China’s “Firewall” – Here’s Why it
Could Mean Even More Trouble for the U.S.

China said Thursday it must set up a firewall via currency policy and capital controls to cushion itself from external shocks. Just what does that mean?

"As long as the world exercises no restraint in issuing global currencies such as the dollar -- and this is not easy -- then the occurrence of another crisis is inevitable, as quite a few wise Westerners lament," said Xia Bin of China's central bank's monetary policy committee.

Just what kind of a firewall or a hedge would China and other nations are forced into?

In 2007-2008, when the Fed choose to discount U.S. currency by 20%, given China's $800 billion exposure to US Treasury Bonds, China hedged itself by pouring massive amounts of money into commodities to force a bubble bust.

And here once again, there is no surprise as to where capital is being forced to go.

I just want you to remember what happened in 2007 when the Fed chose to discount the dollar by 20% -- oil shot up from $50 to $140 and China was the principal buyer.

When crude oil hit $90 a barrel, stocks started into a bear market decline just after the S&P 500 made a new yearly high, much as it did Thursday. In 2007, interest rates were not at zero percent as they are today but we didn't have 10% unemployment (if you can believe that number).

What's more, the Fed hasn't even started to print the $600 billion yet.

Years ago, I took my family to Disney World and I remember there was a boat ride we all boarded that floated us along until we came to a near vertical dive. Just before taking the plunge there was a sign hanging down just above us that said:

"You can't run away from trouble. Ain't no place that far!"

The Fed has set in motion a vortex, a domino effect and while it certainly may be a thrill ride for the bulls now, trouble ain't far away with crude oil prices this high and going higher.

Unemployment is about to rise dramatically in 2011 - take that to the bank!

The Fed is selling tickets on the Titanic and it knows this bull market will have a short life. So, the gamble is how long do we have? Who can join in the party and stay sober just enough to be the first one out of the exit when the walls start falling?

Let's hope we have a quarter or two of safe "inflationary" trend. But with $90 oil prices and rising, I have a hard time getting serious about the reward nature of this increasingly high risk party before the economy snaps.

It has happened before…it will happen again. If you keep blowing a bubble…it pops!

Dennis Slothower