Extract from "The Daily Reckoning" - 17.02.04

 

Bill Fleckenstein has identified what he calls the "7 small
steps to crisis":

* Step 1. Nobody notices or pays attention to the fact that
the dollar is falling.
* Step 2. Folks wake up, but they either don't care or they
rationalize dollar weakness as a good thing.
* Step 3. The central banks now know they have a problem,
but the bankers think the market will obey them. It will,
for a while. (This is the step we have now reached and what
emerged at the G7 meeting.)
* Step 4. The dollar now tests everyone's resolve by
resuming its decline. The currency markets will not respond
to jawboning by finance ministers.
* Step 5. In this step, the finance ministers are forced to
take action. (Think about it. Even if they'd stated that
they wanted the dollar to go up, nothing either explicit or
implied indicates they'll do anything about what's
happening. That will come next.) When they do take action,
the market will do what they want - but only for a while.
* Step 6. The ministers take some additional action, but it
won't be enough, and the currency markets won't do what the
ministers want.
* Step 7. Finally, we'll have a full-blown crisis, and that
will be the end game.
 
Americans have come to expect stability from their dollar.
Not that it held its value... but that it lost value at a
reasonably predictable rate. They didn't sweat the dollar's
decline; they welcomed it. A steady rate of inflation and
full employment made it easier for them to live beyond
their means; they could borrow... confident that inflation
would make the loans a little easier to carry.
 
But now the dollar is losing value in a new and different
way - while prices at Wal-Mart are going down, too. They
don't know what to make of it. They continue to bet that
they won't really have to pay their debts... while, as in
Japan 10 years ago, consumer prices sink and well-paying
jobs become scarce.