Dollar collapse on Horizon as stock market sell-off looms*

Wall Street begging for Fed Funds cut, but rate already effectively lower

Posted: August 28, 2007

With Wall Street begging the Federal Reserve to cut the Fed Funds target
rate, few have noticed the effective rate already has been lowered,
triggering what could be the beginning of an unprecedented worldwide
dollar sell-off.

Econometrician John Williams documented in the most recent newsletter on
his Shadow Government Statistics website that in the 11 trading days
since the Fed has cut the discount rate, the effective Fed Funds rate
has averaged 4.84 percent, ranging 25 to 50 basis points below the
official 5.25 percent target rate.

The Fed Funds rate is the rate at which commercial banks may borrow
excess reserves from one another. It is considered the key rate index
set by the Federal Reserve Open Market Committee, or FOMC.

The minutes of the Aug. 7 FOMC are due to be released tomorrow and are
certain to be scrutinized by Fed watchers for indications of the future
direction of movement in Fed Fund target rates set by the committee.

Currently, Wall Street is begging for a rate ease as a return to the
easy credit policy that fueled the credit markets in real estate,
commercial paper and leveraged buyouts.

An unprecedented strategy of widely available easy credit has stimulated
world stock markets to a string of record highs since 9/11, with the Dow
Jones Industrial Average reaching a peak of more than 14,000 July 19.

To stabilize the Dow's 1,000-point drop since then, the Fed literally
has printed money.

Williams estimates central banks around the world, including the Fed,
have infused $1 trillion in the global banking system during the last
two weeks.

While the European Central Bank has been raising rates, the drop in the
effective Fed Funds rate and the reduction of the discount rate pushed
the dollar down Friday to $80.68 on the U.S. dollar index, ending a
brief rally that had begun in the prospect the Fed would hold rates in
the face of a sell-off.

The Fed is in a dilemma. If it lowers the Fed Fund target rate, the
dollar will suffer on world currency exchanges. A dollar sell-off will
trigger a new stock market sell-off.

If the Fed holds or raises rates to support the dollar, it will almost
certainly prompt a massive stock market sell-off.

Either way, the stock market in September and October is likely to drop
below 13,000 and begin testing a new support level at 12,000.

Bob Chapman, whose International Forecaster newsletter reaches an
international audience of about 100,000 subscribers, estimated in his
Aug. 25 newsletter that his reconstruction of M3, an important index of
the money supply, has been rising at a historically unprecedented rate
of over 13 percent.

The Fed simply stopped publishing M3 data after issuing a technically
worded March 2006 announcement.

Not publishing M3 data has allowed the Fed to print money to infuse
billions of new liquidity into the market following the 1,000-point
August Dow decline in the current worldwide credit meltdown of real
estate foreclosures and multiple forms of bad corporate debt that was
allowed to be created by rating agencies that drastically underestimated
risk.

Chapman agrees the dollar is at risk, writing in his current newsletter,
"If Fed Chairman Bernanke cuts prime interest rates he will be
abandoning the dollar, whose value will fall against other currencies
and gold."

Chapman believes the current credit meltdown in the U.S. is headed
toward a recession.

He notes, "Since the beginning of August, 25,000 workers nationwide have
lost jobs in financial services. Since the start of the year, 40,000
have lost their jobs at mortgage institutions. We are told 20,000 have
lost jobs in construction."

Even illegal aliens have been hurt, Chapman notes, writing, "In the last
year, 200,000 illegal aliens have lost their construction jobs. This is
far worse than in the airline industry in 2001, when 100,000 lost their
jobs. We are talking about massive layoffs."