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The Bailout Will "Crush" the Dollar Analysts Say

Written By Brian Hicks

Posted September 22, 2008

Editor’s Note: For a more updated and in-depth analysis of the Euro bailout from Wealth Daily, click here…

 pitch fork

Don’t look now but inflation is back. But we shouldn’t be surprised.

After all, that’s what happens when the government decides that it’s better to print our way out of trouble, than it is to take a leap into the unknown.

Deflation, it seems, will have to wait.

So not only are they going to mortgage your future with a $1 trillion bailout of rich, they’re also working to destroy the value of the few dollars you have left.

Neat trick huh?

That may be why commodities are suddenly hot once again, led by oil. Crude peaked today over $130 a barrel in its biggest one day move ever.

Of course, it was no coincidence that the run up came on the same day the greenback got pummeled. It’s inflation in action.

The two go hand-in-hand.

Here’s the skinny on that score from Bloomberg.

It’s in an article by Bo Nielsen and Anchalee Worrachate entitled: Dollar May Get `Crushed’ as Traders Weigh Up Bailout

“Treasury Secretary Henry Paulson’s plan to end the rout in U.S. financial markets may derail the dollar’s three-month rally as investors weigh the costs of the rescue.

The combination of spending $700 billion on soured mortgage-related assets and providing $400 billion to guarantee money-market mutual funds will boost U.S. borrowing as much as $1 trillion, according to Barclays Capital interest-rate strategist Michael Pond in New York. While the rescue may restore investor confidence to battered financial markets, traders will again focus on the twin budget and current-account deficits and negative real U.S. interest rates.

“As we get to the other side of this, the dollar will get crushed,” said John Taylor, chairman of New York-based International Foreign Exchange Concepts Inc., the world’s biggest currency hedge-fund firm, which manages about $15 billion.

The dollar fell against 14 of the world’s most-traded currencies on Sept. 19, including the euro, as Paulson unveiled the plan, while the Standard & Poor’s 500 Index rose 4 percent. The plan may end the rally that began in June and drove the U.S. currency up 10 percent versus the euro, 2 percent against the yen and almost 13 percent compared with Brazil’s real, strategists said.

Paulson’s plan, sent to Congress Sept. 20, would mark an unprecedented government intrusion into markets and increase the nation’s debt ceiling by 6.6 percent to $11.315 trillion. Officials may also start a $400 billion Federal Deposit Insurance Corp. pool to insure investors in money-market funds.

“The downdraft on the dollar from the hit to the balance sheet of the U.S. government will dwarf the short-term gains from solving the banking crisis,” said David Woo, London-based global head of foreign-exchange strategy at Barclays, the third- biggest currency trader, according to a 2008 survey by Euromoney Institutional Investor Plc.”

The rescue comes as the U.S. budget deficit and the current-account balance, the broadest measure of trade, grow. The Congressional Budget Office projects the spending shortfall will increase to $438 billion next year from $407 billion. The current account deficit is up from $167.24 billion in December.

“Investors may start to worry about the amount of debt the U.S. is taking on and its impact on the dollar,” said Geoffrey Yu, a currency strategist in London at UBS AG, the second- largest foreign-exchange trader. “The fact that they mentioned taxpayer money implies that they’re going to issue debt. If there’s going to be a huge new supply of Treasuries, this will be dollar negative. It’s too much for the dollar to take.'”

Welcome to the Banana Republic.

By the way,  if you don’t belive that you need to read the bailout bill in its entirety. Pay particular attention to section 8 of the bill.  It reads as follows:

“Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.”

Now if that doesn’t make the hairs on the back of your neck stand up nothing will.

To read the rest of the bill click here. It’s well worth your time.