Inflation and other worries...

Markets have been heading south over most of the week in response mainly to the growing complacency that there may be too much stimulus out there. The most visible confirmation of this came from the G8 meeting over the weekend in which leaders hinted that they may ease on their stimulus plans in light of growing confidence that the economic downturn may not be as bad as it seems.
It is indeed true that shortly after the Fed entered into the liquidity trap territory after bringing the target rate down close to zero, market worries started to focus on the future inflation implications of the overwhelming stimulus package. This worry grew more recently as economic indicators started to reveal a marked deceleration from the accelerating freefall of early weeks and months and as banks now seem to be in much better shape than just a couple of months back.
Trouble is that it is very difficult to predict if the economies of the world are indeed close to taking off again or if the slump is here to last for a while more. Although it is true that a deceleration in the negative statistics could imply that the worst may be behind us, it is a whole different thing than a bottoming out or, even better, an acceleration in the opposite direction. By taking action to reduce the stimulus firepower out there, authorities risk prolonging the recession significantly, as was the case with the great depression of the 1930's or, more recently, Japan's deflationary slump of the 1990's.
As mentioned in the previous blog, unless there is some yet to be accounted for event occurring, the anticipated correction should bring markets to a level above the low that was reached in March of this year.