Rebuilding the balance sheets of banks, households and governments, with all that implies for higher savings rates and taxation, means the leg of the L-shaped recession will be years long.

There is no denying the current strengthening of the USD and the deflationary environment. However, we see both as limited in time when the USA is “printing money”.

The Keynesian remedies are all very well, probably essential, but what about Schumpeter and his “creative destruction”? That is quite the opposite of the Greenscam remedies past and present.

Moving from overpriced government bonds to quality corporates, our recommendation last October, is now commonplace. The Madoff scandal has very negative implications for New York and for hedge funds.

The Madoff scandal crowns a year of serial disasters. Neither regulation not the hedge fund industry will ever be the same again. Obama is the focus of much hope.

The flight to quality is leading to a bubble in government bonds. A better yield/credit risk can be found elsewhere, notably in young corporate bonds and emerging markets.

Bernanke is walking a fine line between deflation and inflation. For the moment deflation is more to be feared, so his actions are all about stimulating inflation, including printing money.

When first the crisis broke, the USD strengthened, but there are good reasons to ask whether it was only a short-lived phenomenon, including the practice of "printing money".

How long will the recession last? One answer is as long as it takes for households to achieve a 3%-5% savings rate from the negative pre-crisis rate. One year? Four?

President-elect Obama has an intimidating task to repair the damage of the outgoing Administration, but they have more or less fixed the capital markets ready to face a long downturn.

Bond markets are moved back into difficult trading as market making is proving inadequate faced with large-scale liquidation even of quality bonds by funds facing margin calls or redemptions.

As investors move from panic, through shell-shock to quiet reassessment, they should separate the capital market crisis, which governments are solving, from the recession, which they cannot.

Weekly Comment

The UK Government injecting equity capital (preference shares) into banks before they need to be nationalized outright in panic may signal that exit from the storm is in sight.

This week we dare consider the moral implications of the GSE bailout, as well as reviewing the financial impact. Pity the next generation as they will pay the price.

The peril in which the entire US financial system now stands, with many banks and the GSEs fitting the category of “the walking dead’, is growing from week to week.

A return to a healthy level of household indebtedness and savings by the middle of next year? Just about conceivable, but the new film, “IOUSA”, needs a big impact.

As the turbulence in forex and commodity markets continues, we review this week where the world has reached in the rebalancing process. This may help in reaching a long-term view.

When stock markets enthuse about the Fed going on hold and commodity prices falling back, we can but point out that the underlying problems are worsening.

Major commentators (IMF, ML) are expressing what we have been emphasising for a year: this is no cyclical adjustment but a major realignment to match US earnings to spending.

A ray of sunshine with a fall in commodity prices and financial market optimism, but it can only be a brief respite as clouds return and spread beyond the USA.

While the CPI is way above target, asset prices, notably stocks and housing are falling. It may be therefore more meaningful to see this as a deflationary environment.

In combating inflation the credit squeeze may suffice in the medium-term, but, while waiting for its impact, central banks want to hold the fort with one or two rate increases.

The American consumer is now noticing the diversion of his already restricted spending power to costly food and fuel, squeezing his ability to pay back mortgage and other debt.

Inflation and recession together, and central bankers recognising that they had better fight the former now than risk a greater recession later: what does that mean for fixed-income investors?

In the debate dual-mandate versus inflation-focus for central banks, the ECB approach of “control inflation and the rest will follow” seems ahead with even the Fed coming round.

This week is seeing three turning points to do with the commodities bubble, vehicle technology and the attitude of the Fed towards inflation. The credit crisis’ second phase is underway.

High oil prices and a credit squeeze together: no coincidence. In fact, knock-on and secondary effects of the cheap money policy of the USA are our themes this week.

Against a background of unrelenting bad economic news, we consider the looming dangers of the world’s largest unregulated insurance and financial market: credit default swaps.

The data used to calculate LIBOR may be improved by threatening the participating banks, but how can we deal with official statistics which have been creatively manipulated for decades?