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The Dow Jones and Your Credit

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The Dow finally surpasses 9000 for the first time since January. Is this just a Bear Market Rally? Despite corporate Americas positive earnings announcements and the announcement of 3.6 percent gains in existing home sales, there seems to be an army of analysts around that would say that the 34 percent gain since the Dow's low in March will not continue.

Some analysts indicate that there is a high risk that corrections in the market are inevitable and that history would show that retracements of one third to two thirds could be coming.

While many would say that the US is showing signs of a recovery, some are asking for a plan to counteract the effects of an inflation that's expected to follow the ending of this recession. Without an effective plan in place the fears of inflation could have a negative effect on the markets in the future. Inflation has a direct impact on Credit and Credit rates.

The Federal reserve sets Monetary Policies which are the primary tools in controlling inflation. One policy is to fight inflation by setting higher interest rates (slowing the rise in supply of money). Keeping a balance in the interest rates is a complicated issue. Keeping interest rates too low results in deflation which many economists believe is a problem for our modern economy because of a danger called a deflationary spiral. One of the worst economic disasters in history is linked to a deflationary spiral, and that was the Great Depression.

The Great Depression, or Black Tuesday, the day of the great Stock Market Crash, on October 29, 1929. The Dow Jones Average increased fivefold up until September 1929, after which, for six weeks the Dow Jones fell sharply resulting in almost 13 million shares sold as investors lost faith in the Stock Market and panicked in an effort to save what little was left of their investments. An incredible 30 billion dollars was lost in just that one week in October alone.

By the middle of 1932 the Dow Jones was down a staggering 89 percent, all because of the Federal Reserve's policy to try to drop interest rates to revive growth. Today, while most Americans rejoice in the news of a declining interest rate, there is a silent fear among the few that can remember the devastation of that unforgiving time in history.

Since December of 2007 the core inflation rate in America has dropped less than 1 percent as compared to the Great Depression where the core interest rates dropped annually as high as 10 percent. The Federal Reserve admits that while this is a good sign of a recovering economy, they still need to be very aware of and keep a close watch for the signs of deflation. However, because some of the steps taken to battle the current credit crunch, especially with the mortgage backed securities, the inflation risks today are quite different than in any of the previous recessions.

For now, credit interest rates are stable and may be raised slowly in the future to account for moderate inflation. Recent studies have indicated that the number of American Households behind on debt payments is decreasing, and that a turning point in the economy is near.

While there are no easy choices for the Federal reserve to act now, with unemployment as high as 9 percent and foreclosures wreaking havoc, a plan needs to be in place to contain inflation if necessary.



Source by Robert Armenta

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