The next crisis has already begun

We've survived a financial meltdown, and we're working through a recession. But another phase -- when all the money printing melts down the dollar -- is just getting started.

By Bill Fleckenstein
MSN Money

This week I'd like to update readers on the funding crisis. That's the third in the three-baseball-game analogy that I dreamed up last fall (read "Economy sinks as we save bankers") as a way to think through the enormous problems we faced.

The first and second games (crises) -- the credit meltdown and the economic downturn -- have been pretty easy for folks to understand, as they were front and center in the news.

The view from the dugout
Essentially, the financial crisis now lies behind us (with the economic crisis in full bloom, the recent economic "bounce" notwithstanding). That's due to all the moves put together by former Treasury Secretary Hank Paulson and other government officials. Those actions stopped the vaporization of the financial system, essentially giving everyone a do-over.

But therein lay the seeds for the funding crisis -- which, as I noted in my daily column at FleckensteinCapital.com on May 21, appears to have started.

This is a much more subtle but pernicious crisis in some ways, as it's not so apparent but is disastrous in the long term.

My reason for saying so? Because if the dollar is called into question (as now appears to have begun) and if the Federal Reserve's monetization cannot lower interest rates (and in fact causes them to rise, due to the consequences of printing so much money), then the Fed is trapped. The more it tries to solve the problem by printing more money, the worse it all becomes.

How that will play out exactly, how long it will take and what the road map along the way might look like is difficult to say, due to the many permutations of how events might interact.

But the ultimate outcome will be a weaker currency, more inflation and higher rates until such time as the printing press is finally taken away from the Fed.

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