"It is the response which is specific to the political culture concerned."

From Tracy Alloway on Alphaville, a very interesting post:

"In this case, their own financial bubble. From a strikingly philosophical Dresdner note:

According to Tolstoy, happy families are all alike, but every unhappy family is unhappy in its own way. The same could be said of financial bubbles, which are all much of a muchness in their pathology. It is the response which is specific to the political culture concerned.It goes without saying that bubble collapses are always deflationary since wealth is destroyed and savings, personal and corporate, need to be rebuilt. The bigger and longer-lasting the bubble, the greater the risk of embedded deflation. The potential policy responses range from the extreme of acceptance (”take the pain”) to panic (”avoid any pain at all costs”), depending, we believe, on deeply ingrained political and social values, reinforced by demographics.

To wit, this singularly arresting chart of gold’s post-bubble performance in the UK, US and Japan.

One way to combat the mess of a bubble popping is, as Dresdner puts it, “reducing confidence in the value of money” — i.e. creating inflation.

What the rise in the US and UK gold price tells us is that those two countries (assuming gold is in fact acting as an inflationary hedge here) are not shying away from their inflationary task. They are, unlike Japan, really going for it."

I hope that this is correct.

"Back to Dresdner:

Japan had no Japanese precedent to study. The last experience of deflation was buried so far in the past that anyone predicting a recurrence could be safely dismissed as a crank. The BoJ was dominated by inflation vigilantes who bitterly rued inflating the bubble and were determined at all costs to avoid a repeat. They remained far behind the curve and allowed growth in the monetary base to collapse. The contrast with the United States could not be clearer. Ben Bernanke is an authority on the historical experiences of deflation, and in his famous speech of 2002 laid out his playbook for all to see.

And to conclude:

No policy response to a post-bubble bust can ever be free of unintended consequences. The speed and scale of the current economic fiasco as good as ensures that the mistakes will be serious. The key question for investors is whether over the long haul their bias will be deflationary (too little, too late) or inflationary (too much, too fast). Given the different pressures that policymakers are working under, we find it hard to
believe that the world as a whole will choose the Japanese path."

I hope you are correct. I love Yukio Mishima, but if I go out by my own hand, I'll follow Levi and Amery, not Mishima.

Let me say that, from the Dresdner, I fully agree with this point:

"The same could be said of financial bubbles, which are all much of a muchness in their pathology. It is the response which is specific to the political culture concerned.It goes without saying that bubble collapses are always deflationary since wealth is destroyed and savings, personal and corporate, need to be rebuilt. The bigger and longer-lasting the bubble, the greater the risk of embedded deflation. The potential policy responses range from the extreme of acceptance (”take the pain”) to panic (”avoid any pain at all costs”), depending, we believe, on deeply ingrained political and social values, reinforced by demographics."

Our responses will be a kind of trial and error pragmatic method informed by our ingrained habits and presumptions, although not mechanical and capable of being predicted with much precision.

"No policy response to a post-bubble bust can ever be free of unintended consequences. The speed and scale of the current economic fiasco as good as ensures that the mistakes will be serious. The key question for investors is whether over the long haul their bias will be deflationary (too little, too late) or inflationary (too much, too fast)."

All human action is troubled by unintended consequences. We need to accept the inflationary bias as the best we can do in the present circumstances.