The US Federal Reserve Bank has made it clear to currency traders that the US dollar will be sacrificed in a desperate effort to prop up the US economy.

In testimony before congress last Tuesday and Wednesday, The Fed Chairman, Ben Bernanke, spoke primarily of further downside risks to the economy while stating that he thought that inflation, while obviously increasing, could be controlled. I wonder if our Ben the helicopter man has taken a look at how the sinking dollar is affecting commodity prices.

Neither Ben Bernanke nor President Bush seem capable of speaking about a recession that is probably already underway. They both state that a recession will be avoided.

However, they seem joined at the hip in a misguided effort to flood the markets with liquidity and to further lower interest rates in an effort to prevent what can not likely be prevented. I fear that with present policies the dirty “R” word will perhaps be avoided only to be replaced by something worse, stagflation.

The Fed seems to completely ignore the fact that it was a policy of low rates for far too long that caused the bubbles that are now collapsing. Thinking that you can correct economic conditions by reverting to the same policies that caused those conditions in the first place seems to me to be more like wishing and dreaming than sound policy.

In my opinion, the first quarter of 2008 will mark the beginning of a recession that will be made more dangerous to the health of the US economy by the desperate actions on the part of the Fed to lower interest rates. Lower interest rates will place further pressure on the dollar and lead to even higher inflation as the dollar falls.

With the dollar hitting record levels against the Euro above 158.00 this week the big question now is how low can the dollar go? With no historical benchmarks to guide us, as we are in uncharted territory, that is a tough question for anyone to answer. Any price level is really just a guess.

However, with the Fed cutting rates by 75 basis points at the FOMC meeting on March 18, a panic uncontrolled free fall of the hapless dollar is not out of the question. A panic move could take the Euro to at least 160.00 to 165.00 in a very short period of time.

Most analysis feel that the dollar’s lot will improve in the second half of this year. I’m not so sure of that assessment as it is based upon the US economy improving later this year. With the stage set for a complete rout in housing, with big name financial firms in serious trouble due to billions of dollars in writedowns already taken, with even larger writedowns looming for financial firms, and with trillions of dollars of impossible to evaluate derivative instruments still in financial firms portfolios, the possibility of a truly huge disaster later this year is all too real.

The world financial community is under serious stress. The Fed is focused on fighting off a recession instead of allowing a recession to happen that would in time correct the excesses of the past many years of careless lending and investing practices. The risk of a dollar collapse as the Fed cuts rates Japanese style until rates can not be cut any further is high. A collapse of the dollar will add greatly to inflationary pressures.

My guess is that 2008 will be the Year From Hell. Everything that can possibly go wrong will go wrong. While I, like any other forecaster, can only be guessing, my guess is that a financial storm is brewing like none we have ever previously experienced. The US Federal Reserve Bank nor any other institution will not have the power to control it.

However, by trying to avoid the unavoidable, cutting rates and at some point triggering a dollar collapse, the Fed and Mr. Bernanke can make things a lot worse. Get ready for the financial Year From Hell.

P.S. If you are short dollars against almost any currency or are invested in gold , silver, wheat, corn, soybeans, oil, or almost any other hard commodity that is in high demand and that generally goes up as the dollar goes down, you might think 2008 is a year from heaven. Great disasters for one man always present great opportunities for another.

If you're new here, you may want to subscribe to my RSS feed. Thanks for visiting!