Bond Outlook
| The recovery in the USA, such as it was, depended on cheap money and deficit spending, and has now been knocked off course by the events in the Arab world, and subsequent rise in energy costs. Cost-push inflation was threatening anyway, with higher food and commodity costs. Now the pressure has ratcheted up further. |
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| A possible policy response to shifts in the world economy is to accept that living standards cannot, for a while at least, move forward at the same pace. We usually call this “belt tightening”, and this appears to be accepted by governments in most of Europe, even if not by the unions. It looks like the only way to moderate the inflationary pressures from outside. |
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| It is, of course, far from being the accepted policy of the USA. There is, admittedly, an entire political movement to reduce government spending, but overall, nothing has been done to withdraw from the impasse the country entered many years ago in spending far more than it earned in both the public and private sector. |
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| Will the Arab Awakening change that? It has certainly presented Bernanke with a dilemma: |
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