When yours truly was growing up to be the man of today, the legendary movie, “The Good, The Bad & The Ugly’”, was one of the exceptional one for its richness and its peculiarity of being a Western set against the violent background of the American Civil War. The movie released in 1966 has stood the test of time and has been heralded as the classic for all ages. Years have rolled on, and under similar tumultuous backdrop, the financial crisis has shown facets of all depictions-the good, the bad & the ugly-to the rest of the world.

The economic recovery which began in 2009, have been plagued by a plethora of good and not-so-good economic news. It has become obvious to many that the current experience is not that of a conventional business cycle. The recovery process is on but the pace is extremely slow and the fragility of the recovery is obvious to almost everyone. Major focus has been centered on the banking system, the housing and the labor markets. These worries translate into issues of solvency and deleveraging coupled with the tension over Iran, Syria, Afghanistan, the rising price of oil, and the financial difficulties of the Eurozone.

The important thing is the economy is recovering. The second most important is that the major problem areas the world is facing have been identified. Given these two factors, the major policy issue faced by the monetary and the fiscal authorities is to avoid further unexpected shocks to the system.

Given the above scenarios, the major problems I see on the distant horizon are two. First, the investors should be worried that people in Washington, playing for a political advantage, will still feel the need for additional budgetary stimulus in one way or another. I believe that this would achieve very little in the way of greater economic growth because the private sector will continue to deleverage and so the multiplier of any additional government programs would be less than one.

Secondly, the Federal Reserve must deal with all the excess reserves it has injected into the banking system. The dilemma here is that the banking system is still fragile and requires further time to help the banking system get smaller in number of banks in existence. On the other side of the equation, is the fact that at some time the excess reserves can turn into kindling for the inflationary fires.

The economic system is still very fragile, but the economy is recovering. It has shown its bad and the ugly scheme of affairs. Now, the US economy and indeed rest of the world are awaiting the ‘good’ side.