‘back to normal’ as everything’s been solved. But here all our
borrowing is going to the wrong people - the largest part to banks
for their capital structure, to foreign bankers and to the government
itself to expand its own departments. It is not being lent! , The
credit crunch is still severe.
Unemployment is rising, and this vast borrowing is stoking up massive
inflation. This is the calm before the storm and the sun is
shining. But we have a threatened borrowing crisis ahead and the
total priority of paying back all that borrowing, for if we don’t no
state employee will get paid.
Oh, yes, I forgot: the VAT cut is nearly half way through so at the
end of the year all prices will rise! That achieved precisely
nothing at enormous cost.
xxxxxxxxxxx cs
================================
When Germany's Chancellor Merkel accuses the world's main central
banks of aggravating the financial crisis with loose monetary policy,
she says as much about her country's history as she does about
today's challenges. Germans are unsurprisingly scarred by the
hyperinflation of the Weimar Republic.
The collective memory shaping Barack Obama's policy is quite
different. Resorting to the printing presses to buy another $300bn
(£184bn) in US Treasury bonds this year is designed first and
foremost to ensure that Americans never again face the mass
homelessness and soup kitchens of a deflationary slump.
Given a choice, the US administration will instinctively do too much
rather than too little.
In the light of Britain's inflationary post-war economic history, one
might have thought that we would lean towards German discipline in
this debate but don't be surprised if the Bank of England keeps
interest rates at today's emergency levels for the foreseeable future
and expands even further its untested policy of quantitative easing.
The minutes of May's monetary policy meeting were clear: "The risks
of stimulating demand too little at the current time seemed greater
than the risks of stimulating it too much."
Time will tell us who is right, but the bond market does not wait for
the evidence. It holds governments to account every minute of the day
and its judgment has been unambiguous: profligate government spending
and printing money to buy the developed world's debts is an
inflationary disaster waiting to happen.
Since last autumn the yield on the 10-year Treasury bond has risen
from just over 2pc to almost 4pc. In other words, the world's
investors have collectively informed Washington they expect to be
paid almost twice as much as six months ago to finance America's eye-
watering deficits. [When I looked today our gilts all had yields of
over 4% -cs]
The key question for investors is why this yield has moved up so much
and so quickly. There is a good reason and a bad. The good reason is
that rising bond yields typically reflect a strengthening economy and
a greater desire by investors to put money to work in riskier but
potentially more rewarding parts of the economy than US government debt.
There is some evidence they are right to do that. American consumer
confidence is at an eight-month high and rising; commodity prices
suggest that China might be on the mend. That is certainly what has
fuelled the recent equity rally, especially in the emerging markets.
The bad reason is that the unprecedented steps taken by the Federal
Reserve to rescue the US housing market by driving long-term interest
rates (and so mortgages) lower could have a terrible price. Investors
are demanding a better yield on their fixed-income assets because
they believe that when the bonds are finally repaid their purchasing
power will be a whole lot less.
The Fed is in a Catch 22. If it buys more Treasuries to push yields
lower, it will stoke inflation fears and investors will demand yet
higher yields. If it does nothing, and yields continue to rise, then
the housing market will take a hit, dragging the rest of the economy
down with it again.
There is one solution for governments on both sides of the Atlantic.
They can come clean with their electorates and admit current levels
of public spending are not affordable. No, I don't think it's going
to happen either.
Government bond yields are some way from signalling an immediate
crisis. The 10-year Treasury yield has almost doubled, but is only
back to where it stood for most of last year. If the halving to 2pc
was a panicky flight to the perceived safety of the US government,
then its recent move is no more than a return to normality.
The more worrying prospect is that the bond market has lost faith in
the British and American governments' ability to pay the tab. If
investors do not believe that the political will exists to reverse
today's extreme policies in a timely and decisive manner inflation
could surge long before recovery has taken hold and bond yields could
soon be at levels where they could do real damage to both the economy
and shares.
What does this mean for markets? I suspect that a rising bond yield
is a signal that investors are starting to favour "stuff" over
"paper". If so, then emerging markets looked well placed versus the
developed world. Commodities and gold have further to run. Even
property will have its day again (although it is hard to believe
there's any rush while unemployment is rising, credit is scarce and
prices are still historically high). But unless and until governments
can demonstrate that they have a plan that Angela Merkel and the bond
vigilantes can believe in, they can keep their paper.
---------------------------------------------------------
Tom Stevenson is an investment commentator for Fidelity
International. The views expressed are his own.
Thursday, 4 June 2009
The calm before the storm
TELEGRAPH 4.6.09
Rising bond yields highlight fears about governments’ crisis skills
By Tom Stevenson
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