Default, devalue or deflate

Faced with a country bent double under a mountain of debt, US monetary policymakers are allowing the dollar to devaluate rapidly. But that may not be enough to prevent the US from defaulting on its debt.

Recent economic indicators have provided the clearest confirmation yet that the US economy is in recession, a view we have held strongly since December.

The problem is that Federal Reserve policy (aggressive base rate reductions) is also boosting near-term inflation and threatening to make matters worse not better! It is unusual for the political cycle and economic cycle to be so far out of kilter. Most commentators and, judging by the reaction to Dr Bernanke's recent pronouncements, financial market operators too, tend to the view that all that is required are a series of aggressive base rate reductions, coupled with a limited fiscal stimulus.

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