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Strategies & Market Trends : MDA - Market Direction Analysis

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Nov 20 4:00 PM EST

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To: Joan Osland Graffius who wrote (68267)	2/1/2001 7:01:18 PM
From: sea_biscuit	Read Replies (2) of 99985

Consider this scenario (from itulip.com) : Reflation Efforts are Ineffective: Significant Inflationary Recession 1. Tax cuts in mid-2001 create fiscal stimulus which combined with monetary stimulus ends the current recession in 2001 2. Dual stimulus ignites significant price inflation in late 2001 3. Exploding fiscal deficit created by tax cuts combined with falling tax receipts cause long term interest rates to rise 4. Fed hikes rates to tame inflation, pushing the U.S. quickly back into recession for 2002 - 2004 as was the case in 1980 -1982 5. As the U.S. economy weakens, dollars flood back into the U.S. from a sales of dollar denominated foreign owned assets causing a domestic dollar inflation in the price of imported goods, especially energy What if the Fed didn't raise rates in 4 above? i.e. The Fed tacitly allows inflation to rise, acknowledging that it is the price to pay for growth. How would the scenario play out in such a case?

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