar policy". Meanwhile across town, with the latest crop of inflation figures pointing to the greatest price surges in a generation, Fed Chairman Ben Bernanke tried to do the Administration one better by insisting that inflation expectations remained "well anchored", and that stagflation was nowhere in sight.

The truth is that Bernanke's view that inflation expectations are "anchored" should be afforded as much respect as his prior pronouncements that the subprime mortgage problems were "contained". With official inflation numbers, such as PPI, CPI, and import prices showing unacceptably high levels of inflation, the dollar hitting new all-time lows, and market indicators, such gold, silver, oil and agricultural commodities all heading straight up, the Fed Chairman risks losing what's left of his credibility.

Bernanke contends that the source of our inflation is rising commodity prices, which he attributes to strong global demand. This is Bernanke's attempt to shift the blame for inflation to external factors beyond his control. This of course completely misses the point that increased global demand is a direct result of the rapid increase in global money supply, the source of which is Bernanke himself. This Alfred E. Newman routine is obviously wearing thin as the dollar seems to tick down and gold ticks up every time Bernanke completes a sentence.

The biggest factor pumping up demand around the globe is the Fed's excessive money creation and irresponsible monetary easing, which requires foreign central banks to follow suit to keep their own currencies in relative alignment with the dollar. Of course, some increased demand is genuine, but that demand is being met by increased supply. It is only the artificial demand created by inflation that is pushing up prices.

Amazingly, Bernanke feels that rising food and energy prices themselves do not present a problem as long as the increases are contained in those areas. In other words, as long as these costs can be excluded from the officially messaged PCE deflator, Bernanke doesn't care if American families have to pay more to feed their families, heat their homes, and drive to work. But if these basic costs continue to rise, it doesn't matter what happens to prices of other goods as few people will have any money left to buy them.

Bernanke also seem to think that if the economy does somehow slip into recession, that inflation will subside as a consequence. This is pure nonsense, as diminished demand here at home will be offset by enhanced demand abroad. As a weak dollar forces Americans to cut back on their consumption, strengthening foreign currencies will give foreigners added purchasing power to consume more. Therefore fewer foreign made products will be imported while more domestic made, or in most cases grown, products will be exported. The result will be reduced domestic supply putting additional upward pressure on prices.

Equally naïve is the concept that the Fed can stabilize the economy now by slashing interest rates while holding out the hope that future inflation could be reined in through aggressive rate hikes in the future. Even if a recession could be avoided by easing, our economy is so dependent on cheap debt, that as soon as Bernanke reaches for his hawk mask, the economy would immediately destabilize, necessitating a fresh round of rate cuts and still more inflation. If Bernanke really were serious about fighting inflation he would do it right now. By postponing the cure he simply allows the disease to get that much worse.

Of course Bernanke is not the only one in denial. Wall Street's brain trust has recently devised many explanations that rationalize the inflation problem. For example, some argue that falling housing prices are deflationary, and negate the impact of other prices that happen to be rising. While it may be true that home prices are falling, the costs associated with home ownership itself are rising. Most homeowners are not only facing rising mortgage payments, but higher insurance, maintenance, utilities and taxes. In addition to those costs, potential home buyers also face higher down payments and tighter lending standards as well! Also, when home prices were rising few considered it an inflation problem, so why should those very people consider the reverse deflation?

Others talk about "food inflation" or "energy inflation" as if there were different kinds. There is only one type of inflation, which is an expansion of the supply of money and credit. Prices do not inflate; they merely rise and fall. When people refer to rising food prices as being "food inflation", they are shifting the blame for inflation to rising food prices, rather than attributing the rise in food prices to inflation itself.

I have heard others maintain that rising commodity prices are merely a supply problem. However, tight supply is a function of the artificial demand created by inflation. If the government handed out million-dollar bills there would be a shortage of Ferrari's as everyone would want to buy one.

Of course one of the most problematic turn of events is the way some of the Fed's biggest cheerleaders have turned critics. For example, CNBC's Larry Kudlow, who just months ago was calling for "Shock and Awe" rate cuts to boost the dollar and revive our "goldilocks economy", now blames those very rate cuts for pummeling the dollar and the economy. If the Fed cannot instill confidence among its biggest boosters, imagine how this show is playing to a more skeptical audience overseas.

For a more in depth analysis of our financial problems and the inherent dangers they pose for the U.S. economy and U.S. dollar denominated investments, read my new book "Crash Proof: How to Profit from the Coming Economic Collapse."