>So, for example, housing could see a price decline--which
>would have very significant effects on the banking system.
Housing is almost guaranteed to see a price decline as a result of the factors you state and what I see as higher interest rates down the road.
However, regardless of what consumer debt levels rise to, people cannot live without a certain baseline of products. As any visit to a local Wal-mart will tell you, more and more of these products are imported from overseas. And therefore the natural result of a weaker dollar is inflation...
...however, note that all inflation isn't caught by the CPI. For instance, when you go to the supermarket in 1980 and buy a 128 ounce bottle of detergent for $5.99 and go to the supermarket in 1990 and buy a 65 ounch bottle of the same detergent for $5.99, you have 100% inflation.
However, the CPI sees this as 0% inflation.
Are you absolutely certain that your example is correct?
If so, food inflation (cereal boxes are smaller, too) has been running a lot higher than CPI would tell us.
If you have documentation, please advise.