The alphabet soup of possible shapes for this recession is now clarifying somewhat. The recent strength in several US and global indicators, before fiscal stimulus has had time to kick in, indicates that the panic among governments after September’s financial crisis was overblown. Indeed the strength in economic indicators, combined with the global stock market rise and the impending kick-in of “stimulus” suggests that the initial trough may be short-lived, with apparent recovery swift and robust. Unfortunately, the imbalances produced by panicky fiscal policy and in some countries monetary policy are considerably larger than the original imbalances that led to recession, so the recovery will be short lived. A year from now, we will probably be diving into a second global “dip” of recession that may well be deeper than the first, and is certainly likely to be much more prolonged.

There are some countries for which this is not true; those which, for one reason or another did not adopt the prevalent global pattern of monetary laxity and fiscal hysteria. Poland, for example, was always likely to get in trouble from this recession, because it ran a balance of payments deficit, and over 5% of its Gross Domestic Product came in through foreign direct investment, which has dropped sharply. However instead of engaging in massive “stimulus” Poland allowed the zloty to depreciate, by about 30% against the euro since July 2008, while its M3 money supply, up 17% in zloty terms declined in euro terms by over 10%. Poland also benefited from two other favorable factors: its economic structure is relatively free-market and its government relatively small, spending only 25% of GDP. Consequently Poland’s exports have held up well in zloty terms, while its balance of payments is improving rapidly and it appears likely to avoid outright recession. Once global economic recovery arrives, Poland will have no “imbalances” to correct and so should return quite quickly to its trajectory of around 4%-5% annual growth.

Because of its large international debts, Brazil has since 2002 run a fairly tight fiscal policy and an extremely tight monetary policy, with short term interest rates of 13.5% going into this recession, against domestic inflation around 6%. Brazil shares with Poland the benefit of a relatively small government, but its economic structure is bedeviled by inefficiencies put in place by past governments, particularly the dead weight of the public sector, un-removable by the 1988 Constitution. Like Poland, it did not have the option of vigorous fiscal and monetary stimulus, which would have caused the Brazilian real to collapse and produced a debt default. Instead, the real has declined by about 27% against the dollar, while domestic interest rates have remained in double digits, allowing only modest domestic reflation. Consequently Brazil is projected by the Economist panel to suffer only a 1.5% decline in GDP in 2009, with 2.7% growth in 2010 – a forecast that may well be too pessimistic.

South Korea, also, has been affected by the Western banking system collapse and by the sharp fall in Asian exports. However, through allowing the Korean won to decline by 23% against the dollar, it has limited the decline in its exports and caused its balance of payments to swing into sharp surplus. Like Poland and Brazil, Korea has implemented only limited stimulus; the Economist forecasts a budget deficit of only 3.5% of GDP in 2009. Unlike Poland and Brazil, the Economist forecast a sharp recession for Korea, with GDP declining more than 5% in 2009. Given Korea’s relatively small public sector and open economy, that looks much too pessimistic. In any case, also like Poland and Brazil, there will be no reason for Korea’s economic recovery to be delayed once its economy has bottomed out.

All three of these countries have survived the downturn through what in the 1930s were called “beggar my neighbor” devaluations, the policy followed by 1930s Britain under Neville Chamberlain to great success. By definition, not all countries can follow such policies, and indeed even these three moderately substantial countries by following them have made the position of their neighbors more difficult.

For most other poor and middle-income countries, the constraints against uncontrolled monetary and fiscal stimulus are strong, because of the danger of financial collapse due to their fragile credit positions. In the context, the expansion of International Monetary Fund lending facilities, if it takes place, will be thoroughly unhelpful. In IMF-favored cases, such as Mexico, unconditional IMF facilities will allow the countries to purse more expansionary fiscal policies than would otherwise be possible (this danger also exists in Poland, but the Polish government is pretty sensible.) In other cases, the prospect of IMF conditionality is so unpleasant that countries like Indonesia will seek to avoid it at all costs. Thus most IMF help will go to countries like Pakistan, Ukraine, Hungary and Latvia where past profligacy has been so great that no non-IMF solution is possible. In other words, as has been the case for so much of recent “stimulus” programs, the extra IMF aid will go predominantly to the least productive countries.

