Welcome to the deflationary '00's. Perhaps the deflation that Alan Greenspan and others have recently started to worry about has already arrived. The most recent government statistics show the Producer Price Index dropping 1.9% in April and the goods component of the core Consumer Price Index dropping 2.4% over the last half year. Even the services component of the CPI is now experiencing large declines in the rate of price change, indicating that it may start to drop in the future as well. The government also reported a record drop in import prices, in spite of the falling dollar. 

Get used to it. While it is much more difficult to figure out why the actions by both the private and public sectors make any sense (e.g. the $20 Billion that the Bank of Japan spent on Monday alone buying dollars; real interest rates in the US and Japan that are negative; corporate business models that still are based on giving away products and services to build market share), it is much easier to figure out what actions to take on an individual basis, as my wife is aptly demonstrating as I write this.

Make sure that you are obtaining the full benefit of falling prices. Set your expectation that all prices for goods and services should be falling (perhaps at different rates), set cost-cutting objectives accordingly, and drive your supplier negotiations and business plans accordingly. Also, make sure that your business plans take into account that your customers will be expecting falling prices on your products and services as well.

Hold euros and euro-denominated assets. Try to convert out of US dollars, yens, and yuangs as quickly as possible. If you can figure out how to pay your suppliers and employees in dollars, yen or yuang and get paid for your products in euros, you win. Better yet, set it up so that you can report your earnings from those euro-denominated sales in US dollars. As the first quarter 2003 results have demonstrated, investors will not notice that most of your earnings were from currency conversions and will reward you with a handsomely higher stock price.

Borrow in the US or Japan, lend in Europe. Not only will you be borrowing at negative interest rates, courtesy of the US Federal Reserve and the Bank of Japan, and receiving real interest courtesy of the European Central Bank, but the rising euro will make it that much more profitable. If you have the skills and resources, join George Soros in leveraging the daylights out of this type of currency and interest rate arbitrage. As George demonstrated in the 1980's when he played a similar game against the Bank of England, the central banks will happily create money and pour it into your coffers until it finally occurs to them that maybe this is not what they should be doing.