As we mentioned in the previous article, policymakers in many countries are still dedicated to continuing the stimulative policies that have lifted their economies out of a nasty recession. They are likely to maintain these programmes until there are greater assurances that autonomous private-sector demand can underpin sustainable growth.

However, judging the right time to wind down the expansionary measures will be exceedingly difficult to do. Of course, to assuage concerns, policymakers are issuing a lot of assurances that they are up to the task. The problem is that their past performance does not inspire a lot of confidence.

More often than not - and operating in much easier times - they have failed to manage smooth transitions in the economy. Much of the evidence is that they have frequently distorted market signals, maintained excessive policy measures for too long and caused volatility in the economy and financial markets.

We hardly need to mention that present conditions are the most difficult that have been encountered in the aftermath of a crisis. Monetary policies are more expansive than previous episodes of laxity, and include a slew of unorthodox measures classified under the heading of quantitative easing. In addition, a range of government spending programmes, combined with weak tax revenues, has handed many countries a whacking great fiscal deficit that in normal circumstances would scare the hell out of financial markets.

What has happened over the past year is that market solutions to the crisis have been rejected in favour of massive intervention. The crash itself was a consequence of the excessive risk-taking of the boom years and had been underwritten by lax policies in a number of countries. And, of course, a crisis and a recession are not abnormal phenomena. They are the means by which the market resolves large excesses and corrects mistakes.

If the market is to carry out adequate resource allocation, it must be allowed to function properly. Overleveraged households and firms in the financial services sector had made mistakes, along with many central bankers, and the day of reckoning was at hand. Except that it was politically unacceptable to allow the market solution to take its course.

Many financial firms in the US and Europe were effectively bankrupt and have been resuscitated at public expense. But most of their chief executives remain in place. As for the central bankers who made such egregious errors, they are still holding office. What's worse is that these same people continue to extol market principles. Evidently, hypocrisy isn't uncommon among the privileged and powerful.

But preventing the market from correcting mistakes and removing excesses definitely has costs. It perpetuates inefficiencies and saps the long-run productivity of the economy. Witness the case of Japan, where the government provided a great deal of protection after the 1989 crash. A short-term plunge in activity was avoided but, subsequently, the economy only managed to limp along lifelessly for years.

Presently, given the size of government intervention, all eyes in the market are on signs of when and how the winding down of the policies will take place. The pronouncements from assorted officials are to the effect that the stimulative policies will continue. And only fudgy words are offered, that they will be withdrawn when "appropriate".

Now it may happen fortuitously that they will successfully carry out a fine-tuning exercise. The policymakers will wind down stimulative measures gradually as the baton is passed to the private sector, ushering in a period of stable growth and low inflation.

Unlike the Japanese strategy, protection would be removed earlier, stimulus withdrawn and the overleveraged public sector can then begin to safely deleverage. A nice rebalancing of the economy would take place. The authorities could then claim great policy successes. The downside was protected and the upside ensured.

This is a heart-warming scenario, if it comes to pass. As mentioned above, we are sceptical that this is the most likely outcome. Based on past evidence and current trends, it is more likely that authorities will wait a long time before withdrawing stimulative policies, and the unwinding process itself will be difficult to execute.

Mistakes will be made and will lead to even more errors, as the historical record indicates. It would be wise to prepare for greater volatility next year.

Iraj Pouyandeh is a strategist and senior portfolio manager at LOM Asset Management. He manages the LOM Global Equity Fund. For more information on LOM Asset Management please visit www.lomam.com