That's the way I see it. To some degree they can't lend, their capital has been too badly damaged. The new cash is needed to restore their capital and isn't free to be loaned.
And those that do have free reserves are wary of lending in this environment. They may hold extra reserves against the possibility of new waves of loan losses.
How does this translate into a strengthening dollar? Scarcity of dollars to borrow?
Yes. The money supply is determined by the willingness of local banks to make loans against their fractional reserves. The Fed can supply banks with high-powered money and encourage them to loan, but it can't make them loan. It's the 'pushing on a string' problem. Think of the Fed's actions as being arithmetic increases in the money supply, and local banks' actions being geometric. The real action is at the local level, not at the Fed level. And at the local level credit is scarce. Even a return to normal lending will seem like a credit crunch after the casino atmosphere of the last decade.
What causes the dollar to strengthen against foreign currencies and commodities?
This is a global credit crisis. Foreign central banks are going to be trying the same tricks that the Fed is trying, with no greater success. The dollar will continue to look better, or at least less-worse, than the alternatives.
Commodities will be driven by demand. They need real demand for price rises to stick. Real demand won't show up until the next upswing in the business cycle.
The Federal stimulus package seems like an irrelevancy as it only creates an artificial bubble in demand.
Yes.
This will cause huge price increases in imports, and, as most consumer stuff in America is made elsewhere, consumers will pay a higher price for most goods.
The big worry continues to be oil and energy. Oil is a huge portion of our import bill. A responsible political class, which we are in no danger of meeting, would be building nuclear reactors and otherwise increasing our electrical supply. This won't solve the problem of vehicle fuel but it would protect the economy to some degree in one of our greatest vulnerabilities.
Shakespearean in quality!
I fear the cost push of import driven inflation ala' the 1970s. oil back then but consumer goods and oil now a days.