The worst period of the financial crisis is over, according to Tao Dong, chief economist for Asia at Credit Suisse First Boston, in an article in Securities Market Weekly. But the three phases of the crisis—the crisis itself, the worst economic recession since World War II and the highest inflation since the 1980s, have not reached an end. Edited excerpts follow:

The global financial tsunami is receding as a result of aggressive credit expansion by central banks, giving rise to active trade in capital markets and ascending property prices.

Although the financial situation is improving, the world economy still faces the most serious recession since World War II. The speed of economic revival has not kept up with the buoyant market mood.

Nonetheless, I believe that the U.S. economy has passed through the worst. Even though it will take time to recover, as long as banks start to issue loans and unemployment begins to improve, then recovery is just a matter of time.

But this is not the whole story. The supposed recovery is built on unprecedented low interest rates, unprecedented monetary expansion and unprecedented joint efforts by central banks around the world. Recovery means starting to absorb the record amount of liquidity that has been injected into the markets by way of government stimulus packages.

High liquidity, coupled with the restoration of commercial bank loans, will surely be accompanied by inflation.

Capital inflation has already begun, while consumer inflation will likely pick up from 2010 to 2011. The consumer price index might jump 3-6 percent year on year in the next two years, whereas up until recently it has been falling. Central banks will then be forced to reclaim liquidity. It will not be surprising if central banks hike interest rates by 3-6 percentage points in 2010-12 from their current levels.

For central banks, credit and liquidity expansion is an immediate means of combating this financial crisis. They directly interfered in the market by acquiring a large number of commercial bills and bonds in an effort to pull down the commercial interest rate and reboot capital market transactions. They had the guts to do it this way because inflation was not a problem at the time.

But if inflation returns, central banks will be trapped in a dilemma. They need to stabilize the economy by continuing to increase credit to spur consumption, but at the same time they have to maintain the value of currencies and bring liquidity back to normal. In post-war economic history, central banks have rarely been successful in fighting both battles simultaneously.

The third phase of this crisis should be runaway inflation. Central banks will be forced to raise interest rates, which will cause panic in the markets featuring tight liquidity and soaring capital costs. Investors will in turn be thrown into a predicament.

From my perspective, high inflation is not inevitable. It all depends on how well central banks manage the economic slowdown and excess liquidity. But to date, central banks have not come up with a convincing mechanism to end their intervention in the market. It is very possible that they might lose this battle, since they could easily be upset by current political and market conditions.

Whether we see inflation or stagflation in the wake of this economic chaos, we are only halfway through the financial crisis.