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Bury the past

“The moving finger writes; and, having writ, moves on: nor all thy piety nor wit shall lure it back to cancel half a line, nor all thy tears wash out a word of it.”

So famously pronounced the 11th Century Rubaiyat of Omar Khayyam in Edward Fitzgerald&#39s 1859 translation.

But, while it is true that what has happened has happened and cannot be undone, there are deeper issues inv olved. Specifically, only once it is properly accepted that the past has genuinely passed can energy be released to look for solutions in the present. “Why?” becomes less important than “what can be done now?”

Otherwise, the past acts as a drag. Not only do individuals and nations become inflexible and vulnerable to shocks but they also remain primed to avoid only a limited range of potential traumas.

This is one of the reasons why otherwise obvious problems are so easily missed.

It is arguable that certain aspects of global policy-making still remain too influenced by the past, thereby leaving them less receptive to the present. In Europe, older politicians remain infected by the memories of two world wars. In Japan, policy-making rem ains influenced by the inflation during the second of those wars and, of course, by the asset inflation of the 1980s.

In the US, the policy rem ains committed to avoiding a rerun of the depression of the inter-war years. So, the valid desire to avoid conflict in Europe has resulted in an attempt to “unify” it through a single currency, a single monetary policy and (ultimately) a federal government, the valid desire to avoid inflation in Japan has trans lated into a bias in favour of fiscal expansion and the valid desire to avoid depression in the US has translated into a bias in favour of monetary expansion.

In each case, however, the solution to the problem is in danger of itself becoming the problem. Countries in the eurozone probably need significant adjustments in their individual mix of monetary and fiscal policies but cannot obtain them because of the strictures of Maastricht and the strait jacket of a single monetary policy.

So, paradoxically, the fear of the effects of diversity is taking Europe to a point where pressure for diversity reasserts itself. Japan probably needs to pump money into the econ omy but cannot because of the size of the fiscal deficit.

So, paradoxically, the institutional fear of inflation is taking Japan to the point where inflation may become unavoidable. Meanwhile, the US probably needs to tighten monetary policy but cannot because of the accumulated debt.

So, paradoxically, the cultural fear of depression is taking the US to the point where a sharp recession may become inevitable.

These comments are, of course, oversimplifications and they apply to long-term trends. But their influences are subtly making themselves felt in, for example, foreign exchange markets. Money policy in the US continues to be accommodative enough to support economic activity, so the dollar remains firm.

Economic disparities and an ineffective money policy in Europe have again forced the euro to new lows (although momentum does appear to be moderating) and a de facto tight credit situation in Japan is sustaining the yen&#39s value against the dollar despite economic sluggishness. Never theless, while the current cyclical status of the US does not yet appear to signal an immediate fall into recession, some form of lon ger-term retrenchment may well start within the next year or so.

In which case, Europe and Japan will need to shrug off the burden of their histories and seek creative solutions to their current dilemmas, otherwise the US&#39s slowdown will start at a time when the ability of anyone to do anything about the consequences will be at its weakest. This would be the stuff of global deflation.

Hence, if a significant rally in equities emerges in the next six months, investors will need to keep a watchful eye on the underlying realities.


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