In the rich world, the Polish solution has not been tried, as memories of the 1930s make competitive devaluation unacceptable even if, in a closed planet, it were possible. Instead most governments, with the partial exception of Germany and France, have indulged in expansionary fiscal policies, many of them running budget deficits up to unprecedented (in peacetime) levels of around 10% of GDP. In monetary policy, there is a difference between the US and Britain, which have both been highly expansionary to counteract the effect of their banking collapses and the eurozone and Japan, which have cut interest rates but maintained monetary growth at moderate rates – 7% in euro M3 in the 12 months to February 2009, for example.

It now seems likely that the next few quarters will see an economic bounce. The rate of decline of economic indicators has slowed sharply in almost all countries. Confidence indicators such as the University of Michigan sentiment indicator have ticked up, albeit from very low levels. The worrying collapse in Asian trade has turned around, showing itself to have been a largely a matter of inventory correction in the supply pipeline to the US consumer. In countries like Britain and the United States where monetary policy has been exceptionally expansive, this expansion has doubtless played a part also – and even in the EU and Japan, monetary policy has been far from contractionary.

Now the fiscal stimuli are about to kick in – in the US for example the modest Obama tax cuts are appearing in April pay packets. While the economy is so far below full capacity, these stimuli will have the expected Keynesian effect in boosting demand further. If you asked me to guess, I would expect that the third and probably fourth quarters of 2009 would show quite robust global growth.

Then what? In only a few countries, like Poland, Brazil and Korea, one could in isolation expect growth to continue, producing a normal-strength business-cycle upswing. China and India are both special cases; in China infrastructure investment should also produce an upswing, but with the caveat that the problems in the Chinese banking system have not gone away and may be getting worse – thus the future trajectory is more or less unknowable. In India, the fiscal deficit is so large, and the prospects for reform if a Congress-led government wins the current election so poor, that, absent an unexpected BJP triumph, it seems likely that growth even if it resumes will be sluggish and interrupted over the medium term.

In the rich West there will be two factors tending to impede growth. In some countries, such as the US and Britain, rapidly rising inflation will pose the authorities with a problem they will urgently need to deal with. In most other countries (but only marginally in France and Germany) large fiscal deficits will produce a “crowding out” effect by which private investment is stunted by the excessive demands on credit from the public sector deficit. Both these imbalances will be larger than previous imbalances that the recession has corrected, notably the US payments and savings deficits, which were 6% and 8% of GDP respectively compared to the 2009 budget deficit’s 12% of GDP.

Countries with both large budget deficits and inflation will pay a pretty obvious price: higher interest rates, which will impose costs across the economy. Ben Bernanke’s claim that the Fed will remove liquidity when it needs to is pure hogwash. The Fed will be slow in reacting as it almost always has been with inflation, because it will be politically much easier to deny that inflation has become a problem. Hence inflation will get a major hold on the economy, and the combination of inflation and excessive budget deficits (which were not a problem in 1979-82 – the federal budget deficit peaked at 6.6% of GDP in 1983, after inflation had been broken) will prove exceptionally intractable. The recession will not be W shaped, because there will not for several years be a final upward swing from the W. Instead, after a sharp middle upswing, which is now beginning, the US economy will relapse into inflationary stagnation, the right-hand side of the W becoming an L or even declining further.

In countries without inflation, such as Japan, India and the eurozone countries with excessive budget deficits, there will be no inflationary signal of trouble. Instead the recovery will much be weaker than in the US and the UK, because it will lack the exceptional monetary stimulus and will be retarded by excessive public sector deficits. The pattern will be that of late 1990s Japan, with the bottoming out process exceptionally prolonged – a very sluggish U shaped recession. In these countries, particularly in Japan, Ben Bernanke’s favorite demon of deflation, prolonged price declines, is also possible. The correct solution will be a combination of moderate monetary laxity and severe fiscal tightness, similar to Poland’s current policy, which will both remove government’s drag on the economy and allow prices to resume a gentle rise.

The reversal of recovery in the inflationary countries and the lack of recovery in the deflationary ones will make economic recovery in even the paragons of Poland, Brazil and Korea sluggish, because of the lack of buoyancy in their export markets. Nevertheless, over the next quinquennium I’d rather be Polish, Brazilian or Korean than Japanese, Indian or Anglo-American.

As in 1929-41, government bungling has in most countries made the recessionary experience much more unpleasant and prolonged than it needed to be. Governments never learn!

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)