Bond Outlook February 6th

Fellow members of the G7 are resisting the USA’s request to stimulate their economies along the lines of its own tax and interest rate cuts. This may reflect two views of the USA emerging among the authorities of the “Rest of the World”:

• “This mess is of your creation. Don’t ask us to follow you down the path of still more irresponsibility”
• “It is high time to correct the world’s economic imbalances. You’ve got to consume less and sell more. If that means recession for you, too bad. It may even mean recession for some of us, too, but we’ll live with that if better balance is the prize

There is a growing perception on both sides of the Atlantic that interest rate cuts will not “do the trick” this time, and that fiscal stimulus, should it work, cannot solve the long-term weakness of an economy dependent on indefinite deficit financing. If that is the view of the authorities, then that of the markets represents the other side of the same coin: trust in US paper, especially of anything linked to the whole securitisation process, has evaporated.