System cannot afford another failure, so where are we now?

As we leave behind what was possibly the most dramatic year on record for the financial markets, what should be the take-outs for 2010?

My first observation is, almost without exception, everything is currently already in the price. My second is the system simply cannot afford another systemic failure – evidenced by the speed with which markets recovered from the recent news out of Dubai. Where does that leave us? The first risk is growth slows more materially than expected. With falling inflation almost a certainty, this could push us into a deflationary environment. In the UK the MPC has already deployed £200bn of QE and effectively cut interest rates to 0% and so has little left in its armoury. In this environment,...