Newsweek featured an article recently where leading economic experts tackle the global inflation problem.

Of note were comments made by Mohamed El-Erian--a leading authority on the global financial system--on how economic leaders should navigate policy in a challenging environment:

The global economy, still reeling from the U.S. financial crisis, has entered an even riskier phase on account of inflationary pressures. Inflation is particularly painful when it is driven, as it is now, by price increases on essential products like food and fuel. Governments and companies have to react even if they end up using blunt instruments that initially make the situation worse. ...

In normal times, the emphasis on monetary policy would be necessary and warranted. But conditions are far from normal in today's global economy. ...

First, tighter financial conditions, especially higher mortgage rates, will further undermine a U.S. housing market that is already collapsing under the weight of overvaluation, excessive inventories and growing foreclosures. The recent decision by the U.S. Congress to extend emergency assistance to mortgage holders and behemoth lenders (such as Freddie Mac and Fannie Mae) will only act as a short-term Band-Aid. ... Second, growth in emerging economies will also decline as policymakers there realign their domestic priorities. For the global economy, this means slowing the "other" engines that, particularly in the past year, have accounted for a growing share of the increase in world GDP, thereby effectively compensating for the more sluggish U.S. economy.

So where does that leave us? El-Erian's bottom line is that policymakers must respond to inflated food and energy prices. But, he continues:

..in relaying overwhelmingly on tighter monetary policy, and in failing to aggressively pursue enhanced production and distribution channels for food and energy, they risk weakening global demand too much, thereby being potentially forced into a sudden reversal. The rest of us should keep our seat belts fastened as the global economy continues to navigate an even bumpier phase, as weakening growth impulses aggravate the impact of the credit crunch.

From a trader's point of view, El-Erian's comments further reinforce my Trader's Advantage research, which indicates that the current bear market likely has a long way to go...