American recession fuelling domestic inflation?

American economy is influencing the world economy as never before and particularly the Asian developing nations which are increasingly becoming dependent on GDP growth fuelled by $ based trading. The present American recession pushed the US interest rate down to almost zero. However, the crisis didn't require similar cut back in interest rates for other economies. Though we saw strong measures to increase liquidity in developing nations. Why were the interest rates cut down so much and increased liquidity was ensured through various means. Why did it all happen and why in this large proportion? Was it only to fight liquidity crunch in the domestic market of developing nations? No, the reasons are not so simple. There was another very important factor playing a role. "Developing nations dependence on Dollar based world trade".

As lowering interest rates in US devalued the dollar, developing countries like India had to follow suite. Developing nations had to make a choice between stable exchange rate and domestic inflation. Most of the nations chose to maintain their currency against dollar rather than to maintain a stable domestic inflation rate. In doing so, almost every developing nation increased the flow of domestic currency in the local market, but this was done not only to fight credit crunch but to match the falling dollar as well. The extra bit of effort made to maintain the value of dollar cost the countries a recent surge in inflation.

Well, free market economy is all about choices. The developing economies chose to defend dollar to maintain their cost advantage but in the process stoked inflation which will anyways hurt export. The question is which would have hurt more? A weaker dollar or domestic inflation?

Please write in your views.

What to blame for the present economic crisis?

It's an interesting question, specially because everybdy wants an answer and has an answer as well to this query. I would not put the blame on Financial innovation or American politics or Greed or Real estate crisis, etc etc... What we receive is often a result of what we choose, and we have chosen to follow a "similar to" free market economy model. Not a wrong choice but surely it comes with an inherent characteristic named *swing* which is responsible for 'almost cyclical' booms and bursts in the economy. Free market economy, though gives space to greed, profit motives, financial innovation, political adventurism, etc etc, still manages to provide an economic model which is good enough to be followed by the majority of the world. For me, the only downturn is the *swing* which needs to be controlled through appropriate policies. The swing needs to be attenuated through regulatory measures.

With the choice we have made, everything else which we have blamed so far is inevitable. Political adventurism, greed, booms, bursts, et al, have happened in past and will keep happening without control. The only controllable part is regulation which we failed to provide and thus should bear the blame for the crisis.