The 7 stages of a dollar crisis
'Experts' simplistically tout a weak dollar as good news. No wonder many regular folks are unaware that its dramatic decline could spell real trouble.
By Bill Fleckenstein
Along the way to a full-blown crisis, the steps leading up to it may either pass unnoticed or prompt insufficient concern. That is the story of the dollar. Its decline continues to strike many folks as good news. It is only a matter of time before that perception changes. The inevitable crisis will inflict damage, but those who see where we are headed can protect themselves beforehand. To this end, I'll explain where I believe we are in that process.
G7's 'lingo limbo:' How low can the dollar go?
Recently, the Group of Seven finance ministers met in Boca Raton, Fla., to hammer out a much-parsed currencies communiqué. Why folks take this exercise in semantics seriously beats me. The fact is, even the seven ministers, who are capable of speaking five languages, can't tell you what the heck they mean. Of course, one reason they can't tell you is that their differing agendas make it hard to pretend like they're all on the same page.
That said, the foreign ministers probably agree on one point: The dollar is becoming a problem, which is why the gist of their communiqué stated that too much volatility (read: dollar weakness) is not a good thing.Your money, fast.
What we are witnessing is the unfolding of a dollar crisis. Though its external value seems to be a nebulous concept for many folks, as the dollar's ongoing decline builds to a crisis, it will have a significant impact on the workings of financial markets -- and affect everyone's financial well-being. (For review, please see my past columns: "The dollar's dramatic decline comes out of your wallet”; "The dollar: linchpin to stocks and the economy"; "Face up to the falling dollar"; “Fantasy, the Fed and the falling dollar: Oh my!"; and "The dollar is on borrowed time.")
7 small steps to crisis
Here, then, is my outline of a 7-step process of creating a full-blown crisis.
Step 1. Nobody notices or pays attention that the dollar is falling.
Step 2. Folks wake up, but they either don't care or 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. ...Link