When housing prices drop, the Fed will lower rates. The Fed is the engine of inflation. Why would they NOT do this? You write as if inflation is something controlling the Fed. They are creating the money and credit expansion (that is the definition of inflation).

Rising prices are a RESULT of inflation. Some prices go down when there is inflation (e.g. Chinese goods have lowered prices of retail items). Rising prices are a general effect of inflation. They are not the same thing. It’s like saying that your rash is poison ivy (like many people say “I have poison ivy” and point to their rash). In reality, poison ivy (inflation) gave you a rash (rising PPI and CPI). Similarly, it takes time for the rash to form just like it takes time for the inflation to cause price movements.

If the dollar weakens, yes we could theoretically export more, but it takes time to get a factory going that can compete in the world market.

I don’t know what is going on in China, but I’ve heard that the Chinese govt is making loans to Chinese businesses that probably can’t be paid back. They will get away with it until it doesn’t work anymore. Anyone’s guess.

Consumers can’t buy things when they don’t have jobs. You can’t “make” consumers if you don’t pay them enough to buy the stuff. And, no, they probably don’t see the recession looming. They got themselves into a corner because nothing bad has happened yet. It doesn’t matter until it matters. It’s like asking me why people don’t see the housing bubble? They don’t see it because they have been successful in the face of all the evidence against them.

China can’t just turn the US loose and become consumers themselves. The dollars they hold are not entirely worthless. They can buy real estate when it crashes or equities. Now, you may understand why the Fed will try to prop up prices in the US.