Bond Outlook by bridport & cie, November 17th 2010

There are now economic wars, and wars within wars. We saw the Dagong report last week as the opening shot in a growing escalation between China and the USA over economic policies and exchange rates, with particularly virulent criticism of QE2. However, the USA refused to respond to the provocation by simply ignoring Dagong’s, and other, increasingly loud criticisms. China vs. the USA remains the major conflict on the road to global rebalancing.

QE2 has few supporters outside the USA. The FT’s Martin Wolf is a notable exception, and he has now been joined in support of QE2 by the Governor of the Bank of Israel! Wolf uses quite derogatory language to describe those who take a different view, in which regard he is more than matched by Jim Rogers in his view of Bernanke’s competence. Within the USA, economic civil war is gathering speed. In pushing QE2, Bernanke is doing all he can do in the absence of serious fiscal action. His Fed colleagues are mostly following his lead with, for example, Vice Chairwoman Yellen flatly denying that QE2 is aimed at both lowering the dollar, and pushing inflation back over 2%.