Bond Outlook [by bridport & cie, January 21st 2009]
| A new era has indeed begun with President Obama, but old problems have not gone away, as the fall in bank share prices on Inauguration Day forcibly reminded everyone that after the hope must come the reality of a seriously wounded economic giant. |
| Our concerns about the bail-out plans being a further dose of “Greenscamism” remain. So long as their objective is to encourage the return of credit availability for households so that they may return to their spendthrift ways, a fundamental error is being made. Credit to companies, yes, credit to prolong consumers’ spending beyond their means, no. There are signs on both sides of the Atlantic that the authorities are beginning to see this important distinction, but it needs to be made much more explicit. This recession is and has to be “L-shaped”, i.e., when the economic decline has stopped, a long, probably years-long, period of mediocre growth will follow. This is because consumers will be repairing their own balance sheets by saving, rather than spending excessively. Even when house prices stabilise, they are unlikely to return to their old habits – once bitten twice shy (at least for some years!). |