THIS JUST IN!!  Here’s an even more scary thought:  

DOLLAR BEN

From:  Wall Street Journal, 
http://tinyurl.com/yuhsef   ( Requires registration or subscriptin)
November 1, 2007

Watching the U.S. currency continue to decline in value, our irreverent friends at the New York Sun have stopped referring to the dollar. They now call it "the Bernanke," in mock honor of the Federal Reserve Chairman who is presiding over the greenback's plunge. With another rate cut yesterday, Ben Bernanke and the Fed are continuing to act as if they like the Sun's moniker.

At least this time the Fed accompanied its rate cut with a statement acknowledging that "some inflation risks remain" and that it will "act as needed to foster price stability" and economic growth. This time there was also a dissenter, with Kansas City Fed President Thomas Hoenig opposing the rate cut. Perhaps he's been paying attention to the super-rally in inflation-sensitive price signals since the Fed declared in September that it put a higher priority on limiting the housing recession than on the value of the currency.

Commodities have soared, including oil, which passed $94 a barrel yesterday; predictions of $100 oil are commonplace. Some politicians are blaming tensions with Iran for the oil spike, but those tensions have ebbed and flowed for several years. What has mostly flowed is the supply of dollars, and so some part of oil's increase should be called the Alan Greenspan-Ben Bernanke inflation premium. To the extent higher oil prices slow economic growth, they also defeat the stated purpose of the Fed's rate cuts.

The dollar price of gold is also reaching heights not seen since 1980, closing near $800 an ounce yesterday. Gold is not some magic talisman, but it has served throughout history as a reasonable proxy for other prices. The nearby chart shows the trend since 1971, and if nothing else the recent gold rally is a market commentary on the Fed's priorities. The speculators think the risk is all on the inflation side. Meanwhile, the dollar -- "the Bernanke" -- also hit a record low against the euro yesterday.

For the Fed and most of Wall Street, this is all worth any future inflation risk. The Fed is guarding against the danger that the recent credit-market turmoil will send the larger economy into a recession.

The bankers holding bad mortgage assets are also cheering easier money, as they beg for a housing reflation so they don't have to take even larger write-offs. Then there are the exporters and economists who think the U.S. can devalue its way to prosperity, or at least to a few quarters of export-driven expansion until the housing market hits bottom.

Lost in all of this domestic focus is the fact that there are also major risks to the Fed's reflation. The Fed isn't merely a creature of U.S. policy but is the steward of the global financial system. The dollar is the world's reserve currency. It is vital as a medium of global trade and investment, and central banks hold hundreds of billions of dollars as reserves. Many countries peg their own currencies to the greenback, meaning that they are subcontracting their own monetary policies to the Fed. These countries import American inflation when the Fed makes a mistake.

All of which means the Fed has a special responsibility to avoid a disruption in the world monetary system. In particular, it needs to avoid the perception that it favors a devalued greenback for narrow domestic purposes, lest it signal to countries around the world that they can play the same game. The recent cry of concern over the dollar by Rodrigo Rato, the departing head of the International Monetary Fund, is a sign that the world is beginning to wonder.

In the worst case, the world could lose faith in U.S. monetary management and there would be a run on the dollar. Then the Fed would have no choice but to raise rates much higher and faster to restore its credibility, and the recession that followed would be far worse.

That's what happened as recently as the 1970s, the last time gold and oil reached these heights and the dollar was this weak. In that era, as in this one, the excuse for easier money was always to save the U.S. economy from recession. In that era, too, the rise in oil prices, gold and other commodities was blamed on everything except monetary policy -- OPEC, or rising global demand or something.

We rehearse all this not to say we are back at the 1970s but as a warning that we can get there faster than the sages at the Fed imagine. Yesterday's report that third-quarter economic growth clocked in at 3.9%, following 3.8% in the second, already shows that most Wall Street forecasters were wrong earlier this year. The Fed is worried about growth after the summer credit implosion, to be sure. But if the economy defies the forecasters again, the Fed could be raising rates faster than it now expects. The dollar's credibility as the world's reserve currency may depend on it.

NOW—I am really leaving!    See you soon…

The November Trading Doctor Newsletter  ( Lead article :  Why You Might Be A Trading Train Wreck And What To Do About It.) will be published in the next few days. It will also include the next buy targets for the DOW and NASDAQ.

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