Bond Outlook [by bridport & cie, April 29th 2009]
| Inflation and higher interest rates are coming, but when? The reasons for such an affirmation? Huge and cheap money supply, printing money and government borrowing. Why, then, the absence of inflation now? Because the velocity of money supply is so slow; plenty of money is available, but those who have it are reluctant to lend or spend. The result is the present low inflation, or even deflation, on the “headline” rate – even though core inflation remains positive. |
| What will bring about a shift from deflation to inflation? Success in overcoming the crisis, this “success” being defined as the end of the fall in GDP rather than renewed growth. Inflation without economic growth sounds impossible and is certainly very rare. However, the reasons for inflation we have cited above do not depend on growth; they can act merely upon the GDP decline ending. |
| The situation for next year looks grim: either the stimulus packages work and inflation and long-term interest rates will both rise, or the packages fail and deflation persists. |