Friday, May 26, 2006

Fire in the Theater

from Richard Benson

FMNN Market Trends Strategist Publisher

Benson's Economic and Market Trends

"In order to fully understand what is really happening on the central bank front, Larry Summers is worth listening to, now that he is free of all the politics at Harvard. Mr. Summers who served in a series of senior policy positions – most notably as the secretary of the treasury of the United States – specialized in the currency markets. Indeed, he was “the man” who successfully engineered foreign central bank gold sales to help hold the price of gold down and make the dollar look strong!

Mr. Summers is now urging the poorer, smaller countries with excess dollar reserves, “to do something with them”. Perhaps his advice is to sanction foreign aid, but I suspect he may be encouraging these smaller central banks to swap out of dollars early before the big banks do. This would preserve the real value of their foreign exchange reserves, and save the IMF a lot of money down the road for not having to bail them out.

Just remember, when someone yells fire in the movie theatre, you want to be sitting in the back row near the exit door, so you can get out before it’s too late. Larry Summers has just yelled “fire”.

The dollar is in grave danger because there are hundreds of billions of dollar assets funded by hedge funds that will be sold. Worldwide, central banks are beginning to buy fewer dollars at a time when the U.S. needs new buyers of dollar assets to fund our escalating trade deficit.

If America, as a matter of policy, is going to let the dollar go, there are many investments you must not own as an investor or saver: One investment is dollar-denominated bonds. A falling dollar is very inflationary. As inflation rises, it forces interest rates up so you’ll lose on the currency devaluation, as well. U.S. Stocks will fight the headwinds of inflation and may go up in dollar terms, but they will most likely not keep pace with inflation." (read entire article...)

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