Bond Outlook [by bridport & cie, December 3rd 2008]
| Commodity prices are falling. Consumer spending is collapsing. Shops are discounting. Capex has halved. A stronger USD has led to lower import prices. Unemployment is rising. Unsold housing inventory is still increasing. All these things point to deflation, do they not? |
| The US Government is borrowing massively. The Fed has lowered interest rates. The USD is vulnerable to foreigners repatriating their USD denominated assets and/or losing interest in buying more of them. Lower borrowing costs and fuel bills put money into the pockets of consumers. All that points to inflation, does it not? |
| For the moment the deflationary scenario is playing out, resulting in low yields across the entire yield curve. Deflation, with all its echoes of the Great Depression, is more greatly feared by central banks than inflation. No one spends if prices will be lower by waiting. Those with debts earn fewer dollars to repay them. The USD, a heavily indebted nation, needs inflation to reduce the impact of its internal debt and to generate enough USD to pay its external debt expressed in the same dollars. |